Editor's Pick

Money versus Monetary Policy

With all due respect to Niall Ferguson, whom I’ve heard of, and Huw van Steenis, whom I’ve not, this tweet is quite preposterous.  I’ve personally met more than five people who understand money just in my own circles.

What they mean is “monetary policy,” which is in fact very difficult to understand—given it effectively operates as a political program within the muddled field of macroeconomics. Monetary policy, unlike money per se, is ad hoc, highly technical, reliant on vast amounts of data, and dictated by political expediency.

As for money itself, there is nothing so difficult about it conceptually. A hundred and fifty years ago Carl Menger explained how money arose as the most saleable commodity in the marketplace, with the best properties to be a store of value and medium of exchange. Thus money solved the problems and inefficiencies of barter. Forty years later Ludwig von Mises relied on Menger’s subjective marginal utility theory to solve the circular problem of explaining how money obtained value in the first place. Mises’s regression theorem introduced the element of time into the discussion, explaining how commodities’ “moneyness” value evolved from their preexisting nonmonetary uses. No government or central bank was necessary, as money is a market phenomenon just as surely as houses or wheat or shoes.

These two concepts give us the baseline conceptual understanding of money’s origin and value. But every shrewd merchant and trader over the centuries already understood money instinctively. From ancient Mesopotamia to medieval Holland and the Silk Road, money evolved in the marketplace to facilitate exchange as an alternative to war and plunder. Today Turkish and Zimbabwean shopkeepers can rapidly calculate multiple (favorable) exchange rates in their head.

Many people intuitively understand money. What they don’t understand is monetary policy. The idea that exceedingly intelligent people at central banks and national treasuries must “run” complex monetary “systems” surely is one of the greatest swindles ever perpetrated. It nonetheless remains widely accepted across the world, though less so every day as central bankers lose public confidence in the face of rising inflation. And what we might call early monetary policy is nothing new; Roman emperors “clipped” coins to enrich themselves while diluting the metal content of such coins.

At its core, economics is conceptually simple: humans make choices in an environment of scarcity to achieve ends. Money is a means to those ends, not an end in itself. It is the market’s answer to the inefficiency of barter. We all have wants; goods and services help us with “want satisfaction.” Money is the best way to trade goods and services we produce for goods and services we wish to consume. And money simply held in an account or under a mattress also yields a benefit to the holder, despite what the consumption fetishists say about “velocity.”

Today, however, the concept of money is overwhelmed and completely obscured by politics. Modern money is political (fiat) money, which is to say it is a tool of government and an instrument of political power. Political money is radically different from commodity money and can be understood only in the context of the perverse incentives afforded to the political class in a supposed democracy. The US dollar is untethered from redemption in gold, unbacked by real assets; politicians are unhinged from any market discipline. When money creation and debt issuance appear almost unlimited, the tendency is always to secure votes by printing or borrowing now. Austerity is for the future. Maybe. And central bankers, certainly those at the highest levels, like Jerome Powell and Christine Lagarde, are inarguably political figures.

Political money converts an asset into a liability. Physical gold, which carries no counterparty risk when held properly, is an asset with no risk of default. The only risk is economic: What goods and services can be exchanged for it? US dollars, by contrast, are forever subject to political forces favoring devaluation as a policy. Most Americans lack the wealth to truly diversify their holdings across currencies, and thus are left holding dollars as creditors to Uncle Sam. As Keith Weiner makes clear, dollar holders have only three unholy choices: hold physical cash as a creditor to the Federal Reserve, hold dollars in a commercial account as a creditor to the bank, or hold US bond debt as a creditor to the Treasury.

Thanks to political money, confusion reigns. We hear money described as “energy” zooming around in a closed system and thus subject to the laws of thermodynamics (talk about physics envy!) We hear money described as “information,” which confuses its origins with its uses. We read a description of money as an “agreement about value,” which is partially true but understandable only with reference to Mises’s aforementioned theorem. And mostly we hear confusion between wealth and money, rooted in the politicized, zero-sum nature of monetary policy. More money and credit do not magically create more goods and services, more capital investment, or a more productive economy. Prosperity cannot be legislated by politicians or engineered by central bankers.

What to do? The best approach in a confused world is a return to fundamentals. Mises’s The Theory of Money and Credit is a great place to start, as is Rothbard’s What Has Government Done to Our Money? and Robert Murphy’s Understanding Money Mechanics. For most lay readers, any of these books would be sufficient to puncture today’s money mythology. Circulate them among friends and family to help build the future cadre of monetary policy deniers. What the world needs today is champions of commodity money, sound money, hard money with a high stock-to-flow ratio, all of which is to say money that retains or increases purchasing power even when held in a simple savings account. This will require all of us—Austrians, gold bugs, bitcoiners, capitalists, businesspeople, investors, and anyone worried about the future of money—to push for a great awakening.

Money is simple, but opposing the political tool of monetary “policy” is not.

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