As Venezuela Dollarizes, Monetarism's Conceit Collapses

Though history books have at times reduced Germany’s post-WWI currency crack-up to visions of wheelbarrows full of marks being brought to the marketplace to buy life’s necessities, the reality was quite a bit different.  As Adam Fergusson explained it in When Money Dies, his classic account of Germany’s tragic hyperinflation, marks were rather scarce.  That they were should be a statement of the obvious.  With the German currency having plummeted to 4.2 billionth of a dollar, no sane producer of anything passably valuable accepted marks in return.

It’s all a reminder of what an obnoxious farce are notions like “easy money” and Gresham’s Law, not to mention the wrongheaded belief that has sadly even captivated some Austrian scholars: that central banks armed with printing presses are capable of financing ever-expanding government.  No, they can't.  Markets are very wise.  The producers who populate those markets are wise.  They’re not going to accept currency that is exchangeable for less than what they’re bringing to the marketplace to begin with. 

No matter what economists tell you, money isn’t wealth.  Wealth can’t be printed.  It’s in fact what we create.  Money is just an agreement about value that producers use to facilitate the exchange of what they’ve produced for what they want and need.  And while it brings new meaning to superfluous to even write it, the truth about money explains why it’s historically been issued with near and long-term stability in terms of value top of mind: money is most useful not for it being plentiful in supply, but because its value is trusted over time, across borders, continents, oceans etc.  

Which brings us to Venezuela. This column argued in April that Venezuela wouldn’t need to dollarize; that dollars are already there to the extent that there's any production to speak of.  Figure that the collapsed bolivar can’t liquefy much in the way of exchange at all.  Why would it? What sane producer would hand over real goods and services for that which is in freefall? Like the mark nearly 100 years ago, the bolivar is scarce.  That it’s scarce is once again a statement of the obvious.

Similarly obvious is that the dollar is replacing the bolivar.  As the Washington Post’s Rachelle Krygier reported last week, “[A]ccess to U.S. dollars” is increasingly the “line between survival and starvation” thanks to the “nearly worthless” bolivar.  Even though the dollar is far from stable, it’s accepted around the world by producers since it’s exchangeable for goods and services around the world.  Stated simply, Venezuela is dollarized. 

That it’s dollarized should exist as a lesson for all those still captivated by the late Milton Friedman’s discredited monetarism, along with those taken in by the modern adherents of that which was long ago discredited. Not only can central banks not control so-called “money supply,” they shouldn’t even if they could. 

Money supply is logically something set in the marketplace.  Figure that production is an expression of one’s desire to get commensurate goods and services in return for one’s production.  By extension, production is an expression of one’s demand for stable money that can be exchanged for commensurate goods and services.  What this means is that where there’s lots of production, there’s lots of stable “money,” or money viewed as more credible than the currency alternatives.  Where there’s very little production there’s very little money.  Central bankers can’t alter this truth despite what economists would have us believe. It’s a reminder that dropping money from the sky won’t increase societal wealth one iota.  The production has to come first in order for stable money to have any meaning.

Monetarists don’t care about money’s exchangeable value.  They simply want central banks to centrally plan the supply of the currency without regard to its value.  But as Venezuela reminds us, the stability of the unit of account is exponentially more important than the supply of money is.  In Venezuela’s case there are lots of bolivars in the country, but they’re not circulated precisely because their near total unreliability as a measure of value renders them almost totally useless as a measure necessary to facilitate exchange.   

All this is yet more evidence that monetarists get it completely backwards in their presumption that economic growth is an effect of the creation of money.  No, stable money migrates to economic growth.  It does because producers logically want commensurate value in return for what they’re producing.  And if governments fail to “supply” the money necessary, market-driven substitutes will soon enter the picture.  A capitalist system that has produced supercomputers that literally fit in our pockets can easily produce money-like measures that facilitate the exchange of actual wealth.  Don’t worry about money supply.  It will take care of itself.  That seems to be what’s happening in Venezuela, and it has nothing to do with central banking.

As the Post went on to report, a dozen eggs that cost 2.6 million bolivars can be had for 60 U.S. cents.  Those who have dollars are able to access some of life’s necessities and luxuries like eggs, shampoo and toothpaste.  They’re able to because the socialist country defined by its political class’s disdain for anything American has a black market economy that’s lubricated by the American dollar.  Crucial here is that the Fed or any central bank couldn’t have engineered this reality.  It can’t be stressed enough that money supply is always and everywhere an effect of production.

In Venezuela’s case, those who escaped the socialist hell are working for the dollar in countries like Ecuador, and they’re sending dollars home.  They’re sending them home because admittedly slim production in the country rates dollars.  Getting into specifics, there are goods and services that can be had in Venezuela in return for dollars.  If there were none, there would be no dollars in the country to speak of. Importantly, those dollars were not dropped from helicopters.  No, they’re an effect of production; inside and outside of Venezuela.  Money once again can’t stimulate production as much as it’s a necessary medium of exchange where production (or the effects of it) is taking place. 

So while news accounts indicate that Venezuela is in desperate shape, the creation of money for the sake of it will do nothing to fix what’s wrong.  Only economic freedom will alter the outlook, after which the supply of money in Venezuela will rise rapidly through market forces, and without regard to the actions of superfluous central banks.