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Back to School: Austrian School
Please take this as penance for my recent, and recently-deleted, post regarding the Fed. Out of that regrettable conversation came, I hope, one good thing: an opportunity to open a door for the genuinely curious who wonder what I’m so worked up about. Specifically, let me present a good launching point. It isn’t a massive scholarly tome, but it isn’t (or at least isn’t merely) opinionated handwaving.
What Has Government Done to Our Money? and The Case for the 100 Percent Gold Dollar is Murray Rothbard’s famous manifesto on sound money. First published in 1963 in the style of a pamphlet designed for mass distribution, it is one of his most influential works.
Murray Rothbard needs no introduction in libertarian economic circles. For the rest, Rothbard might best be characterized as an economist analogue of David Horowitz. Raised by parents of the Left, he was intellectually unable to reconcile cant with reality, but sincere in his belief in freedom, both in the abstract as a moral good in itself, and in practice the best vehicle for improving the lot of the less fortunate.
Rothbard, a student of Ludwig von Mises and hence the Austrian school of economics, begins with a brief apologia for taking freedom as a guiding principle in discussing money. It isn’t likely to convince the unconvinced, but is characteristic of any student of von Mises, who was a stickler for making assumptions as explicit as possible. “If we favor the free market in other directions,” Rothbard writes,” if we wish to eliminate government invasion of person and property, we have no more important task than to explore the ways and means of a free market in money.”
Part II, “Money in a Free Society,” is worthwhile by itself as an excellent capsule summary of Austrian monetary theory. He quickly argues the value of exchange generally:
If no one could exchange, if every man were forced to be completely self-sufficient, it is obvious that most of us would starve to death, and the rest would barely remain alive. Exchange is the lifeblood, not only of our economy, but of civilization itself.
He surveys primitive barter schemes and their limits: “Clearly,” he observes, “any sort of civilized economy is impossible under direct exchange.” Next he treats indirect exchange: “At first glance, this seems like a clumsy and round-about operation. But it is actually the marvelous instrument that permits civilization to develop.’ From this, he concludes:
A most important truth about money now emerges from our discussion: money is a commodity. Learning this simple lesson is one of the world’s most important tasks. So often have people talked about money as something much more or less than this. Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a “claim on society”; it is not a guarantee of a fixed price level. It is simply a commodity. It differs from other commodities in being demanded mainly as a medium of exchange. But aside from this, it is a commodity—and, like all commodities, it has an existing stock, it faces demands by people to buy and hold it, etc. Like all commodities, its “price”—in terms of other goods—is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. (People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.)
He notes the benefits of money. Because of it, “an elaborate ‘structure of production’ can be formed, with land, labor services, and capital goods cooperating to advance production at each stage and receiving payment in money.”
Next he treats monetary units, noting that “the free market will choose as the common unit whatever size of the money-commodity is most convenient. If platinum were the money, it would likely be traded in terms of fractions of an ounce; if iron were used, it would be reckoned in pounds or tons. Clearly, the size makes no difference to the economist.” If the size makes no difference, neither does its shape. He then considers private coinage:
Champions of the government’s coinage monopoly have claimed that money is different from all other commodities, because “Gresham’s Law” proves that “bad money drives out good” from circulation. Hence, the free market cannot be trusted to serve the public in supplying good money. But this formulation rests on a misinterpretation of Gresham`s famous law. The law really says that “money overvalued artificially by government will drive out of circulation artificially undervalued money.”
In the section treating the “proper” supply of money you’ll find a pillar of his critique of central banking; to wit, that the decision about the “proper” supply should be left to the market:
Aside from the general moral and economic advantages of freedom over coercion, no dictated quantity of money will do the work better, and the free market will set the production of gold in accordance with its relative ability to satisfy the needs of consumers, as compared with all other productive goods.
“The critic of monetary freedom is not so easily silenced, however,” he concedes:
There is, in particular, the ancient bugbear of “hoarding.” The image is conjured up of the selfish old miser who, perhaps irrationally, perhaps from evil motives, hoards up gold unused in his cellar or treasure trove—thereby stopping the flow of circulation and trade, causing depressions and other problems. Is hoarding really a menace?
He believes not:
Money is only useful for exchange value, true, but it is not only useful at the actual moment of exchange. This truth has been often overlooked. Money is just as useful when lying “idle” in somebody’s cash balance, even in a miser’s “hoard.” For that money is being held now in wait for possible future exchange—it supplies to its owner, right now, the usefulness of permitting exchanges at any time—present or future—the owner might desire. …
We have seen that society cannot satisfy its demand for more money by increasing its supply—for an increased supply will simply dilute the effectiveness of each ounce, and the money will be no more really plentiful than before. People’s standard of living (except in the non-monetary uses of gold) cannot increase by mining more gold. If people want more effective gold ounces in their cash balances, they can get them only through a fall in prices and a rise in the effectiveness of each ounce.
There goes Keynes.
In another pillar of his argument against central banking, he points out that those who seek to “stabilize the price level” must necessarily overrule freedom, “[s]ince the price of money would admittedly fluctuate on the free market.” Indeed, “[a]rtificial stabilization would, in fact, seriously distort and hamper the workings of the market.” Money he concludes, “is not a ‘fixed yardstick.’ It is a commodity serving as a medium for exchanges. Flexibility in its value in response to consumer demands is just as important and just as beneficial as any other free pricing on the market.”
Nor does he see the need for a single currency. To the contrary: “The free market is eminently orderly not only when money is free but even when there is more than one money circulating.
What kind of “standard” will a free money provide? The important thing is that the standard not be imposed by government decree. If left to itself, the market may establish gold as a single money (“gold standard”), silver as a single money (“silver standard”), or, perhaps most likely, both as moneys with freely-fluctuating exchange rates (“parallel standards”)
But where will these currencies be stored? Worry not. “There is every reason to believe that gold warehouses, or money warehouses, will flourish on the free market in the same way that other warehouses will prosper.”
In sum, he argues:
[F]reedom can run a monetary system as superbly as it runs the rest of the economy. Contrary to many writers, there is nothing special about money that requires extensive governmental dictation. Here, too, free men will best and most smoothly supply all their economic wants. For money as for all other activities, of man, “liberty is the mother, not the daughter, of order.”
You could stop there and have a better understanding of money than 98 percent of the populace, whether you agree with Rothbard’s conclusions or not. Such is the quality of Rothbard’s exposition.
In Part III, “Government Meddling With Money,” Rothbard the teacher gives way to Rothbard the polemicist. “The Economic Effects of Inflation,” “Permitting Banks to Refuse Payment” (AKA “Bank Holidays”), “Central Banking: Removing the Checks on Inflation,” “Going Off the Gold Standard,” etc., all explain, in detail, the central lie of central banking: It doesn’t control inflation; it creates it, and usually on purpose:
We have seen that, over the centuries, government has, step by step, invaded the free market and seized complete control over the monetary system. We have seen that each new control, sometimes seemingly innocuous, has begotten new and further controls. We have seen that governments are inherently inflationary, since inflation is a tempting means of acquiring revenue for the State and its favored groups. The slow but certain seizure of the monetary reins has thus been used to (a) inflate the economy at a pace decided by government; and (b) bring about socialistic direction of the entire economy.
Furthermore, government meddling with money has not only brought untold tyranny into the world; it has also brought chaos and not order. It has fragmented the peaceful, productive world market and shattered it into a thousand pieces, with trade and investment hobbled and hampered by myriad restrictions, controls, artificial rates, currency breakdowns, etc. It has helped bring about wars by transforming a world of peaceful intercourse into a jungle of warring currency blocs. In short, we find that coercion, in money as in other matters, brings, not order, but conflict and chaos.
Part IV, “The Monetary Breakdown of the West,” is Rothbard the teacher again, in my opinion at his best. Economic theory, to qualify as scientific, must show explanatory and predictive power. Here Rothbard uses his command of Austrian monetary theory to look at the Classical Gold Standard of 1815-1914, World War I, the Gold Exchange Standard of 1926-1931, the Fluctuating Fiat Currency regime of 1931-1945, the Bretton Woods agreement of 1945-1968, Bretton Woods Unraveling 1968-1971 (a period I personally remember), Bretton Woods’ End in 1971, The Smithsonian Agreement 1971-1973, and Fluctuating Fiat Currencies 1973-?Folks my age can fill in the blanks: the Carter years and Carter bonds; Reagan, Friedman, and Volker’s Fed, etc.
In Rothbard’s view,
As we face the future, the prognosis for the dollar and for the international monetary system is grim indeed. Until and unless we return to the classical gold standard at a realistic gold price, the international money system is fated to shift back and forth between fixed and fluctuating exchange rate,s with each system posing unsolved problems, working badly, and finally disintegrating. And fueling this disintegration will be the continued inflation of the supply of dollars and hence of American prices which show no sign of abating. The prospect for the future is accelerating and eventually runaway inflation at home, accompanied by monetary breakdown and economic warfare abroad. This prognosis can only be changed by a drastic alteration of the American and world monetary system: by the return to a free market commodity money such as gold, and by removing government totally from the monetary scene.
The conjoined volume, “The Case for the 100 Percent Gold Dollar,” takes a few pieces of the first volume, elaborates on how they abet the central bank in inflating, addresses some popular objections, and presents a rough plan for returning to a classical gold standard. Of these, I’d say only the last is essential, but it’s just a sketch. For more detail, you’ll need one of the scholarly tomes. If there’s any interest, I may write about one of them next. Fair warning.
So here it is. Yes, I’m angry. Not as angry as Rothbard, but angry. However, my anger is not directed toward any individual on Ricochet, and I was wrong preemptively to forestall debate from those I am admittedly already satisfied are wrong — not evil, just wrong. The right thing to do is make what case I can, and let that speak for itself. I hope this first attempt is of value to someone.
Published in Economics, General
This is the silliness about Descartes I was thinking about-
Or maybe, given comment #57, Titus posits some flaw of Bacon’s that we should appreciate better?
Speaking of Eco, if historical documents were evaluated only on merit of content alone (and not on things like handwriting styles, “irrelevant” linguistic shifts, and radiocarbon dating of materials used), it would be possible for a cadre of callow but talented and obsessive college students to perpetrate any number of hoaxes where their work was mistaken for the work of the “ancient greats”.
Take Bach’s music, for example. What makes Bach outstanding isn’t any one piece’s perfection, but that he produced so much so excellently. We rightfully admire him for that, and doubt that any one person will ever recreate his lifetime accomplishments. Yet even today, musicians still learn to write music like his – yes, even like his better stuff. It’s an uncommon-enough pastime that people not in the know tend to think it has already died out. But if you know where to look and you have “enough” innate talent (which we can concede is much less than the talent Bach himself needed at the time), producing “undiscovered Bach masterpieces” is perfectly possible. Thanks to our inheritance, of course!
Well, I can’t take much credit: That really goes to Rothbard.
What, have you got his ghost, too?
To be brief, being is being caused & being caused is being caused to effect certain effects. Lots to be said about the effects there; time was, that was called our world. Apologies for this vulgar talk–is this anything like what you were saying? I am unfortunately not fit to hear those words…
I love how well you put things: The stuff that works out best as theory or a claim to knowledge is the stuff that came damn near next to last–the micro stuff. How did people get there? How did they know to look for it?
I don’t know you, but you might not take insult at the suggestion that you are not altogether different from me–we’ve got eyes, we look around, we see stuff, we learn all sorts of things even as kids & at some point become able & aware we are able to figure out all sorts of things about the world in which we find ourselves. How do you get from that to micro-particles?
How do you get from fantasies about atoms to the kind of power it takes to get experiments done that allow physicists to think whatever they think about well, let’s call’em atoms?
As my interlocutors have so eloquently stated–the people who started science on this new path–I’d love to talk causality with whoever cares, but I fear I do not understand your words too well–knew nothing of what is known today!
I don’t know…
I don’t take insult at that. For approximately the same reason you shouldn’t take insult at the fact that a mere drone in the scientific world doesn’t think of himself as being so different from the great names of science history that he’s unqualified to comment on them.
If I may grossly oversimplify: observation feeds imagination feeds observation.
Do you mean political power?
The first experiments regarding atoms didn’t take massive government funding. Rather, they used clever observation to indirectly infer atoms’ existence through relatively low-cost means.Not every person would observe a bunch of chemical reactions and think “maybe these patterns of ratios happen because of atoms” or “maybe pollen grains in fluid bounce around like they’re being swatted by little balls because they really are”. Some imaginations make the leap, though.
Midge, you’re strange. The response was not addressed to you–I had not hoped you would answer. You are generous overmuch.
One problem with your gross oversimplification, observation & imagination is how I go through an Ezra Pound poem. I do not tell people anything about being after that, even if I flatter myself that I’ve figured out something about human beings.
No, I did not mean the political power you need to conduct experiments. You’re really something…
You’re right that not every person thinks the same way about, well, anything?
Leaping imagination. Engine’a’progress.
As for the ‘not every person’–you’re lookin’ at his writing, make no mistake-
GGoG,
I guess I read and think slower than you guys. I never have time to read everything here, missed your first piece, and am disappointed I can’t now read it. Why was it deleted?
In a deflationary economy, the general price level is dropping. The factory will be worth less next year because the growth of the economy has outstripped the growth of the (gold) money supply. As an extreme example, imagine that the money supply is constant — no one digs up any new gold — and the economy doubles in size. With the same amount of money chasing twice the output, prices are cut in half.
The result is that you’re better off hoarding your gold, rather than investing. Which causes economic activity to grind to a halt.
I’m not sure you’re working with me here. What about an hundred years back when people did not say such things to kids because they did not know them? Or the hundred years before? I’ve read old books were people say, wholes reduce to parts & thinking is the analysis of wholes to parts–what the word means…–& that’s long before anyone said anything about cells or electrons. Atoms are just atoms–indivisibles, what the word means…–It’s only a matter of figuring where you come to say, to be is to be is to be… All this kind of thinking long precedes modern science or any specific discovery or experiment…
Once you know all these things because someone found them, yeah, you can just tell people. It’s news to them, for a while. But how about when these things really are news? How about before?
Part of what I’m getting at is, decisions about being & cause were made well in advance of Newton even, to say nothing of really successful 20th century scientists who might never ask themselves what the people who made those decisions asked themselves in the beginning-
Nobody apparently felt the need to prove all this stuff science is proving who was setting it up. They just said it would work & achieve their over-arching political goals. Maybe Bacon & Descartes were just lucky or mindless. Maybe not–why I’m interested in them…
The money supply story is a bit more complex that I indicate, because there is also a concept called the “velocity” of money, which is a measure of how often money changes hands. If I recall my macroeconomics correctly, after 25-30 years, GDP = prices x output = money x velocity.
But it remains true that deflation is very, very bad.
Well, that’s better than hoping I wouldn’t answer!
Studying a poem is studying a human artifact that can already speak for itself. Maybe it’s for that reason that prose-analysis of poems, while worth doing, so often feels like an afterthought on the poem itself, rather than an insight into something broader than humanity. Idle speculation aside, that analyzing a poem should be different from analyzing the things science is interested in is not so surprising.
You had talked about political power earlier. You seem to be interested in the role political thoughts and powers play in shaping science. It was a reasonable thing for me to wonder.
Some of them, obviously. Hayek:
Lincoln was a Whig, for instance, as was Madison.
This is a red-herring argument. Whether they’ve succeeded in restoring anything is irrelevant to intellectual heritage. Hayek, in 1960: “The tug of war between conservatives and progressives can only affect the speed, not the direction, of contemporary developments.”
There aren’t enough classical liberals in America to win an election anywhere. I doubt even here.
“Great Rothbard’s Ghost!” does have a nice ring to it.
It was an intemperate screed that explicitly disavowed a willingness to engage—suitable for an e-mail to a friend, but entirely inappropriate for a Ricochet post. When several friends and acquaintances reminded me of this, gently, and more sober reflection also made its mark, I also recommended it be removed, which it was, post-haste.
Not, however, before I had commented with a prospective reading list, which Claire urged we retain. Once the thread was gone, I wrote a new post as a review of what I thought to be the best “first Austrian book” choice for a general readership, in a style hopefully reminiscent of anonymous’s great reviews. The next thing I knew, the structure had been significantly improved, some infelicitous word choices replaced, and apposite quotes from the work included, now on the main feed. I suspected the presence of the keen eye of Dr. Berlinski, of which we now have confirmation.
Ah, more’s the pity. I have an appetite for intemperate screeds and infelicitously-chosen words.
Your 1.5% figure for gold mining matches what I found online — about 2,500 metric tons mined each year, added to an existing stock of about 165,000 metric tons.
But the world economy, in real terms, has grown by about 3.5% annually since 1960.
With compounding effects, this means that over a period of 50 years:
Absent changes in money velocity, staying on the gold standard would have implied deflation totaling about 340% over 50 years, or about 2% per year.
It is true that the growth of the global economy has slowed in recent years. The annual average since 2000 has been closer to 2.5%, rather than 3.5%. But this still significantly exceeds the rate of growth of the gold supply.
What I’m still not getting is why an increase in purchasing power of 2% per year is a bad thing, especially vs. this:
But there’s no inflation!
I remember when Mom didn’t have to work and this is what we paid at McDonald’s.
I wrote the intemperate post that led to this one because I need modern financial types to, in the immortal words of Judge Judith Sheindlin, not pee on my leg and tell me it’s raining.
LOL. I first heard that phrase in the early 1990s on a sales call with a Texan. We had to mute the call we were laughing so hard. “Are y’all still there?”
Where’d you find this figure?
I’ve often thought a better way to measure money would be per capita, rather than measuring the economy, or some other measurement that requires lots of guesswork and estimation. “Economic output” is a fraught number. After all, what really matters is goods per person.
Population’s only gone up by 127% from 1960 (to 2010), which is a lot less than economic output. Gold inventory—to use your numbers—has gone up by 76%, which is a decline in money/person of -0.51% p/a—not that much, in other words. And far easier to live with than the massive decline in purchasing power we’ve actually lived with.
It makes it much clearer when inflation or deflation is occurring: gold/people is a much simpler metric.
Worth saying twice. If it is wrong, I would love to know why ;-)
Others have hit the valid criticisms of the Gold Standard, but we could achieve the same aims by a different mechanism.
Economic growth is remarkably stable over the long haul. Simply increasing the money supply by a fixed number per year (3.5%, 2.5%, or whatever the correct number is) removes the meddling.
The problem is unless you amended the constitution when going back to the gold standard, it is also easy to break from it because of political pressure.
The reason I hope/expect a Zerocoin or some cryptocurrency like it will ultimately succeed is precisely because it will force the issue: people may choose to use it preferentially over Federal Reserve Notes, and good luck stopping it.
Ironically, the link I posted earlier to a tweet from Tim Sweeney is a rather stinging critique of the Austrian critique of Bitcoin: Austrian monetary theory holds that the money commodity must first be used as a non-monetary commodity, which cryptocurrencies, even those otherwise Austrian in design such as Bitcoin, obviously falsify.
I hope so. It will help when they find more ways to speed up the transactions so that all everyday purchases can be made as quickly as sliding a debit card.
So the gold standard is impossible to install & would be impossible to maintain if installed. Anything else or otherwise?
You’re aware of how they stopped the gold standard, right?
The thing that could work is a free black market in one or more alternative currencies. This is already happening in other monetary hellholes, e.g. Argentina.
Well, we’ll have to see whether the state in America is any more serious.