David Gordon Takes Aim at Steve Forbes, But Hits Ludwig von Mises
Last week Mises Institute senior fellow David Gordon reviewed Money, the book released last summer by Steve Forbes and Elizabeth Ames. Gordon described it as "odd" in the sense that he disagreed with how the authors have chosen to define money. What struck this writer as odd is that in lightly attacking Forbes and Ames, Gordon only succeeded insofar as he perhaps unintentionally revealed a strong disagreement about money with the intellectual father of the Institute which employs him, Ludwig von Mises.
Gordon has a problem with the Forbes and Ames assertion that money is merely a measure meant to facilitate exchange. Notable here is that the authors are simply stating what's obvious, something that surely predates even Adam Smith ("the sole use of money is to circulate consumable goods"), that money isn't wealth. It's what we use to exchange actual wealth.
That's why if money of all shapes and sizes were to disappear tomorrow, the U.S. would remain an intensely rich country; one in receipt of the lion's share of the world's resources (credit). The vast majority of those resources don't flow to the U.S. and other rich countries because we and other wealthy countries have the best printing presses, the most aggressive central bankers, or the most dollars, euros and yen, rather the world's plenty migrates toward us here because we have the most to offer in return; money merely the facilitator of trade that always balances, by its very name.
We're not the richest country in the world because we have the most "tickets" (dollars) to exchange for actual wealth; instead we have the most dollars (tickets) to exchange for wealth precisely because we're the most economically productive. When the Silicon Valley technologist produces the next great software, he's demanding dollars, but what he's really demanding are the goods (food, clothing, transportation, shelter) that the dollar "ticket" can be exchanged for.
Rather than viewing money as a concept, meaning a measuring rod of value meant to foster the exchange of actual value, Gordon sees money as a floating commodity that is most useful when it's scarce. As he puts it in his review, "government ought to refrain entirely from monetary expansion" presumably to avoid his definition of inflation. Inflation to monetarists and Austrians is increasingly all about supply, even if demand for it outpaces the supply, or better yet, even if supply and demand are equal.
Austrians view credit in much the same way. Who cares that economic resources (trucks, computers, tractors, labor) are exchanged for other resources, thus explaining why credit is abundant in the U.S. while nearly non-existent in Haiti, modern Austrians labor under a conceit that Mises would likely have mocked: the pretense of knowledge that says they know what the supply of dollars should be, and how much is too much "credit" even though the latter presumes an exchange of resources in much the same way that the butcher and baker trade products for products.
Applied to money, Gordon seems to conclude that for it being scarce, it won't be cheap, thus a lack of inflation. More on that in a bit, but Gordon's implicit desire that money float in commodity-like fashion is arguably at odds with how Mises viewed it.
As Mises wrote in Human Action, "One must disregard the intermediary role played by money in order to realize that what is ultimately exchanged is always economic goods of the first order against other such goods. Money is nothing but a medium of personal exchange (my emphasis)." In short, Mises saw money just as Forbes and Ames do, as a measure that fosters the exchange of actual economic goods.
You can't eat money as Gordon surely knows, and he surely also knows that most who transact with him (this is true of most economics writers, for good or bad) on a daily basis have little interest in his musings on the economic scene. Thankfully their non-interest in Gordon's doubtless wise thoughts don't render him unclothed and undernourished. He can exchange his thinking on economics with those who do care about what he thinks, and who will use dollars to measure his contribution and to compensate him with, then he can exchange the dollars for all that he doesn't have, and with people who will die happily (but surely less wise) without ever having heard of the Austrian School.
The above speaks to the essential importance of money. It allows the vintner to trade his wine for the baker's bread even if the baker is a teetotaler. Money means that the baker can still transact with the vintner, but instead of securing access to the wine he doesn't desire, the baker takes dollars that are generally accepted by all economic participants, and that will allow him to secure meat in return for the bread he sold to the vintner.
The trade facilitated by money that Forbes, Ames and Mises all cite as the purpose of money logically presupposes stability in the value of the unit (money) being used to foster the exchange. To state the latter is to waste words, or breath, or some other precious commodity. Money is again solely the "ticket" used to command real resources, so if it's floating in value there are winners and losers in trade despite the latter very clearly presuming a mutually agreeable exchange. This can only be if the money ticket is invariable thanks to a definition derived from a market good known for stability. The only thing odd about this is that Gordon very clearly disagrees.
Who cares that scarce "money" would have little economic value, and as such would eventually be cheap for it lacking an economic purpose? Who cares that the Argentine peso would be cheap even if stingily issued by the most austere of central banks? By Gordon's definition, a heavily used currency, one that is abundant in terms of "supply," is apparently a debased currency. As he once again made plain, the way to avoid inflation is for government "to refrain entirely from monetary expansion." Apparently missed by Gordon is that quality money is broadly demanded and used, and for being that way is very abundant in supply, while unstable money is not. Put simply, no company owner would accept Argentine pesos from an eager would-be buyer of same company, but nearly all would accept far more credible Swiss francs.
Implicit in such a view about monetary scarcity is that there's some supply of money that would please Gordon, but it's hard to understand what that might be. It may be that he wants government out of the business of money altogether, that's fair enough, but if we assume competing currencies it's no reach to say that the "best" currency will be the one that is known for stability in terms of value. But even if not, even if floating private money is the bliss of more than Gordon, the "best" floating currency will be heavily circulated and marked by expansion of same. It will be the "money par excellence" (how Marx described gold-defined money) used to settle all trades. Good private money would be heavily demanded, and would thus soar in circulation. Would Gordon view such a situation as inflationary? Better yet, would private money constantly changing in value appeal to him? It's doubtful.
That's the case because whether private or government issued, money that floats in value is money devoid of its sole purpose; good money once again described expertly by Mises as "nothing but a medium of personal exchange." Sorry, but per Mises's very definition, money is most useful if its value isn't changing; as in if it has the properties that are the opposite of the floating commodity-money that Gordon desires. Gordon surely knows this, at least implicitly.
Indeed, imagine if Gordon were desirous of using the dollars paid to him for his keen economic insights not for the immediacy of food and clothes, but instead to trade for a study to be added on to his living space. Such a project would take time, and to ensure the completion of the study, Gordon would logically pay for its construction in installments. Nothing to it?
In truth, floating money values make such a transaction far more perilous than it should be, and as such, less likely. Assuming the job is to be completed over 6 months for $10,000 up front and $10,000 upon completion, what happens if the floating dollar collapses in value over the ensuing 6 months? Gordon would in the transaction described "win" to the detriment of the contractor adding on his study. But if the dollar were to soar in value, Gordon would pay back a great deal more in access to economic resources than initially contracted.
Surely Gordon doesn't see money as a valueless concept a la the monetarists, and we know this because he wants it scarce precisely because he thinks over-issuance drives down its value. If so, he logically doesn't want to see the value of money rise either. It's possible he's never taken on debt in his life, but assuming he has, logic dictates that he doesn't want to pay back dollars more valuable than the ones borrowed. Assuming he's never had any debts, that he only has savings means he's a creditor and logically desires money that won't decline in value. This signals that he too wants the stable money sought by Forbes and Ames, and once again Mises too.
Ok, based on the above, "strong," allegedly scarce money is just as crippling as is weak, allegedly ubiquitous money. It is because the purpose of economic activity is exchange, but floating money amounts to wealth redistribution, it creates winners and losers in trade when the latter, by its very name, logically presumes only winners. Because it does, and because money is merely the lubricant meant to encourage the trade of products for products, it's necessary that the unit used to settle all trading be as invariable in value as possible.
That's what's so odd about Gordon's criticism of Forbes and Ames seeking to define the dollar through gold. He views this as an explicit call for governmental "control" over a price. Not really. As Mises wrote, "The gold standard makes the determination of money's purchasing power independent of changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold standard; it is its main excellence."
In seeking to define the dollar in terms of gold through a gold exchange standard Forbes and Ames aren't so much trying to "control" the dollar's price as they understand as Mises did that money is tautologically a measure, and because it is, it's necessary to define the measure with a market good known for its stability. One wouldn't tie money's value to volatile shares of Priceline.com or Amazon, but one eager to issue quality money would give it a measure with something known for its lack of volatility, specifically gold. As John Stuart Mill explained it, gold is "among the [the commodities] least influenced by any of the causes which produce fluctuations of value." Gordon seeks commodity money, but apparently for reasons opposite of what drew people to gold long before Gordon, Forbes or Mises roamed the earth: money needs a gold definition precisely because its value is so invariable, and because gold is stable, it's money par excellence.
Gordon criticizes Forbes' and Ames' desire for gold-defined money as evidence of price fixing, and this is odd precisely because their support of a stable dollar speaks to how very much they loathe the very notion. Lest we forget, floating money isn't market based money; rather it's how the markets price the government's manipulation of the value of the government-issued unit. Floating money is the living definition of government money, and because it is, it gives the government a role not just in fixing the prices of goods priced in dollars and other currencies, but depending on the currency's direction, it gives government the explicit power to redistribute wealth. We've seen this in sad fashion since 1971: those long on hard assets (what von Mises referred to as a "flight to the real") like housing, land, gold, art and rare stamps did relatively well during the weak dollar ‘70s and 2000s, but not so well in the strong dollar ‘80s and ‘90s when those long the future dollar income streams that are stocks did best.
Floating money empowers government to control much more than prices, and because it does, we all lose. To see why, we need only remember von Mises's essential point that "A country becomes more prosperous in proportion to the rise in the invested capital per unit of its population." When investors invest in the U.S. they are tautologically buying future dollar income streams. No ideology or economic School can get around this truth. Money not known for its stability can rise up in value, but it can also fall. These fluctuations render the very investment that boosts productivity more risky. Forbes and Ames are for stable money simply because its stability is a magnet for the very investors whose capital commitments create all the companies and jobs in the first place. They understand as Mises did that while money itself doesn't boost economic growth, the greater its stability the more likely is the trade and investment that drives growth upward.
That's why Forbes and Ames don't fear the "monetary expansion" that Gordon views as inflationary. Good money is once again heavily demanded, so if money is being defined in terms of gold such that it's stable, it's only logical that demand for it will soar. And to maintain the price of money as measured in gold, it will be necessary to expand its supply. Yes, growing economies require more of the lubricant that is money, good money is desired globally, but to avoid a decline or rise in the value of the unit, Forbes and Ames would define the unit through gold to ensure its maximum stability.
They don't worry about supply of dollars for the reasons already explained, but they also don't worry about it for the most Austrian of reasons: only the most arrogantly conceited among us could presume to know the proper supply of money, or how much is too much/too little. This explains the gold definition. We can't know how many dollars the economy needs, so let the market price of gold in dollars serve as the signal of over or under-issuance.
Von Mises seemed to agree. As he wrote in The Theory of Money & Credit, "No individual and no nation need fear at any time to have less money than it needs." Implicit in such a statement is the logical reverse. Production itself creates money demand and will be met with money supply, but so will reduced production under a stable dollar regime logically lead to less "money." So for central banks to create money to ensure the preservation of wealth is, in the words of Mises, "as unnecessary and inappropriate as, say, intervention to ensure a sufficiency of corn or iron or the like." Money is once again a facilitator of exchange, nothing more and nothing less. When an economy is booming demand for money and the goods that can be attained with money soars, when an economy sags, the opposite takes place.
Gordon presumes that Forbes and Ames seek to avoid "deflation" in the weird way that Keynesians tend to define it as a driver of lower prices, but that's a misread of their book. The authors well know that in a market economy defined by stable money that falling prices are the norm precisely because investment in productivity and technological enhancements is most prevalent when floating money is erased as an investment risk factor. Thanks to investment, and Gordon surely knows this, the prices of cell phones, computers and flat-screen televisions in modern times have plummeted. Notably, the latter isn't deflation any more than the rising price of New York City hotel rooms is inflation. Falling prices drive demand and investment in goods previously unattainable, while rising prices in a stable dollar environment signal to producers what consumers desire more of. Forbes' and Ames' disdain of deflation and inflation has nothing to do with rising and falling prices that are the norm in a market economy, and everything to do with dislike of floating money values that are anti-investment, and for being that way delay the eventual commoditization of goods previously only enjoyed by the rich.
Regarding the Great Depression, Austrians and monetarists focused on the supply of money and credit (repeat it many times over, the Fed cannot create credit, the latter is real resources, and the Fed restrains the creation of those resources when it fiddles with interest rates) regularly finger the Fed as a major cause. The problem with such a viewpoint, one that explains the contrarian stance taken by Forbes and Ames, is that the Fed quite happily (though it was still too powerful to the economy's detriment) had a much more limited role way back when. It was the lender of last of resort, but it was only required to spring into action when rates on short credit rose above 10%. But as Nathan Lewis has pointed out in Gold: The Monetary Polaris, interest rates never rose to that level. Banks were awash in credit in the 1930s, but thanks to barriers to growth erected by the political class, demand for credit plummeted. The Great Depression was a political creation of Presidents Hoover and Roosevelt who tragically didn't allow the 1929-30 economic contraction to run its course.
The above is important, because what monetarists have never been able to explain is why, when the U.S. economy and "money supply" contracted in the early 1920s, that the economy didn't flatten as it did in the ‘30s. It didn't precisely because there was no economic intervention in response to the downturn other than a massive reduction in government spending that allowed the real economy to revive itself. Money supply is a function of demand for money; when we produce we're demanding goods in return through the dollars that our production secures. Had Hoover and Roosevelt mimicked the Harding/Coolidge non-response to the 1920-21 downturn, there would never have been a Great Depression.
It's also said that Murray Rothbard fingered entrepreneurial error as the driver of the ‘30s malaise. This is not realistic thinking. Evidence supporting the latter assertion is Silicon Valley itself; the technology sector our most vibrant precisely because failure has been the commerce-boosting norm for over 50 years in the region. As Mises put it about the wonders of failure in Human Action, the entrepreneur who fails to use his capital to the "best possible satisfaction of consumers" is "relegated to a place in which his ineptitude no longer hurts people's well-being."
It's a speculation, but all this disagreement among Classical thinkers like Forbes and Ames and the great Austrian School must be a huge misunderstanding. That's the case because the authors of Money are in many ways promoting ideas that Mises himself did. Stable money values merely ensure that when trade and investment take place, that politicians aren't tipping the scales in favor of one side or the other, or that floating money values aren't discouraging trade and investment in total. Gold defined money is about removing government and politicians from commerce so that there's more of it. What's odd isn't just that David Gordon apparently disagrees with Forbes and Ames, but that his disagreements with them signal problems with what Mises wrote in two of his most important books, Human Action and The Theory of Money & Credit.