Mises Wire

On Money: Measure for Measure

Folding Measuring tape

Dr. Marc Miles, a noted monetary economist, has now joined Mr. John Tamny in criticism of my review of Steve Forbes and Elizabeth Ames’s book Money. These authors write from a shared viewpoint, and I shall endeavor here to respond to both.

In trying to understand my critics, I was puzzled. Forbes and Ames asserted, and I denied, that money measures value. It did not surprise me that Tamny and Miles agree with Forbes and Ames. What puzzled me was that Tamny and Miles not only think I am wrong, but think that I am obviously wrong. I deny, they believe, something that is evident on its face.

Asking what this obvious truth is supposed to be enables one to grasp better what Forbes and his defenders have in mind, and for helping to make this clear I owe a debt to my critics. Their principal contention may be put in this way: Money has no value in itself.  The purpose of money is to facilitate exchange. It is a way station through which we pass when we wish to exchange what we produce for what we want to consume. The “real” action in the economy is the exchange of goods and services for other goods and services. A nation becomes wealthy by producing more goods and services, not by issuing more monetary tickets.

Given these facts, how do we decide what is the appropriate number of monetary tickets for an economy? Here Tamny and Miles appeal to the supposed fact that money is a measure of value.  What do they mean by this? I suggest that what they have in mind is no more than the commonplace that you can compare one price with another. If a loaf of bread costs $3.00 and a candy bar $1.50, then a loaf of bread costs twice as much as candy bar. When they talk about “value”, I think they wish to refer to goods that are wanted rather than the subjective preferences people have for these goods. It is for this reason that Austrian appeals to subjective utility leave them unmoved. They have no interest in the subjective theory of value.  All they mean when they say money measures value is that you can use prices in economic calculation.  “Measurement” is a singularly inapt term for what they want to say, but this is what they mean by it. [1]

The trouble with their view comes with the next step that they take. At a particular time, one price can be compared with another: so far, so good. What happens, though, when, you want to compare the prices of goods now with the prices of goods six months or a year from now?  It is very likely that the goods then available will not be exactly the same as the ones now available. Further, owing to changes in supply and demand for some of these goods, the relative prices of the goods found on both lists may differ. But, bearing these facts in mind, what Forbes, Tamny, and Miles want is a state of affairs in which a dollar six months from now will buy, roughly, the same “basket of goods” as a dollar now. In brief, they wish the “purchasing power” of money to be constant.  Otherwise, money will not be able to be a measuring rod: one will not be able to say, e.g., that a loaf will bread now has the same price as two candy bars six months from now. (If you know the extent to which purchasing power has changed, you can still make the calculation; but it will be much more difficult.) In sum, they want the “measuring rod” of money to be constant over time.

Money, they say, is a measuring rod. People do not want money, but only its purchasing power.What is wrong with this? They reproach me for ignorance of economics, but it is they who have made a basic error in logic. They confuse a good, money, with the uses the good has. Miles says, “Gordon’s argument veers off early by confusing ‘money’ and ‘purchasing power.’” Neither buyer nor seller wants money, which is simply a measuring rod in a transaction; rather goods are exchanged for “purchasing power.” But the services of money as a unit of account, i.e., in their usage its work as a “measuring rod,” and the extent to which a unit of money can purchase goods, i.e., its purchasing power, are not separate entities. Rather, both are uses to which the single good, money, may be put. As usual, Rothbard gets to the essence:   In What has Government Done to Our Money?, he says: “Because money is a commodity medium for all exchanges, it can serve as a unit of account for present, and expected future, prices. It is important to realize that money cannot be an abstract unit of account or claim, except insofar as it serves as a medium of exchange.”

Contrary to my critics, people do indeed want this good. You cannot rightly say that people want purchasing power, but not money.  It is money that has purchasing power.

The critics make a second, and related, mistake in logic. They rightly note that money has value because of what it will buy. Money is not an intrinsic value but rather a means to an end. If you want dollars, you want them for the goods they will buy, now or later. It hardly follows from this, though, that you do not want the dollars, as if something’s being a means to an end negated its having value.

If, then, money is a good that people want, it has a price, determined by supply and demand.  There is, in W.H. Hutt’s phrase, a “yield from money held.” Money is not an ethereal abstraction, a “brooding omnipresence in the sky.”  Miles is thus precisely wrong when he denies that tying the dollar to a fixed price of gold constitutes price-fixing. He says, “’Price-fixing’ refers to pegging the value of one commodity in terms of another. In economic jargon it is fixing the ‘terms of trade’ or barter price between goods. That’s not what Forbes and Ames are talking about. They are targeting the price level.” This contention rests on the false premise that money is not a good.

Further, in the genuine gold standard supported by Mises and Rothbard, money is not introduced by an outside power into a system of barter equations, in order to specify a price level.  Miles says, “In a barter model there is no price level problem. There is no money, so there is no money price level. There are just the relative prices of goods, or terms of trade, and equilibrium can be determined independently of money. However, bring in money and the problems begin. There is now one more variable, but not an additional equation. There is no unique solution to the price level. It could be anything.” In a genuine gold standard, monetary gold is bought and sold in the same way as other commodities. There is no indeterminacy in the market that an outside agency must specify.

Gold is a commodity produced, bought, and sold, like other commodities.  It is thus especially inapposite for Tamny to suggest that I wish to impose some artificial scarcity of money on the free market.  “Applied to money, Gordon seems to conclude that for it being scarce, it won’t be cheap, thus a lack of inflation.” To the contrary, I am content to let the free market itself set the price of money in terms of other goods.

Neither is it the case, as Miles suggests, that I want, or am willing to put up with, money that fluctuates wildly in purchasing power. ”Imagine in Gordon’s world of ‘free market’ weights and measures. The true weight of a pound would vary from minute to minute in some futures market.” To the contrary, and this is the grain of truth in the ideas of the Forbes group, money that remains relatively stable is indeed desirable. This is a great advantage of gold: it has historically been a reasonably stable good. But to go beyond this and seek the spurious precision of money with constant purchasing power is to pursue a chimera. As mentioned before, purchasing power cannot remain the exactly same from one period to another, because the “‘basket of goods” changes and because relative prices within the basket also change.

The whole notion of a uniform “price level” that can be stabilized is, as Mises long ago pointed out, fictional: “Exchange ratios on the market are constantly subject to change. If we imagine a market where no generally accepted medium of exchange, i.e., no money, is used, it is easy to recognize how nonsensical the idea is of trying to measure the changes taking place in exchange ratios. It is only if we resort to the fiction of completely stationary exchange ratios among all commodities, and then compare these commodities with money, that we can envisage exchange relationships between money and each of the other individual commodities changing uniformly. Only then can we speak of a uniform increase or decrease in the monetary price of all commodities and of a uniform raise or fall of the ‘price level.’ Still we must not forget that this concept is pure fiction. . .It is a deliberate imaginary construction, indispensable for scientific thinking.” (The Causes of the Economic Crisis, p.28)

The relative stability of the market is the best that can be achieved, and the attempt to “correct” the market is not only futile but dangerous. As Joseph Salerno has aptly noted, “What may be called ‘price-rule monetarism,’ then, is vulnerable to criticism on precisely the same grounds as the more conventional quantity-rule monetarism. The most serious criticism of both varieties of monetarism is that they fail to come to grips with the root cause of inflation, namely, the government monopoly of the supply of money. The built in inflationary bias of the political process virtually guarantees that both quantity and price-rule targets will be ignored or revised when they become inconvenient to the government money managers.”  (Salerno, Money: Sound and Unsound, p.368.)

I conclude with one more logical mistake by Miles. He recounts his response to the claim that his dollar-gold price rule amounts to price-fixing. No more so, he told the high treasury official Beryl Sprinkel, than the monetarist attempt to control the quantity of the money supply. That may indeed be so; but the fact that a measure is no more an interference with the free market than something else hardly suffices to show that it is not a case of interference with the free market. To think otherwise is, in P.F. Strawson’s phrase, “a non-sequitur of numbing grossness.”


[1] Murray Rothbard aptly notes in What has Government Done to Our Money?  “Money does not ‘measure’ prices or values; it is the common denominator for their expression. In short, prices are expressed in money; they are not measured by it.”

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