When Do People Not Want Money?

When do people not want money? The question arises from a passage of Basic Economics found in chapter 17, pages 365-366, that reads, “Usually everyone seems to want money, but there have been particular times in particular countries when no one wanted money because they considered it worthless. In reality, it was the fact that no one would accept money that made it worthless […]”

If we are referring to natural and unmolested money that hasn’t been debased, the answer is never. However, there is another kind of money we haven’t covered yet: What about fiat money?

Fiat money isn’t the sort of money that develops naturally and spontaneously between market participants like anything Tom Sawyer and his cohorts might have considered money amongst themselves.

Fiat money is, and can only ever be, backed by law. Our money, which started out as bits of gold with inherent value, is nothing today but government issued paper.*

Just suppose gold was money and people decided they didn’t want to use gold anymore. They could still melt down their gold and reform it into jewelry. Your options with dollar bills, should they become unwanted on the market, is limited to either birdcage lining or tiny pieces of origami. Fiat currencies are pretty good at being divisible and fungible, but scarcity is another matter.

With something along the lines of gold (or silver, salt, cattle, et cetera) as money, anyone may enter into the “production of money”. The idea is, if you can bring in more precious metal (or salt or meat) for society, then you’ve earned your reward and good for you. Of course, there are some risks in this. Cattle can catch plague and be wiped out, and the expenses of mining might exceed the amount of gold or salt that you can obtain. When we have a fiat currency, not just anyone can produce money. Because it is far too easy a production, there are no risks and with virtually no costs or limits of paper and ink, one could invest a miniscule amount in paper and ink, and print out a million fiat dollars.

Thus, it becomes necessary for one entity to have the power to produce money, and thereby control the supply. They can print out new notes faster than old notes wear out and flood the money supply with them. This is the essence of inflation. Alternatively, they can stop printing notes altogether. As notes wear out, and they fail to replace them, this will cause the money supply to deflate. It is no longer a market operation, but a command and control operation. This is the same sort of thing the Kremlin did with bread and coats. Sowell seems to be critical of this inefficiency, yet the Central Banks continue to do the same thing with money today and all we seem to get are a few protests from Sowell saying  that the power they hold isn’t the problem – it’s their failure to wield this power wisely.

Sometimes the entity in control of the money makes really poor decisions, doubling and tripling the money supply by the day. As this new money enters into circulation, the value of the money plunges (i.e., inflation at work). There has never been a time in history when the economy was fine and the money was stable, and the next day the money is worthless. There is always some lead time where the money is still accepted, but at a discount. The value of money will always follow the laws of supply and demand. When money is first discounted, and then later not accepted at all, it is because the quantity of money has been drastically increased and is expected to increase significantly more in the near future.

In summation:

  1. Sowell is saying people not accepting money is what causes it to be worthless.
  2.  We of the Austrian school say that the money is being made worthless by inflation, followed by hyperinflation, and this is what causes people to not accept it.
  3. It isn’t a disastrous error in and of itself, but this is a proposition that rests on fundamentals and it’s important to have clarity as we move forward.

We’ll continue exploring inflation and deflation in the next few pages of Basic Economics. For more on this topic, help yourself to a free download of  The Ethics of Money Production by Hulsman head over to amazon.com for a hardcopy.

*5/1/16 ETA: In the comments, Dan Bonin brought up a good point that neither gold, nor anything else for that matter, has inherent value. Though gold does have inherent qualities which are almost universally considered valuable.

The Importance of Psychology in Economics: JSP – April 1, 2016

So I’ve taken this blog in a little bit of a different direction. For all the fellow fans of the Jason Stapleton show, I’m still listening and I’m still going to point out where he deviates from the Austrian School. It doesn’t mean he isn’t worth listening to, he is probably the best source for news from a libertarian perspective.

At one point, about 30 minutes into Friday’s program, he begins discussing the great depression, and I think he got it all right. There would have merely been a panic as there was in 1819 were it not for the Smoot-Hawley Tariff, and the various other interventions that Jason discusses.

A few minutes into this talk, he brings up a very interesting question; one about psychology and how it has an influence, about what information we receive, how we receive it, and how that makes a difference in what decisions we make.

Jason talks about how the Federal Reserve tries to keep the markets calm and chooses every word very carefully so as not to spook the markets and that Ben Bernanke was giving positive outlooks right up until a week before the housing crash of 2008.

Besides this, he brings up a very interesting question about what Bernanke knew back in 2008. Did he know the markets were going to collapse and keep it quiet? Or, was he caught off guard?  I believe he was caught off guard. I don’t think he even realized we were in trouble until we were well into the recession.  But, that’s a question that we’ll have to try to get into later.

Back to the psychology of things, I think Jason does have sort of a point. If you are an Austrian you’re probably familiar with the master builder analogy. The entrepreneurs in a market are like a master builder, working on building a house, and the master builder believes he has X number of building materials and he is just a buzz of activity building away. Then he realizes he only has X-250 building materials, and he is going to be unable to acquire anymore.  So now, he stops building and panic ensues.  Some have modified this analogy so that the builder is drunk.   Jason gets this, except he doesn’t use the analogy of a builder, but a wounded soldier on the battlefield feeling the distorting effect of morphine. Not nearly as good. The wounded soldier isn’t producing, he isn’t dealing with limited resources, he is just lying there with injuries. Though he isn’t feeling pain that he really should be feeling so he thinks he is okay when he isn’t okay at all. The master builder is producing just like the economy. But, the entrepreneurs in the economy are being deceived by the artificially low interest rates created by fractional reserve banking and the expansionary monetary policies of the federal reserve.

Now, if we suppose that the master builder is drunk, or otherwise has his senses impaired, I think that Jason’s statement has some merit. The builder believes what he is told and keeps building in his drunken state (and yes, you can build things while drunk). But, as soon as he is told the resources are not as plentiful as he thought they were, he panics.

He is intoxicated, as it were, and can’t make out what supplies he actually has through his beer goggles, but is happy to just keep building. He is relying on the interest rates, and what information the Federal Reserve tells him to determine how much material he has to build with.

So, yes, what the people down at the fed say has an impact, but it isn’t because of psychological factors, it’s because, thanks to the actions of the Federal Reserve, the economy is wearing beer goggles and can’t see for itself and is thus dependent on what the fed says about how the economy is doing.

If, for instance, we didn’t have a Federal Reserve people wouldn’t be relying on a financial guru, but would instead look to market indicators, principally the interest rates to determine where the markets are going. Instead, because we don’t have that, the market is relying on every word that comes from the Federal Reserve Chairman.

So, it isn’t a matter of psychological factors, but simply trying to see through the distortions created by manipulations of the interest rate.

Here is an article exerted from Human Action that gives a great explanation.

And, there are two good Tom Woods episodes that discuss the boom-bust:
Episode 118 and Episode 419