Money makes the world go ’round—we all know that much.
Economies rely on the exchange of money for products and services. So do people, families, firms, and communities. Money is simply a medium of exchange; it allows people to obtain what they need to live.
Currency was invented to improve upon a less-than-perfect barter system. Economists’ “double coincidence of wants” is solvable by a fungible, divisible unit of account—like greenbacks. Anyone looking for a good primer on basic monetary theory should have a look at this link.
We all know the sound of money, too—ka-ching.
From long and arduous experience, we know it takes work and investment to make money and to see it grow through that magical mechanism of time, which is the root of compound interest. We also know that, historically, some nations have prospered economically while others have failed miserably.
In the words of everyone’s favorite founder, Benjamin Franklin, “money makes money. And the money that money makes, makes money.” Nations that fail to accumulate wealth or practice the virtue of thrift will have to repent. Ask the Argentinians. (I wrote a whole book on the subject).
Is sound money a flight of fancy in 2021? Some gold miner’s dream? Was it ever a reality? What is the sense of the adjective “sound” as applied to money? Can we get it back with Biden’s proposed tax-and-spend regime?
The Sound Money System
Classical economic theory postulates that in order to be useful, the currency should be fungible, durable, portable, recognizable, and stable. These properties ensure that the benefit of reducing or eliminating transaction costs by replacing the unit of account in barter situations does not outweigh other types of transaction costs associated with that specific good. Many cultures across the world invented various forms of currency or coinage. Yet in order to be sound, money must be all these five things—and ours is increasingly not.
The ideal (sound) money system ticks these boxes to the highest possible degree. The nationally legal tender must be a bulwark to personal and national freedom, a tool that safely and reliably stores, measures, and transfers purchasing power according to the needs and wishes of its owner(s).
That ideal money system is not elusive—it is readily achievable today. Digitize and blockchain gold, silver, and any other scarce, long-lived commodity as the collateral. Make the exchange of it nontaxable as paper dollars are. Accept Bitcoin as payment for federal tax obligations.
There you go, mission accomplished.
But that’s the easy part. The hard part is prying open the dying hand of the current political and fiscal order, for which honest money is deadlier than an informed public and a truly free press.
$200 Trillion and Counting
Digitization and blockchaining are not the threat. Those are complex processes, but not prohibitive. Both are firmly underway and inevitable, anyway. The issue is that honest or sound money—collateralized and nontaxable—limits the government’s ability to do what it chooses with the people’s purchasing power, whether the people understand it or not.
Sound money is what the American founders wanted for our republic, and what “we the people” experienced more or less continuously until 1913, when the bankers won the Federal Reserve battle that may prove to have decided the monetary war and subtly but terminally corrupted the whole American experiment.
We never voted to take on the $200 trillion in debt and unfunded liabilities that now suffocates us. That is the legacy of our betters, the accumulation of the promises they led us to make to ourselves, knowing full well they could not be met and would eventually lead us to the suffocation (or worse) that we now face.
In dire straits, at risk of failure and humiliation, the same priesthood (led by Federal Reserve chairman Jerome Powell) resorts again to hocus pocus and fills the hall with the smoke and mirrors of Modern Monetary Theory, which is neither modern, nor monetary, nor much of a theory. It has been done repeatedly since forever and has always failed in practice.
We hid the excess by recycling the Eurodollar, the petrodollar, and the various lesser versions of the same phenomenon in the smaller currencies and commodities. As the world’s reserve currency, the U.S. dollar still reigns supreme. Emitting the world’s reserve currency has its perks, and abusing it is very unwise. Already house prices are inflating out of the grasp of middle America. It isn’t too late to turn the tide, but some tough medicine will be necessary.
Modern monetary rules such as Nominal GDP level targeting do leave you hankering for inflation. Anyone who passed Macro 101 will remember that the GDP is a direct function of the inflation measure, by construct (GDP = Inflation + “real” growth). MMT enthusiasts contend that it doesn’t matter if 100 percent of that number is inflation. Which is ludicrous, of course.
The truth is, “sound” money was never based on empirical relationships among economic variables. It was not invented but discovered as a successful social contract. It is more analogous to the rule of law and its own emergence out of the Hobbesian morass of a war of all central banks against some wildcat currency entrepreneurs (Dogecoin, anyone?). Ludwig von Mises made this point clearly:
Ideologically [sound money] belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and bills of rights was a reaction against arbitrary rule and non-observance of old customs by kings.
This brings us back to interest rates, that Einsteinian force, the eighth wonder of the world, and the painful remedy for inflation, which is banker class’s one weakness. The price of oil—a major component in price inflation—keeps shooting up, not least because America’s shale industry effectively has been banned by the Biden Administration. Apart from the public finance implications of higher oil prices (they’re bad; tank diesel and jet fuel don’t get cheaper), it is a major piece of the price equation of everything from food to airplane rides to the take-home pay of any commuting hourly wage earner.
The case for sound money is not merely an abstract economic argument. When classical economists contended that commodity standards were a bulwark against inflation, they did not suggest there would be no variability of inflation under a gold standard. Their own experience told them otherwise. Rather, they recognized that such a standard was protection against arbitrary actions by sovereigns to depreciate the currency as the inflation tax is about to do to your portfolio if Biden keeps spending like a drunken sailor. Protection against arbitrary and capricious government actions is what constitutions are meant to provide.
In the new world of money in this 21st century, the Fed and other central banks deviated from the rule by lowering interest rates in response to the dot-com bust. Then came the housing bust which was the consequence of the boom created by the contrived policy of low interest rates. “No boom, no bust.” The Austrians have some choice thoughts on that business cycle, but in any case, the Federal Reserve applied its own wondrous onanism through operation twist—buying its own bonds at the targeted rates so as to lower the rates and therefore the cost of financing longer-term debts (as well as your credit card APR).
Central banks have not returned to a monetary rule, ever since the Troubled Asset Relief Program and the auto company bailouts (remember when George W. Bush nationalized Detroit? Ha! Great conservative, that one). The funny money in the system has been swept under the seigneurie column of D.C.’s profit-and-loss sheet. The horn of plenty miraculously provides. Instead, they have engaged in what should be termed “monetary improvisation.” The central bank fears competition to its fractional-reserve pyramid scheme from sound money. The cartel of banks that the Federal Reserve represents seeks to maintain its power over us mere mortals.
A Winter of Discontent
So, the coming fall is going to be harder, steeper, and nigh on impossible to overcome, since there are no tools in the proverbial toolbox to fix the crisis. Inflation can’t be papered over unless we return to sound money. A winter of discontent beckons and we’ve already seen what a toilet paper riot looks like.
Money, as we know it in this century, is proving immune to control by central bankers at long last. The relationship between monetary reserves and various monetary aggregates (the Keynesian multiplier) has indeed broken down.
More precisely, central banks appear to have lost the ability to control inflation. In any other business, missing a target by almost 100 percent (here’s one for the budding economists: what’s 0.02 percent of a two percent target?) would carry serious consequences. That feeling you have—that your money isn’t worth much or that it is not backed up by anything real—is accurate.
Inflation is about to return with a vengeance, and we are totally unprepared for the result. Obama’s collusion with big corporations allowed quality to take the hit in a lot of the cracks that were papered over—the proverbial increase of air in your Lay’s crisp bag. Biden plans to point the firehose at greenery and hope the electricity bill comes in cheaper now that the oil is more expensive. Yes, not possible.
And when the Biden crowd gets finished soaking not just the rich but the middle class and spending trillions upon trillions more of your hard-earned money they don’t have and will need to borrow, the greenback will truly be worth less than nothing. We’ll have to run the Russian gas market play and allow fracking again.
The dollar now is defined by nothing except a promise to pay another undefined and worthless dollar. Money underlies everything. When money itself is not defined, it cannot be honest. That is where we stand at present. No sound money, no sound country.