“No individual and no nation need fear at any time to have less money than it needs.” – Ludwig von Mises
“I would like to say to Milton and Anna. Regarding the Great Depression, you’re right. We did it. We’re very sorry.” So said Ben Bernanke to Milton Friedman and Anna Schwartz back in the early 2000s. What a shame that Friedman and Schwartz didn’t quickly correct the misguided Bernanke.
Instead, they let a refuse-to-die myth live. Which one was this? The obvious falsehood that an insufficiency of money caused the Great Depression. For decades, Friedman and Schwartz at least publicly dined out on the laughable notion that a “tight” Federal Reserve caused the 1930s slowdown.
Naturally economists gravitated to this ridiculous untruth. If an insufficiency of money was the author of economic misery in the U.S. decade most-known for economic misery, economists would forever have jobs fine-tuning the so-called “money supply.” And so a myth was born. It lives to this day. It gave us August 15, 1971 when President Nixon chose to sever the dollar’s tie to gold in “temporary” fashion. He did so against the wishes of Fed Chairman Arthur Burns, but at the encouragement of the economics profession broadly, including eminences such as Friedman, George Shultz and Paul Volcker. Going forward the dollar would no longer have a definition. Which means fifty years ago Nixon et al mindlessly deprived the dollar of what made it so useful as a global medium of exchange: stability as a measure.
Money on its own serves no purpose. As this column regularly states, no one buys and sells with money, or lends and borrows with it. All exchange is barter. Products and services for products and services. Money is just an agreed upon measure of value that enables the producers of both to exchange real economic goods with each other (buying and selling), or for those with surplus access to goods and services to lend them to producers who lack surplus in the present, but who have a vision for producing more goods and services with the surplus loaned to them.
When Nixon floated the dollar in 1971, it was the restaurant-kitchen equivalent of chefs suddenly having to rely on degrees of heat, minutes and tablespoons that were constantly changing. Readers can imagine the chaos that would ensue if the amount of heat in a degree, the number of seconds in a minute, and the size of a tablespoon were changing all day and every day. Good food would soon enough be inedible.
Except that cooks would adapt. They would hire individuals with quick mathematical minds to routinely calculate the changes to the degree, minute and tablespoon with stability of each top of mind. Much the same happened in commerce. Great minds who would formerly have spent their lives crafting cancer cures, transportation advances and communications leaps would, after 1971, “trade” the currencies (and the volatility wrought by floating currencies) that formerly required no trading. It was as though they started buying and selling feet and inches. Commerce SPSC -0.7% would still occur, products and services for products and services would still be the norm, but countless great minds from around the world would exit production for facilitator roles. In modern times, currency trading is a $7 trillion/day industry.
Adam Smith would marvel. “The sole use of money is to circulate consumable goods,” said Smith. Money is the just the quiet enabler of trade. No longer. A major factor in this odd, growth-restraining turn of events was the Friedmanite notion about the 1930s that lives to this day: supposedly a Fed wedded to gold suppressed “money supply” on the way to a “Depression” in the 30s, which meant the link had to be severed so that central bankers could boost the “supply” of dollars to stave off future contractions.
Except that it made no sense in the 1930s, and it still doesn’t today. Indeed, even if it had been true that the Fed “tightened” in the 1930s, it would have been of no economic consequence. As it was, the Fed emerged from a fear among banks that more and more lending was taking place well outside the banking system. After which, and per the late Robert Mundell, the only closed economy is the world economy. Mundell’s point was that credit is borderless, and it is. Assuming the Fed had been capable of shrinking credit in the 30s, global credit sources would have gladly profited from a margin created for them by the Fed. Looked at in modern terms, the Fed could no more drain so-called “money supply” from Silicon Valley than it could increase it in West Baltimore.
As Mundell and his colleague Arthur Laffer (both rather uniquely saw right away that August 15, 1971 was unfortunate) knew well, and as Mises, Ricardo and Smith knew before them, “money supply” is production determined. Where there’s production of well-regarded or well-desired products and services, there’s always “money” to facilitate their movement. Always. Insufficient “money supply” could never have caused the 1930s simply because there’s no such thing. Subdued “money supply” in the 30s was a consequence of subdued production born of tax rates that rose to 83% on the top end, massive increases in the tax that is government spending, record tariffs on 20,000+ foreign goods, massively increased regulation, and yes, a devalued dollar care of FDR in 1933. Per the Mises quote at the top, insufficiency of money is something that needn’t concern individuals or nations. Where there’s production there’s always “money” lubricating its movement, and where there isn’t, money is always scarce. Not to economists.
That’s the case because nothing brings out the intensely foolish like money. Keynesians like Bernanke believe money creation is wealth creation, as opposed to a logical consequence of same. Monetarists like Friedman, along with his “market monetarist” disciples, believed and believe money creation is an instigator of economic activity, thus rendering allegedly insufficient money creation a somnolent. No, markets are wise. Production never lacks for money. That’s why a desire to plan so-called “money supply” is an obnoxious conceit as braindead as the properly-dismissed Soviet Five Year Plans of the past.
All of this rates mention simply because an impossible notion informed the severance of the dollar from gold. Supposedly the tie of the greenback to the yellow metal limited supply of dollars. Except that it couldn’t have, and didn’t. The dollar had been tied to gold for much of the U.S.’s prosperous existence. As production increased, so did the number of dollars moving the production. This wasn’t planned by economists; rather it was a consequence of production.
All Nixon’s policy choice of leaving gold achieved was to logically reduce what would have been a much greater surge of production in the 1970s and beyond. As evidenced by $7 trillion in daily currency trading once again, money’s sole purpose as a facilitator of exchange hasn’t changed one iota. But since economists like Friedman thought of money as a “supply” concept, it was robbed of its crucial purpose as a measure. Yet markets work. Currency trading and hedging of the floating currencies would facilitate the trade and investment that money was invented for, but there would logically be fewer producers. The unseen when it comes to imagining what people with names like Soros, Jones (Paul Tudor) and Simons (James) would have accomplished as producers staggers the imagination. When Nixon delinked the dollar from gold 50 years ago, he repelled wondrous productive talent from production. Put another way, Nixon’s mindless decision logically decreased the very “money supply” that mystical economists told him would increase by leaving gold.
Nixon listened to economists who said the Fed needed “discretion” to guide the economy. No, such a view wasn’t serious. See Silicon Valley and West Baltimore yet again. Reality can’t be rewritten through monetary tinkering. Yet the myth lives. And markets continue to disprove what’s absurd. Money and credit are scarce where production is scarce, and abundant where production is. Money is an always and everywhere consequence of production. Repeat this truth over and over again. There’s no way to plan it despite what the various economic religions contend, but there will logically be less of it if its lack of definition moves producers into facilitator roles.
Fifty years ago President Nixon turned the broad misunderstanding of money among economists into policy. In so doing, he allowed a falsehood about what caused the 1930s to deprive the dollar of what made it the most “money” of currencies. Economists cheered. What was and is false would give them perpetual employment in ways that free markets and stable money never would.