Money and the Market
AUGUST 01, 1969 by PAUL L. POIROT
Jogging is great for the circulation, but it is no cure for inflation. A man simply can’t outrun a printing press.
"A printing press run wild" is not a perfect definition of inflation, but it will do for a start. The details have to do with the exchange of goods and services and with the money supply which serves as the medium of exchange and the foundation for economic calculation or business accounting.
Goods and services can be exchanged directly as a matter of barter. But the process is primitive and cumbersome. Supply and demand are continuously changing for each item; in the absence of money, there is no easy or convenient way for any buyer or seller to compare various costs of production or to determine the profit or loss from his operations.
If he is to specialize in production and trade, really go into the business of serving consumers, he needs a special tool: a unit of accounting or economic calculation —a medium of exchange that will enable him to compare with reasonable accuracy the cost of one commodity or service with the cost of various other factors of production. In other words, he needs a money so that he can know the money prices at which economic goods are available for trade.
This is not to imply that anyone ever sat down and logically invented money. Tradesmen probably discovered by a process of trial and error and long experience that some particular item of commerce was more universally traded, more easily recognized, more readily accepted than most other items —perhaps some precious metal such as silver or gold. Whatever it was that thus facilitated trading came to be used as the medium of exchange or money—and then it was possible to determine the money prices of other scarce and valuable resources.
It’s true, of course, that money is a great convenience to traders. It facilitates the process. And it’s doubtless true that money was discovered or came into use because traders found it helpful. But the great value of money and the most important reason for having a monetary unit is that it permits the entrepreneur to operate in a businesslike manner. It makes possible the record keeping and cost accounting by which he can determine, with workable accuracy, the profit or loss from various operations, combinations of resources, transactions. It takes enough of the guesswork out of the process to enable competitive private enterprise to function in an open market and to efficiently serve the most urgent wants of consumers. It is the essential lifeblood of specialized industrial production and trade.’
The future is always uncertain, to be sure. The conditions of supply and demand for each and every item of commerce are constantly changing. And the most successful entrepreneur is the one who can most accurately predict or guess the direction of such change and plan his operations accordingly. Money prices, of course, do not eliminate the uncertainties of the future in an ever-changing world. Prices simply extract from the giant computer of the market place the most accurate possible representation of the latest available conditions of supply and demand. Not perfect, but something; and this is information vital to the conduct of business and trade.
Formulas for Perfection Are Doomed to Fail
There is a grave temptation among those who appreciate the necessity of money to try to set forth its specifications and create an artificial money system that would perfectly serve the purpose of trade. The natural money that grows out of trade—gold, for instance—is subject to more or less unpredictable changes in purchasing power: the discovery of new mines or mining techniques might augment the supply; or various new nonmonetary uses for the metal or a popular urge to hoard gold would affect the demand. In other words, gold is a monetary yardstick that might shrink or expand in general purchasing power from time to time. So the temptation is to create an artificial yardstick that might be of stable purchasing power. Instead of relying on the market to determine what the money unit ought to be and how much of it there ought to be, some men believe that a better money system can be provided through government definition, regulation, and control; if it is to be gold (or whatever else may be chosen as money), let government regulate the supply and set the price in order that the money unit may have greater stability; let government take charge of coinage or printing to assure that each monetary unit is of the precise weight and fineness as advertised; let government devise an index of the cost of living or of purchasing power as a guide to the quantity of coins or other monetary units to be allowed in circulation.
To yield to such temptation is to mistake the nature and purpose of money. Money comes into being only as the result of trading in the market. Artificial money substitutes are relatively worthless as the tool for economic calculation upon which industry and trade depend—the greater the artificiality, the less the value for monetary purpose.
Stop the Counterfeiters
There is one useful service government can perform with respect to money. It can apprehend and punish counterfeiters who might try to substitute "fool’s gold" for the real thing, thus to withdraw goods and services from the market by defrauding rightful owners. But governments are rarely content to limit their activities to the defense of life and property. Politicians bend easily to popular demand, and will as quickly serve the purposes of counterfeiters or other pressure groups as they would serve the purposes of honest and peaceful men and women. This is why no honest, peaceful person ever should delegate to government any responsibility for or control over the money system, other than to stop counterfeiters. Anything the government does must be paid for in taxes. There is hardly any limit to what a government will attempt to do if it can gain control of the money system and resort to inflation as a method of taxation to extract goods and services from rightful owners. And this is one of the major reasons why the market relies upon gold as money. Governments have discovered no way to artificially augment or inflate the supply of gold.
Unfortunately, not all consumers and—more unfortunately still— not all businessmen understand the vital necessity for a market-originated and market-regulated money if the market economy is to survive. In consequence of such misunderstanding, governments have been authorized—or, at least, permitted—to tamper with the money system until inflation has become the order of the day in practically every significant nation of the world. "Paper gold," we are told, "is better than the real thing!" And it’s true that fiat money affords one of the most effective ways for government to get control of all scarce resources, including people. But for honest, hard-working men and women, this is not a condition to be preferred above any other. Nor is an inflationary situation one that can last indefinitely, for it destroys the source of its sustenance—the market economy of competitive private enterprise.
Fueling the Fires of Inflation
Because they do not understand the cause and the nature of inflation, businessmen as well as consumers at every level of income and property-ownership turn more and more to government to uphold their particular interest at the expense of other persons or groups. But by this process of begging for relief, they delegate to government additional powers that only aggravate the basic problem and further fuel the fires of inflation.
For example, many of the aged have placed their faith in Social Security, which leaves them entirely dependent upon the future taxing power of government. The personal thrift and saving so vital to future production of goods and services are thus discouraged. Under pretense of keeping faith with senior citizens, Social Security benefit payments are continuously escalated to try to keep pace with the ever-rising cost of living. So, taxes must be raised; yet there are larger and larger Federal deficits financed by new printings of "paper gold."
It bears repeating here that government-created fiat monies, artificial and irredeemable paper promises that have been declared legal tender, are not the same as real money originating through voluntary trade; nor do these fiat monies adequately serve to facilitate business and trade and provide a useful unit of business accounting. This fiat money, as in the case of any other form of government price fixing, only creates shortages or surpluses that amount to waste of economic resources. For instance, the irredeemable paper simply induces buyers and sellers to stop trading and start hoarding. Gresham’s Law that bad money drives out good money means that tradesmen will hoard gold instead of going about their business as usual. Sophisticated recipients of irredeemable paper promises hasten to convert the paper into any and every available tangible resource. If they can’t redeem in gold, they will try to redeem in some other form of real property. They may not realize it, but they are trying to find something that will serve as money.
So it is that the prices of real property are bid up to levels that reflect not only anticipated annual earnings but the higher resale price that is to be expected with further inflation. And the government collects a tax on the so-called capital gains whenever an owner can be tempted or forced to sell; or else it imposes an inheritance tax likely to ruin the business in case the late owner could not rid himself of it in time.
Misuse of Scarce Resources
Instead of plowing earnings back into productive but taxable enterprises that would serve the wants of consumers, businessmen are tempted by such policies of exorbitant taxation to divert earnings into tax-exempt charitable trusts that more often than not become propaganda agencies for the socialistic principles upon which they are based. So, the revenues of competitive private enterprise are diverted, by taxes or through various tax loopholes, to causes that are detrimental rather than conducive to perpetuation of the market economy. The profits or rewards consumers have designated for those who best served them are thus turned against the consumer-oriented system of private ownership and trade.
Businessmen are bound to do their best to avoid the impact of heavy taxation. They seek special depletion allowances to quickly write off the value of natural resources that are being used in the course of production. Also, they apply for extra-rapid depreciation schedules on tools and equipment and other production facilities; or they try to add a cost-of-living clause in the depreciation schedule so that the write-off of the old machinery will be sufficient to cover the higher-priced new machinery at time of replacement.
This is not to condemn the businessman for trying to do his best with his business. But these efforts at tax avoidance tend to be largely wasted, in the long run. And they certainly do nothing to halt the inflation that is causing the problem. Changing the rules of accounting to accommodate an encroaching socialism is certain to ruin the accounting system, but it will not curb the socialistic trend. Socialism affords no way to make use of the money prices of a free market; business accounting or economic calculation is a unique feature of the market economy.
Creating the Climate for Trade
Instead of wasting time and effort to change the system or the principles of economic calculation and accounting—instead of asking the government to grant tax-exemption and at the same time to assume power to regulate and control more and more of the economy, including control over money and over people—the first order of business ought to be the limitation of government and the preservation of the only kind of a free market economy in which business can logically function for the satisfaction of the wants of the consumers.
Only when money and its regulation and control is taken from government and left to the market, only then can entrepreneurs and consumers enjoy the blessings of private ownership and competitive enterprise, specialized industrial production, and free trade. And free trade in gold is the key to sound money and sound business procedure.
Finally, it should be understood that all the wasted resources and the wasted efforts of businessmen to avoid the consequences of government tampering with money ultimately mean fewer goods and services available at prices the poorest of consumers can afford. This is not a deliberate war against the poor. Government planners and spenders fully intend to help the poor through various welfare programs. But these very programs lead to the government deficits that lead in turn to inflationary policies that distort and eventually dry up the operations of business and trade. The resultant hoarding of economic resources, by those who can afford to fight against inflation in that manner, isolates from the market resources that good business practice otherwise would have made available as efficiently as possible for use by the poor. The ultimate victims of inflation are the ones who can least afford the malinvestment of scarce resources.
1 For further development of the importance of money for economic calculation, see Human Action by Ludwig von Mises (Chicago: Regnery, 1966 revised edition), especially pp. 212-231 and 398478.