The Quality of Money
Below is an extract from a commentary available to subscribers at www.goldenbar.com on 9th November 2005.
It's not the quantity of money that facilitates exchange and fosters economic growth, but its quality.
Now you know what most people do not; and that which they may not know for all of their lives. If you do not know it, then my aphorism will not help you understand it - it is only the conclusion stemming from the truth of several economic premises stated in a way that I think is somewhat original, potent and clear.
But perhaps the ultimate premise is the simple empirical fact Mises deduced from the other facts of human history:
"If it were really possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world" - Mises, Planning for Freedom p.190
Who would dispute this? Yet many try because they don't like the conclusion it supports. Of course, there are those who insist it is both - that it is important that economic growth is accommodated by some form of expansion in good quality (sound) money - or that for some reason, those who are in the position of expanding credit withhold some deliberately in order to keep most people poor - though thinking like that is precisely why we have central banks to begin with because it leads to thinking that interest rates are an artificial phenomenon arbitrarily charged by the greed of money lenders, which then leads to the idea of creating a central bank on the basis of pushing interest rates to zero - the problem can then be solved by nationalizing the central bank (taking away its alleged independence) so that it doesn't withhold any inflation!
Thus, it may be argued, the reason poverty still exists is because we haven't done something like this? It won't be long...
Inflation is not a thing, like an object. It is an economic concept describing a process: it is the artificial expansion in credit and/or the supply of money relative to the demand for money, which necessarily leads to a devaluation of the monetary unit... in other words, it causes affects on prices independent of real tastes and preferences, etc. It is a policy implemented by the state (and its banking monopoly) in order to pick your pocket, which is the only way outside of war, or sometimes alongside of it, governments can hope to deliver on their promise of utopia (since force alone cannot keep them in power). It affects a redistribution of incomes, not an addition to prosperity; but it does this under the guise of illusory prosperity - it supplants growth in savings, or capital (capitalism), with a boom in consumption. It is effectively a hidden tax.
And a central bank exists primarily in order to coordinate it, so that it can be sustained.
This requires a special knowledge of how to manage its effects so that it does not result in a demonetization of the monetary unit right off, because then the scheme is headed off - thus the mere existence of a central bank implies knowledge that the market determines the object and value of money.
Over the long run the policy undermines productivity and it erodes a society's capital structure (the capacity to produce those goods that are most urgently needed); it organizes the economy's capital in such a way that it serves the needs of the state primarily as one very big consumer with a short term outlook and five fingers, rather than respond to the needs of consumers; it fools entrepreneurs into thinking they are consuming profits when they might in fact be consuming capital; it subsidizes interventionist ideologies that could not survive in the absence of the policy, which then manifests as an inherent dependency on the policy; it subsidizes the fundamental disutility of saving and encourages consumption and thinking short term; it gradually undermines the moral fabric of society - almost all of the moral ills of society can be traced back to it; its progression is unpredictable in fact.
You've all heard of the proverbial butterfly that flapped its wings. Well, inflation is an invisible elephant.
And I just wonder what would happen to gold if more people knew this stuff... about butterflies and elephants.