Recalling economic life in the former Soviet Union, the late George Melloan observed in a 2020 opinion piece that “SOEs compensate their workers with rubles. But people don’t work for scraps of paper; they work for what the newspaper will buy. ”
Those who are keen to understand monetary policy would do well to internalize Melloan’s simple statement. Understood correctly, this would save too many mistaken assumptions about the meaning of money.
For context, consider the Why behind money historically having a sort of definition of a commodity. What he did is and reminded that no one works for money. As Melloan helpfully explained, people work for what money can be redeemed. The Soviet state paid Russian workers in rubles that the producers of real wealth did not respect for their exchangeability. As a result, Soviet workers worked for next to nothing. The latter was revealed by very limited worker productivity.
Which brings us to currency defined in terms of gold. Gold has always been used to define currency precisely because the producers of goods and merchant services trusted its stability. Gold was and remains the commodity least sensitive to volatility. As a commodity known for its steadfastness, it brilliantly served the purpose of money. Workers could trade their labor for gold-defined dollars, pounds, francs, and yen, and in doing so, they knew they could trust the earned money to hold its value for long periods of time. Translated, the workers knew that they would not be cheated for the work provided. Money exchanged for their labor would consistently command proportionate goods and services in the marketplace over time.
It is essential that suppliers of goods and services eagerly accept the silver defined by gold for the same reason as workers: “the money” given to them at the time of the transaction could be taken alongside, on the street or thousands of kilometers away only be redeemable for commensurate goods and services. About what has been said so far, there is a reason why what is so basic needs to be mentioned.
This given the popular narrative that the lack of a gold standard, or the lack of silver defined in terms of commodities like gold, has allowed a government to grow larger and larger. Those who take the aforementioned point of view argue that with goldless anchor money since 1971, the result has been runaway government thanks to the ability of monetary authorities to “print” paper with abandon. The creation of money without gold, the application of spending discipline would have allowed the public debt to skyrocket.
This point of view convinced some within the eminent Austrian school. Their opinion is that quality money has held back the waste of government spending. Such a point of view is mistaken about the debt, and more broadly about the money.
To understand why, ask yourself why you or anyone would save money in the first place. The logic behind saving is that if consumption can be delayed in the short term by shifting the use of the money to someone else, another entrepreneur, or another company, the long term reward will be. more money to spend. Translated, saving is an act of abstinence which rewards the abstainer with a greater capacity for consumption across the board.
Viewing public debt as the vehicle for savings, the buyer of $ 1,000 in government bonds like treasury bills does so in order to achieve greater consumption power in 2.5, 10, 20, or 30 years. Conversely, no reasonable saver would buy $ 1,000 worth of treasury bills or other government debt securities with a view to achieving purchasing power of $ 500 within 2, 5, 10, 20. or 30 years. Saving is once again an act of abstinence that continues in the hope of an increased ability to consume in the future.
It is a reminder that modern members of the great Austrian school have reversed causality with money and debt. Precisely because the future value of the floating currency is so uncertain, the latter limits government growth. Seriously, who would want to delay consumption in order to benefit from reduced consumption capacity in the future? No serious person would, but the Austrians argue exactly that when they say that floating money facilitates government growth as far as the eye can see. No, this is not the case.
Those who should be better informed are apparently missed by the fact that no one is working, saving or borrowing money. In truth, we work for goods and services, transfer our access to goods and services to others, or we borrow someone else’s access to goods and services. Future income streams of money of uncertain value are logically less attractive to savers. It is not an opinion. It’s just a statement of the obvious.
On the other hand, future income streams in which paid currencies have a commodity definition are logically a bit more trustworthy. Translated, paid dollars, euros, yen and pounds should retain their value, so savers will be rewarded for their abstinence with better access to goods and services. What this means is that if anything, a quality currency allows more, not less government borrowing.
History supports the above claim. In 1815, the debt of the British government exceeded 250% of the GDP. England was then on the gold standard. The pound was trustworthy, therefore a debt paid in pounds was much desired. And while the dollar has no definition of gold today, the world is sort of on a dollar standard. At least implicitly. The trustworthy nature of the dollar in the world makes it relatively easy for the Treasury to get into debt.
Nothing that has been written should be construed as a defense of government spending or borrowing. Not at all.
The genius of freedom and economic growth requires a little less public consumption. But it’s a reminder that a gold standard, which is really just an acknowledgment that the sole purpose of money is as a measure to facilitate labor, trade and investment. , would in no way limit the size and scope of government. It never was and never will be.