Mises Wire

From the Invisible Hand to the Invisible Sleight-of-Hand

​Why are we using state money instead of market money? Put another way, why can’t we select the money we want to use? Cryptocurrencies are a market alternative, but they haven’t put state money out of business yet. If they ever threaten to do so, the state can prohibit them.

Market money is sound because of two essential features. First, it represents the market’s choice of a universally accepted medium of exchange, and second, it shackles government to a great extent, liberating the people. A state that prowls foreign lands in the name of freedom and democracy and keeps its domestic population in line with free stuff and threats has no interest in a currency it can’t will into existence. For this reason, governments hate sound money.

Even worse, people hate sound money. Sound money means taking responsibility for their own lives, relying on savings or charity when life gets ugly. They can’t turn to the government for help because governments without printing presses tend to let the chips stay where they fall.

Almost no one today comprehends sound money. Besides, they might retort, if sound money were once gold, look at the problems it caused. We were plagued with panics when gold was enthroned (forgetting that gold was corrupted by fractional reserve banking). And when recessions hit, the economy suffered because there was no printer of last resort to proliferate “unsound” money to jump-start its productive engine (not admitting that unsound credit expansion created the problem in the first place).

The better people are proactive—they don’t like to sit and let matters take their course, as they did with nineteenth-century crises. That’s why enlightened elites created the Federal Reserve. Things are better today with a central bank ready to fend off catastrophe with liquidity injections. Sometimes humongous injections. Sound money is an unsound idea for a modern, industrial economy that’s gone woke. Gold is a barbarous relic, with the emphasis on barbarous.

If history and theory didn’t prove otherwise, we might be tempted to believe the gold detractors. Granted, some of the history is hypothetical, but it’s a strong hypothesis.

Those Who Produce and Trade

Archeological findings show us that people once lived much like wild animals, hunting and gathering their food. When they discovered they could grow some of their food and domesticate certain plants and animals, they formed settlements. Agriculture provided a surplus of food and allowed people to spend less time trying to feed themselves and more time working on other productive pursuits, thereby creating a diversification of labor.

With specialization came the opportunity to trade, beginning with barter and advancing to indirect exchange. All other discoveries that have raised our standard of living are contingent on the simple process of trading one good for another good that is highly liquid. (A house is highly valuable but not at all liquid, whereas a carton of eggs is both liquid and valuable.) With this eminently marketable good, it could be traded for something else rather than consumed, and thus through successive trades individuals could acquire the goods they wanted that they couldn’t get through direct exchange.

Goods that became universally accepted in trade became known as money. Only with the emergence of money could a division of labor develop to any great extent, enabling people to specialize in lines of production most suited to their skills or temperament. Thus, money made possible the advancement of civilization as we know it.

Looking back from our perch today we find something odd about this evolution from barter to money. At no point was anyone able to exchange nothing for something—other than by cheating. In a free market a person could not scoop up a handful of wet leaves, for example, and expect to trade them for a basket of eggs or admission to a stage play. A trader had to bring something to market that people actually wanted.

People embraced the idea of money because it made them much wealthier. Unlike barter, they were no longer limited by a double coincidence of wants. When gold and silver became universally adopted in the West, goods flowed across borders, hampered only by government policies.

Those Who Resort to Political Means

But civilization developed in other ways as well. Not everyone was content to work and trade to support themselves and their families. Some men became part of a ruling gang, promulgating rules and demanding tributes from producers in exchange for protection from other gangs. Thus, the development of civilization coincided with the emergence of autocratic government, a multitiered social structure with parasitical thugs at various levels giving orders and the rest of society obeying them.

As coined money began to be used, the rulers saw that control of the money augmented their power considerably.

Over the centuries governments, in collusion with bankers, have driven commodity money from world markets, replacing it with fiat paper money that’s divorced from any connection to market value. Those who attempt to use gold or silver in exchanges should prepare themselves for a lengthy prison sentence.

With autocratic government we would expect nothing less. Monopolizing the counterfeiting of money has always been a preferred way for the state to confiscate the wealth of its subjects, since it doesn’t have the inflammatory reaction that taxes provoke.

But what about so-called democratic societies, where the government allegedly serves the interests of the people who elect them? Did an economist discover a truth that happens to legitimize the activities of repressive governments? Are we now subject to a scientific syllogism that says effectively that more of a good thing is always better, and since money is good, more money is better? And since paper money can be produced quickly with almost no limit, paper money (or its electronic equivalent) is the best choice.

How did we ever get such a barbaric monetary scheme when money entered the world as an innocent benefactor of mankind?

The State Comes into Its Own

With the rise of state power in the twentieth century under the banner of progressivism, economists have flocked to the state to bolster the ideal of inflation and deficits as a permanent condition. From 1930 to the publication of John Maynard Keynes’s General Theory of Employment, Interest, and Money in 1936, free market economists slipped into oblivion. The few books offering a free market explanation of the Depression—notably The Great Depression by Lionel Robbins (1934) and Banking and the Business Cycle: A Study of the Great Depression in the United States by Chester Phillips, T.F. McManus, and R.W. Nelson (1937)—never influenced policy. MacMillan published all three works, and Robbins later repudiated his book.

F.A. Hayek thought Keynes would later repudiate The General Theory as he had done with an earlier work, so he didn’t bother to critique it immediately (though from 1937 to 1988 he did critique it in a variety of ways). During the 1930s and through World War II, Chase bank economist Benjamin Anderson criticized government polices in articles that were later published in Economics and the Public Welfare in 1949, the year he died.

As Gary North points out, Keynes’s book won the ideological battle, even though nobody reads it. They read the textbook version instead, beginning with Paul Samuelson’s book Economics, originally published in 1948. Samuelson led the charge in promoting Keynes’s “work of genius”:

It is a badly written book, poorly organized; any layman who, beguiled by the author’s previous reputation, bought the book was cheated of his five shillings. . . . It is arrogant, bad-tempered, polemical, and not overly generous in its acknowledgments. It abounds in mares’ nests [defined as “A much vaunted discovery, which later turns out to be illusory or worthless”] or confusions. In it the Keynesian system stands out indistinctly, as if the author were hardly aware of its existence or cognizant of its properties. . . . In short, it is a work of genius.

He concludes,

Keynes denies that there is an invisible hand channeling the self-centered action of each individual to the social optimum. This is the sum and substance of his heresy. Again and again through his writings there is to be found the figure of speech that what is needed are certain “rules of the road” and governmental actions, which will benefit everybody, but which nobody by himself is motivated to establish or follow. (my emphasis)

The poor layman was not only cheated of his shillings, he also was denied a clear exposition of how a market economy worked. Instead, he is told we need the great savior government to keep the economy from self-destructing.

Government actions, by their nature, never benefit everybody. Smith’s invisible hand worked to the extent that interventionists stayed home.

As Keynes is considered the most influential economist of the twentieth century, hyper-interventionist governments, not the market, own the declining economic state of the world today. If economies were free from state intrusion, life would be far better and any calls for a Great Reset would be dismissed.

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