Switzerland Mocks Monetarists and So Called 'Money Supply'

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With roughly 8.4 million inhabitants, Switzerland has the world's 97th largest population. Of the world's total population, the Swiss account for 0.11 percent.

Despite its rather light demographic footprint, and allowing for the fact that GDP is a very inaccurate measurement of anything, Switzerland's economy is the world's 20th largest. In an economic sense, its citizens punch well above their weight.

Even more interesting is that while the country's population is once again a microscopic fraction of the world's total, according to the Wall Street Journal the Swiss franc "is the fifth most widely used currency for international loans." The Journal added that "There were $8,655 worth of franc notes and coins per Swiss inhabitant in circulation at the end of 2014." This number comes in at "twice the U.S. per capita figure for outstanding dollars."

In so-called "money supply" terms, the Swiss franc is very well circulated. We're once again talking about a tiny country. Based on Monetarist and Austrian school theorizing about inflation, Switzerland has a major hyperinflation problem. But it doesn't.

The Wall Street Journal reports that since 2010 the "franc's weighted exchange rate has risen 24%, more than any other currency's." The franc has similarly risen quite a bit against gold during that timeframe; gold a much more objective measure of a currency's real value.

What explains this development that runs counter to Monetarist School and other popular assumptions among economists about "money supply" and inflation? The answer is that the popular correlation between rising money supply and rampant inflation doesn't exist. It's a major myth.

Looked at with a more critical eye, the strength of the franc amid an abundant supply of same shouldn't surprise at all. It's actually quite logical.

When economic actors produce a good or service, their goal in doing so is to get goods and services in return. We produce first, and the fruits of our labor are what we exchange for all that we don't have.

But in a very specific sense, we produce for "money" that is exchangeable for all that we don't have. Precisely because the Swiss franc has long been viewed by the productive as a credible currency, logic dictates that the productive would and do accept francs in return for their toil. As its global acceptance reveals quite plainly, the Swiss franc is money par excellence.

Monetarist School economists are once again prone to correlating a heavily supplied currency with inflation (devaluation), but the more realistic truth is that currencies that are well supplied are most often strong and stable. Good money is very much demanded by the productive, which explains why the supply of quality currencies is always very evident.

Compare this to the German Mark after World War I. Precisely because German monetary authorities oversaw a staggering devaluation of the Mark, it ultimately was very scarce; even in Germany itself. This shouldn't surprise anyone either. Since we all produce with an eye on getting what we don't have, it's essential that we produce in exchange for a currency that is accepted by the productive. With the post-WWI Mark in freefall, circulation of same logically plummeted. The Mark's weakness logically led to its disappearance as a medium of exchange.

Applying this reasoning to the dollar, it's no mistake that 2/3rds of all dollars are in foreign hands. Though the U.S. Treasury hasn't always done a very good job of maintaining the dollar's stability since its gold link was severed in 1971, it's done well enough such that the greenback is accepted around the world by the productive. If that weren't true, dollars would be very scarce in rich locales like Beverly Hills, Greenwich, seemingly all of Manhattan, not to mention how much the globally rich use the dollar to transact. If Treasury had followed to the game plan of German monetary authorities after World War I, it's fair to say that the dollar would be near non-existent in the world's financial capitals. Its credibility is once again why it's so abundant globally. Importantly, all of this is the seen.

Where it gets most interesting is when we consider the unseen. Imagine if the U.S. Treasury were to mimic the Swiss focus on currency strength and stability, or if it were to once again define the dollar in terms of gold. If so, the global supply of dollars in circulation would logically skyrocket. The productive seek good, exchangeable money in return for their work effort, and a stable dollar would have no peer were it once again stable. And while a stable dollar would occur in concert with a massive surge in supply of same, there would be no inflation to speak of.

For far too long the near-meaningless notion of so-called "money supply" has carried the inflation debate over the exponentially more important focus on the quality of money as a measure of value.  Quaity money is always abundant where the productive are, and it's always scarce where there's very little productivity. No amount of central bank engineering can alter this truth. Any attempt by the Federal Reserve to increase money supply in impoverished Baltimore would fail just as much as any attempt by the Fed to limit supply in Silicon Valley would similarly come up short.

Of greater importance is the basic truth that the rising supply of any currency is the surest sign of its non-inflationary credibility. The Swiss franc is a shining reminder of this. It's only the bad currencies that aren't circulated, at which point it's time for Monetarist School members to rethink their theories.



John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed? (Encounter Books, 2016), along with Popular Economics (Regnery, 2015).  His next book, set for release in May of 2018, is titled The End of Work (Regnery).  It chronicles the exciting explosion of remunerative jobs that don't feel at all like work.  

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