“The sole use of money is to circulate consumable goods.” – Adam Smith, The Wealth of Nations
The Adam Smith quote that begins this piece cannot be written, typed or said enough. A failure among academics, economists, pundits and politicians to understand Smith’s crucial truth has to led to all sorts of embarrassing commentary on good days, and economy-wrecking currency policy on bad ones.
To put it bluntly, money just is. It’s a measure. Nothing else.
I have bread and I want your wine, but you only want the butcher’s meat. Money is an agreement about value that enables all three of us to trade with each other even though we all have different wants. And since money is exchangeable for the trucks, tractors, computers, desks, chairs and labor (among other things) that constitute capital, the existence of money allows the productive to delay consumption in favor of savings and investment directed toward entrepreneurs and businesses without which there is no economic progress.
So while money on its own cannot improve us, its certain facilitation of trade improves us because trade is what frees us to specialize our work all the while importing from others who are specializing. When we can do what we do best while trading with others engaging in their specialties, we progress to our individual betterment. Crucial here is that investment is what enables the thriving individual to achieve even greater specialization for it frequently automating certain aspects of work (think the tractor replacing the shovel, or WiFi enabled computer replacing the typewriter and errand boy) that render the productive quite a bit more.
Stated simply, money isn’t wealth; rather money is what enables the exchange of wealth and investment that relentlessly pushes us forward. That’s why money that holds its value over time is the only real money. Stable money in terms of value means that investors can confidently put their money to work without fear that any returns will come back in dollars, euros and yen (among other currencies) that command increasingly less in the marketplace, not to mention that stable money ensures more of the trade that is the purpose of all activity in what we call the "economy."
Which brings us to a recent Wall Street Journal op-ed by USC finance professor Larry Harris, titled a “A Strong Dollar Is Good for America.” Implicit in a title that Harris may or may not have picked is that a 14-inch foot is better than one that measures only 12 inches. More realistically, the best foot is one that is always 12 inches, much as a minute is always 60 seconds, or a pound is always sixteen ounces. Indeed, imagine the chaos that would ensue on construction sites, in kitchens, and on football teams if the size, length and weight of all three were constantly changing.
In Harris’s case, he at least somewhat means well. He’s surely correct that “a weak dollar would impoverish the country,” and it would for obvious reasons. Americans generally earn dollars, so it’s folly for the U.S. Treasury to devalue that which we Americans earn, and which we use to exchange for the goods and services we need. If the unit (that would be the dollar) is devalued, we get less. Devaluation is a cruel tax that shrinks what we can import (the sole purpose of work) in exchange for our toil.
The problem is that Harris doesn’t stop there. He inexplicably contends that “[S]everal industries do stand to gain by pressuring for a weak dollar. That would make U.S. products cheaper and more attractive for foreign buyers, meaning U.S. manufacturers would export more, creating jobs and perhaps higher wages for their workers.” There’s so much that's wrong with the previous statement.
More specifically, Harris aggressively contradicts himself with his own words. As he correctly states later in his piece, “with a weaker dollar, the U.S. would pay more for everything it buys,” and that’s the first point: everything produced for sale in this happily globalized world is the result of global cooperation. Money is once again a measure of value, so if you shrink the measure that is the dollar, you increase the costs of the goods and services sourced globally to create finished manufactured products. In short, manufacturers would gain less than nothing (as readers will soon see) from dollar devaluation simply because manufacturers are reliant on imported inputs from around the world that will cost more in response to a weaker dollar.
Funny here is that Harris unwittingly acknowledges the above. Not only does a weaker dollar raise the price of everything, it means per Harris that those who suffer it “receive less for everything it sells.” Yes. The purpose of work is to import, to get things, but a weaker dollar means that we get less in return for all of our toil. Manufacturers don’t gain one iota. Along these lines, Harris digs himself a bigger hole with his assertion that a devalued dollar perhaps means “higher wages for their [manufacturing companies] workers.” No, it doesn’t. Money is once again a measure. If you shrink the measure, you shrink what the wage commands.
Also, the devaluation shrinks the investment that powers worker productivity and - you guessed it - higher wages. Worker productivity increases the more that investors back workers and companies (this includes manufacturing companies) with capital. Manufacturers gain less than nothing from devaluation given the basic truth that devaluation repels the very investors with the means to greatly increase the productivity of manufacturers.
The above truth explains why Harris goes completely off the rails with his assertion that low-wage workers are hurt by a “strong dollar,” so government should “provide subsidies to employers for hiring low-income workers.” Wage subsidies are the new policy non-innovation among conservatives who've sadly fallen for Oren Cass, and who much like him don't understand that wages can only increase through investment. As Harris puts it, “[T]ransferring some benefit of a strong dollar to the working class is the price the wealthy in this democratic country must pay to stay wealthy.” No, that's not correct. Not even close.
Seemingly forgotten by Harris is that jobs are always and everywhere an effect of investment. Always. The wealthy, by virtue of being wealthy, have the most disposable wealth to invest. So if money holds its value, meaning the dollar is truly “strong,” the rewards for workers are greatest simply because the investment without which there are no jobs and no wages is abundant.
In Harris's case, his heart is once again in the right place. The shame is that like most economists, his mind is cluttered with fallacy. Good money is the gift that keeps on giving, while devalued money harms everyone. Too bad former USC professor Arthur Laffer is no longer in Los Angeles to explain the monetary basics to Harris.