Intellectuals and politicians often try to verbally summarize or justify conventional thinking in pithy ways. Milton Friedman (in 1965) and Richard Nixon (in 1971) both said different versions of the phrase “we are all Keynesians now.” . . . . Friedman and Nixon were describing the thoughts behind the implementation of Great Society redistribution programs and an inflationary monetary policy designed to offset the cost of those programs. — We Are All Keynesians Now, Brian Wesbury, Robert Stein of First Trust Advisors, 4/4/22
If there is one central myth supporting the folly that passes for monetary policy and by extension fiscal policy, it would have to be the unchallenged assumption that money should be defined and controlled by government.
Given the role of money in the economy – that it is it serves as a trade intermediary, one-half of virtually every transaction – nothing has been more destructive than the government’s commandeering money from the market.
Money was once the most marketable commodity, wrote Ludwig von Mises in 1912, albeit a special commodity. Since the Nixon Shock of 1971 making money a pure fiat, the absence of any commodity connection means that for government money is never an object. Sounds like a drunk’s fantasy. But there’s a downside: Fiat money increases amount to an exchange of nothing for something, a slick form of theft. Thus, unlike gold mining and coin minting, increases in the fiat money supply “set economic impoverishment in motion.”
But if a monetary system “works” why not let it be? Whatever our current problems might be we’ve survived without a commodity standard for a long time. What’s wrong with the government or its agent, the central bank, defining money and regulating its supply and distribution?
First, the money is not theirs – it doesn’t belong to the government or the central bank. Banks legitimately get their funds from depositors or investors. Anything they create on their own through fractional-reserve lending is fraudulent, because they’re guaranteeing the same dollar to both a borrower and a depositor.
Property rights violations notwithstanding, government and the Fed are trying to make a counterfeiting racket support a prosperous economy. The Fed’s money created “out of thin air” does not represent goods or services produced. The subsequent increase in the supply of money puts downward pressure on the purchasing power of the dollar, so that holders of previously existing money are in effect paying for the counterfeiter’s purchases. As Richard Cantillon explained in his famous essay (c. 1730), newly created money enters the economy unevenly, benefiting some groups at the expense of others.
Murray Rothbard discusses the counterfeiting process in What has government done to our money?:
Counterfeiting is evidently but another name for inflation — both creating new “money” that is not standard gold or silver, and both functioning similarly. And now we see why governments are inherently inflationary: because inflation is a powerful and subtle means for government acquisition of the public’s resources, a painless and all the more dangerous form of taxation. (Emphasis added)
And according to Keynes, not “one man in a million” is able to detect the theft — which apparently includes economists who believe “inflationary monetary policy . . . offsets the cost of those [Great Society] programs.”
As Keynes wrote during a brief period of clarity:
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.
Kings of old could debase their coins and pass them off as the real thing but it was a slow, tedious process that didn’t yield much revenue. Not only that, people grew wise to it and found ways to tell a cheat from a genuine article, giving rise to Gresham’s Law. And they saw it as a cheat, not as a way of increasing GDP, or making the price of exports more competitive, or stabilizing the price level.
Paper money changed all that.
Today, the rich are getting richer and the poor are getting poorer not because of “capitalism,” but because of a government-supported monetary system that enriches designated counterfeiters and their beneficiaries at the expense of other dollar holders.
Milton Friedman, in my view, penned the most important statement ever on monetary policy:
If a domestic money consists of a commodity, a pure gold standard or cowrie bead standard, the principles of monetary policy are very simple. There aren’t any. The commodity money takes care of itself.
Free markets tend to simply things. Given that monetary policy today consists of varying degrees of counterfeiting, involving arcane meetings held in billion-dollar buildings, we need to get government out of the way and let the free market take care of itself. And in so doing, take care of us as well.
Final Word
According to Mises there are two aspects to the sound-money principle:
It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.
In my lifetime the greatest defender of sound money is Ron Paul — Keynes’s one man in a million — who in his 2009 book End the Fed explains how the Federal Reserve and its co-conspirator are the enemy of our future:
Bad economic policy can destroy a civilization—no policy is more dangerous than bad monetary policy. . . .
We need to take away the government’s money power. The banking industry needs its welfare check ended. The dollar’s soundness depends on its being untied from the machine that can make an infinite number of copies of dollars and reduce their value to zero.
The Fed and its powerful allies survive on the ignorance of the public. Let’s not go down with that ship.
