Brexit Will Further Discredit the Friedmanite Theory About the 1930s

In a Wall Street Journal front page story last week, it was reported that over half of the dollars currently in circulation are presently faciliating commerce outside the United States. Of the $1.79 Federal Reserve notes in circulation, it’s speculated that over $900 billion aren't here. 

That they're outside the U.S. is in many ways a statement of the obvious. Money’s only purpose is as a measure used to facilitate the actual exchange of real goods and services. And while the dollar has demerits related to instability, it’s broadly trusted around the world by producers. Translated, unlike just about every other currency in existence, a dollar is exchangeable for market goods just about anywhere.

Somewhat fascinating about all this is that the dollar is even the currency of choice in “enemy” countries like Iran, North Korea and Venezuela. Even in those three, a dollar liquefies quite a bit more trade than do respectively rials, won, and bolivars. Gresham’s Law is a myth.

Money is once again a measure. Good money can be found anywhere that production (however slight) is taking place. When we trade it’s ultimately about products for products, with money the agreed upon value used as the enabler of the exchange. Producers will only exchange what they’ve brought to market for money insofar as the money is exchangeable for goods of similar value.

Useful here is that the Federal Reserve didn’t utilize open market operations in order to circulate dollars globally. The production taking place around the world is itself the driver of the circulation. Money doesn’t instigate; rather it’s a consequence of production. Where there’s production there’s always money to enable its exchange.

Which brings us to Brexit. There’s long been an expressed fear that Great Britain exiting the EU would cut Britain off from enormously lucrative trade with the rest of the Europe, along with the financing of that trade. Nonsense. Short of the Brits ceasing to produce and finance, their products and their financial expertise will continue to enhance producers in Europe, along with creators of goods and services around the world.

Goodness, Great Britain was at varying times at war with nearly every European country during the 19th century, yet imports from those countries still surged into very rich Britain despite. Well, of course they did. To produce is to express a desire to import, and no 19th century country was more productive than England. If war couldn’t stop trade and investment, readers can rest assured that Brexit won’t prove a substantial barrier.

And what of currency? Will Brexit somehow create a fraught money situation for U.K. countries that choose to stay within the EU? Some think so. Referencing a recent Mises Institute piece, it was reported that:

Many older Scots worried that independence might threaten their pensions, and the banking community questioned whether Westminster would allow a breakaway Scotland to continue using the British pound. Nobody wanted a rushed transition to the euro, but without a central bank of its own (that pesky sovereignty issue again) Scotland might have been stuck in a vice between two currencies.

Crucial here is that there’s no story here. Fears expressed by elderly Scots are instructive for them showing just how superfluous are central banks. As the global circulation of the dollar makes plain, this circulation including “enemy countries” like Iran, North Korea and Venezuela, money will always migrate to where it’s needed. The Fed once again didn’t circulate hundreds of billions of dollars around the world, but production around the world proved a magnet for hundreds of billions of dollars.

Assuming Westminster doesn’t “allow a breakaway Scotland to continue using the British pound,” fear not. Assuming the pound remains the currency of choice for pensioners and producers alike, so will it remain the currency that liquefies exchange and investment there, along with the currency that pensioners denominate their savings in. As my great friend Bill Meisler likes to point out, “there’s always someone who wants to make a buck.” That being the case, finance denominated in pounds will continue to inform economic activity and savings in Scotland, and will regardless of what “Westminster” desires.

All of which brings us back to the 1930s in the United States. It’s accepted wisdom among followers of the late, frequently great Milton Friedman that the Federal Reserve caused the Great Depression by it supposedly slamming the breaks on so-called “money supply.” A subsequent “money shortage” meant that commerce couldn’t take place, the economy collapsed, etc. One gets the feeling that Friedman’s own views on the matter have been violently perverted over the decades simply because the presumption about a “money shortage” was so ludicrous.

Indeed, as we see now with the dollar’s global circulation, money finds production as opposed to it instigating production. Even if one believed what was laughable, as in even if one believed that the Fed shrank “money supply,” this would have in no way limited U.S. production simply because money is once again not an instigator. It cannot be stressed enough that money is a consequence of production. If dollars had been truly scarce in the ‘30s, then it’s certainly true that other trusted measures of value would have liquefied exchange of U.S. based production much as the dollar liquefies the trade of non-U.S. production today.

The U.S. didn’t have a “money supply” problem in the ‘30s as so many economists still believe; rather it had a production problem born of soaring income tax rates and government spending, massive growth of the regulatory state, record tariffs imposed on foreign goods, and a devaluation of the dollar. For economists to pretend that the Fed caused the 1930s is for those same economists to wholly misunderstand money.

The good news is that assuming Brexit happens, the latter will prove yet another example of just how incorrect Friedman and other monetarist thinkers were and are about the ‘30s. Assuming Scotland chooses to “remain,” its doing so will in no way limit the “supply” of pounds in Scotland. The only thing that could bring down the supply of the British currency would be shrunken production in Scotland, not a central bank.