Recalling economic life in the old Soviet Union, the late George Melloan observed in a 2020 opinion piece that “State enterprises compensated their workers with rubles. But people don’t work for slips of paper; they work for what the paper will buy.”
Those eager to understand monetary policy would be wise to internalize Melloan’s simple statement. Properly understood, it would save all-too-many from errant presumptions about the meaning of money.
For background, consider the why behind money historically having some kind of commodity definition. That it did is and was a reminder that no one works for money. As Melloan helpfully made plain, people work for what money can be exchanged for. The Soviet state paid Russian workers in rubles that producers of real wealth didn’t respect for their exchangeability. As a consequence, Soviet workers toiled for next to nothing. The latter revealed itself through very limited worker productivity.
Which brings us to money defined in terms of gold. Gold has historically been used to define money precisely because producers of market goods and services trusted its stability. Gold was and is the commodity least susceptible to volatility. As a commodity known for constancy, it served the purpose of money brilliantly. Workers could exchange their toil for dollars, pounds, francs and yen defined by gold, and in doing so they knew they could trust money earned to hold its value throughout time. Translated, workers knew they wouldn’t be ripped off for labor provided. The money exchanged for their work would consistently command commensurate goods and services in the marketplace throughout time.
Crucial is that providers of goods and services would eagerly accept gold-defined money for the same reason that workers would: the “money” handed over to them at transaction time could be taken next door, down the street, or thousands of miles away only to be exchangeable for commensurate goods and services. About what’s been said so far, there’s a reason what’s so basic requires mention.
It does given the popular narrative that a lack of a gold standard, or a lack of money defined in terms of commodities like gold, has enabled bigger and bigger government. Those who promote the aforementioned view contend that with money lacking a golden anchor since 1971, the result has been out-of-control government thanks to monetary authorities being able to “print” the paper with abandon. Money creation sans gold’s enforcement of spending discipline has allegedly enabled soaring government debt.
This view is most popular among members of the Austrian School. Their take is that quality money acted as a restraint on wasteful government spending. Such a view misunderstands debt, and money more broadly.
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 near term by shifting use of the money to someone else, some other entrepreneur, or some other corporation, that the long-term reward will be more money to spend. Translated, saving is an act of abstinence that rewards the abstainer with greater consumptive ability down the line.
Considering government debt as the savings vehicle, the purchaser of $1,000 worth of government bonds like Treasuries is doing so in order to attain greater consumptive power in 2,5, 10, 20, or 30 years. Conversely, no reasonable saver would buy $1,000 worth of Treasuries or some other government debt security with an eye on attaining $500 worth of buying power 2, 5, 10, 20 or 30 years into the future. Saving is once again an act of abstinence that is pursued with an expectation of expanded ability to consume in the future.
It’s a reminder that modern members of the eminent Austrian School have simple notions about money and debt entirely backwards. Precisely because floating money’s future value is so uncertain, the latter if anything limits growth of government. Seriously, who would make a point of delaying consumption in order to enjoy reduced consumptive ability in the future? No serious person would, but Austrians are contending exactly that when they say floating money facilitates government growth as far as the eye can see. No, it doesn’t.
Seemingly missed by those who should know better is that no one works for, saves, or borrows money. In truth we work for goods and services, shift our access to goods and services to others, or we borrow someone else’s access to goods and services. Future income streams that consist of money the value of which is uncertain are logically less attractive to savers. This isn’t an opinion. It’s just a statement of the obvious.
On the other hand, future income streams in which the…