For as long as there have been people, there have been great people who have spent their time thinking about money. For as long as money has existed, the reasons to commit so much to studying its beautiful and horrific effects have been obvious. It’s really only been the last half century when ignorance had become the preferred position.
So much for our modern-ness.
Going back further than Copernicus’ Monatae cudendae ratio, the ability of money to fascinate and puzzle history’s most luminous figures is well-documented. At least they understood at its most fundamental level money is really nothing more than a tool.
Where it exists, good things can happen. Become deprived, there’s nearly no chance. How does one get to the other, or from the other get back again? It may be, like theology, this part of Economics divested of everything except faith.
The intellectual lineage from David Hume on down to Simon Newcomb, Irving Fisher, and then Milton Friedman is simply one at which everyone just wants to understand the invisible. Money is never static; to the contrary, it is animated before it animates everything else. Can these ever be separated down into discreet elements for our easy comprehension?
Many of the above had tried. Newcomb formulated his “equation of societary circulation” which then influenced Fisher’s “equation of exchange” which became Milton Friedman’s quest for the econometric, rational market “truth” embedded within DSGE.
We in our sluggishness do not realize the dearness of everything is the result of the cheapness of money. For prices increase and decrease according to the condition of money.
That was Copernicus’ way of stating the obvious, which somehow got left out of the equations which became DSGE. In fact, it was Milton Friedman who would call out this a-historic state of ignorance toward the very end of the last century. In May 1999, in an interview with Forbes, he warned:
We’re in a period like the 1960s, when no one paid any attention to the money supply. Then we got inflation. By the 1980s everyone was obsessed with the money supply. Now they’re forgetting again. And it will turn around and surprise them.
Boy, would it. The end result surprised everyone, and it would have shocked Friedman, too, had he lived long enough to see 2007. After a few decades of the astoundingly immodest Great “Moderation” there was judged to be zero chance of a deflationary event. Let alone one that would prove so intractable and deeply chronic it is threatening a degree of perhaps permanence.
And with that has arrived all sorts of unexpected consequences. Not only globalization being reversed, not only central bankers continuously perplexed and powerless, but the very situation in the shadow money system as it relates to the interest rate situation; not just the interest rate fallacy, but also what it has allowed for the always fiscally irresponsible to go insane.
Going back to David Hume’s essay Of Public Credit, it had been standard gospel that out of control fiscal authorities can only be an immensely destructive force on their people’s economy. Typical of his straightforward style, Hume had written, “[E]ither the nation must destroy public credit, or public credit will destroy the nation.” They didn’t use the term bond vigilantes back then, but this has always been such vigilantism’s rallying cry.
Debt destroys a nation, and the destruction of that nation via its debts will be foretold in the prices of those bonds. Or is it?
A decade before, Hume had already formulated his thinking. Writing in Liberty and Despotism (later to be called Of Civil Liberty), he had warned, “…taxes may, in time, become altogether intolerable, and all the property of the state be brought into the hands of [the government].”
His point is very easily understood; the larger the public debt, the more the taxing authority must be brought to bear to ever extinguish it. Thus, the more indebted the government becomes, the greater the eventual harm it will cause.
In Hume’s day, this was equally an argument against war; the primary reason for most national debts. To fight one the authority must realize both the present time destruction of men and material, plus the future economic destruction once the private economy is inevitably deprived of its needed money to pay for the war already fought.
To many people, this is a settled business; Hume’s reasoning completely unassailable. And yet, so many contrary examples persist. There is equally as much scholarship, as well as practice, conducted at the entire other end of the spectrum from Hume.
Not just European experience, either; good ol’ solid U S of A. And it has very little to do with the Federal Reserve.
In 1865, a guy named Jay Cooke wrote an influential pamphlet titled How Our National Debt May Be A National Blessing. Not that the Lincoln administration had needed much justification to break out some fiat in order to help pay for America’s Civil War, but this was the very new Greenback era which not only re-introduced paper currency also our country’s first truly national currency.
For national currency, there had to be national banking, too.
Jay Cooke was a bond dealer and thus a bit of an exaggerated showman. This new national banking era had produced a more modern fusion of money and government credit which opened the door to just this sort of financier archetype. In his pamphlet, Cooke stated for Americans what was already becoming a more conventional view across Europe.
The funded debt of the United States is the addition of three thousand millions of dollars to the previously realized wealth of the nation. It is three thousand millions added to its available active capital. To pay this debt would be to extinguish this capital and to lose this wealth. To extinguish this capital and lose this wealth would be an inconceivably great national misfortune.
As I wrote above, notice how this is the exact opposite position; Hume wrote in the middle eighteenth century that we must never let public debt loose lest it will destroy the economy, and then Cooke in the middle nineteenth that it would be destructive folly to do anything other than let it grow and stick around. And both centered their arguments on the destructive nature of taxation.
For Cooke, it wasn’t just taxation though; the national bank era and its national currency regime had meant that currency supply and national debt were firmly tied together. To issue currency, as banks had always wanted, they had to “back” their paper by debt notes issued by the US Treasury.
Thus, for the entire latter half of the nineteenth century there was endless debate about currency, money (including silver), and using fiscal policy as monetary policy – there is nothing whatsoever modern about MMT.
In 1908, not long after the Panic of 1907, Andrew Carnegie argued that currency, even a national currency, was too restrictive. Wishing to avoid being imposed with a central bank, Carnegie realized that elasticity in the private sense would be the only way to get around one. But since the supply of national currency was tied to government bonds, the private economy’s hands were largely tied, too, unless the government was set free.
I wrote about Carnegie’s “North Star” (gold, actually) a few years ago:
From the perspective of banks operating upon federal debt reserves, the government had the foul habit of paying down debt and running deficits only during declared conflagrations. Before the Fed, the Treasury Department had learned in the late 19th century by accident its action could have great monetary consequences. It exercised these powers very rarely, and did not during the 1907 event; thus, Carnegie’s lament and what would become a few years later the Federal Reserve.
How’s that for contradiction – for the country to have avoided the Fed, its federal government should’ve issued a lot more debt! To those who follow Hume, the answer was and is simple – simple hard money, no exceptions. Everyone pays their own way, currency never left to fiat. So far as the monetary system may be concerned, you build up reserves during the good times so that you have them already in hand anticipating those times which aren’t good. As Hume had written:
It appears to have been the common practice of antiquity, to make provision, during peace, for the necessities of war, and to hoard up treasures before-hand, as the instruments either of conquest or defence; without trusting to extraordinary impositions, much less to borrowing in times of disorder and confusion.
It is, again, the mirror image of the dominant contemporary viewpoint. Doesn’t idling so much money, squirreling it away for an uncertain future, deprive the present of often badly needed monetary tools? Put another way, the good times might be that much more “good” if we allowed for elasticity.
And the more good the good times, the better we might be able to handle the bad.
This is, after all, the entire premise of the central bank, its function largely agreed upon by society to be something of an ideal (very different in practice, though). Maximum monetary efficiency so that the good times stay as good as they can, and when the bad times show up, like 1907, they don’t turn out too bad.
Not just central banking, either, but the very beating heart of the current way of global banking. What have the Basel rules adopted, after all, since the very first iteration of them nearly four decades ago? Government bonds have been given a primacy, a front place in line as the lines between money and credit have been blurred more and more by even more bank and money evolution.
In that respect, hard money proponents are fighting against advance and progress itself, though not without reasons.
We want banks as monetary agents to build up reserves during the good times, as Hume directed governments to do, but what if those reserves are still government bonds?
Welcome to the nightmare that is the 21st century.
After being allowed to be reckless, money and credit, for too long the banking system is post hoc piling up reserves in the form of sovereign debt. Should they not do this? It is pointless at this point to relitigate the situation of the Great “Moderation.” What’s done is done.
Worse, the effects of being overextended money-wise for so many decades have been predictably deflationary ever since August 2007. The issue may not be extremes so much as tolerances.
In other words, to extricate ourselves from this current level of intractable, widespread madness, we should do what? On the one end of the spectrum, pay down the debt leading to an even greater monetary shortage right when we absolutely need economic growth more than anything. On the other, open the spigot even more, MMT, in order to answer a long prior era of irresponsibility with an even larger one.
Deflation versus inflation, yet again. In the middle, the central bank pretending to be inflationary which only results in more of the deflationary, causing even more confusion and leading to its own brand of disassociation toward the extremes. What a time to be alive! And hardly anyone able to adequately describe anything. Pace Friedman, money supply today is a 1950’s view of the 1930’s.
“Both” (obviously more nuanced than exact polar opposites) sides look to history for their versions of “proof” but proceed each from their own point of view without checking any assumptions. The truth is the history of money and credit has never been truly settled (and yes, I can feel the emotion and anger as that sentence is being read). Absolute truths rarely stand up to scrutiny.
Look no further than that Greenback era; the country wasn’t destroyed by this serious bout of fiat experiment, nor was it by the re-imposition of hard money gold standard which, by the way, wasn’t so hard money gold standard after all (the huge role given to government bonds during gold’s supposed golden age). And the lack of elasticity led to repeated major bank panics throughout, massive political and social upheaval (silver “agitation” was only the surface) and panics which had come about even though the world was nominally on a hard money standard supposedly rendering speculative excesses unlikely.
Are we even talking about money? Maybe it is just humans which are the problem!
They’ve been made all the more so by this last half century of very curious, quite unanswered, absolutely determined monetary ignorance. We can’t even ask the right questions today because of these long shadows being cast. Money, credit, currency were already complex topics and now even more blurred than ever.
We don’t live in a perfect world. You make the best out of what you have. Even the best minds who ever lived couldn’t agree on what that would mean. My own argument has largely been that before even thinking about what comes next, we absolutely need to understand where we are right now. And how we got here.
Holding what might be a wolf by its ears. If all we have to go on is seeing a set of ears, aren’t we just getting ahead of ourselves?