The Moral Issue of Honest Money
Monday, February 1, 1982
Because of the nature of the economics profession—“guild” might be a better word—it is necessary to put quotation marks around the words, “honest money.” Economists will go to almost any lengths to avoid the use of moral terms when they discuss economic issues. This has been true since the seventeenth century, when early mercantilistic pamphlet writers tried to avoid religious controversy by creating the illusion of moral and religious neutrality in their writings. This, they falsely imagined, would produce universal agreement, or at least more readily debatable disagreements, since “scientific” arguments are open to rational investigation. The history of both modern science and modern economics since the seventeenth century has demonstrated how thoroughly unreconcilable the scientists are, morality or no morality.
Nevertheless, traditions die hard. Economists are not supposed to inject questions of morality into their analyses. Economics is still supposedly a “positive” science, one concerned strictly with questions of “if … then.” If the government does A, then B is likely to result. If the government wants to achieve D, then it should adopt policy E. The economist is completely neutral, of course. He is just an observer who deals with means of achieving ends. The economist can therefore deal with “complete neutrality,” with this sort of problem: “If the Nazis wish to exterminate 50,000 people, which are the most cost-effective means?” No morality, you understand, just simple economic analysis.
The problem with the theory of neutral economics is that people are not neutral, effects of government policies are not neutral, social systems are not neutral, legal systems are not neutral, and when pressed, even economists are not neutral. Because societies are not neutral, the costs of violating a society’s first principles have to be taken into account. But no economist can do any more than guess about such costs. There is no known way to assess the true costs to society of having its political leaders defy fundamental moral principles and adopt any given policy. And if the economists guess wrong—not an unlikely prospect, given the hypothetical moral vacuum in which economists officially operate—then the whole society will pay. (This assumes, of course, that policy-makers listen to economists.)
The inability of economists to make accurate cost-benefit analyses of any and all policy matters is a kind of skeleton in the profession’s closet. The problem was debated back in the late 1930s, and a few economists still admit that it is a real theoretical problem, but very few think about it. The fact of the matter is simple: there is no measuring device for balancing total individual utility vs. total disutility for society as a whole. You cannot, as a scientist, make interpersonal comparisons of subjective utility. The better economists know this, but they prefer not to think about it. They want to give advice, but as scientists they cannot say what policy is better for society as a whole.[1]
This is why politicians and policy-makers have to rely on intuition, just as the economists do. There is no scientific standard to tell them whether or not a particular policy should be imposed. Without a concept of morality—that some policy is morally superior to another—the economists’ “if . . . then” game will not answer the questions that need to be answered. Without moral guidelines, there is little hope of guessing correctly concerning the true costs and benefits to society as a whole of any policy. The economist, as a scientist, is in no better position to make such estimations than anyone else. If anything, he is in a worse position, since his academic training has conditioned him to avoid mixing moral issues and economic analysis. He is not used to dealing with such questions.
What Is Honest Money?
Honest money is a social institution that arises from honest dealings among acting individuals. Money is probably best defined as the most marketable commodity. I accept a dollar in exchange for goods or services that I supply only because I have reason to suspect that someone else will do the same for me later on. If I begin to suspect that others will refuse to take my dollar in exchange for their goods and services in the future, I will be less willing to take that dollar today. I may ask the buyer to pay me a dollar and a quarter, just to compensate me for my risk in holding that dollar over time.
A currency unit functions as money—a medium of voluntary exchange—only because people expect it to do so in the future. One reason why they expect a particular currency unit to be acceptable in the future is that it has been acceptable in the past. A monetary unit has to have historic value in most instances, if it is to function as money. Occasionally, meaning very rarely, a government can impose a new currency unit on its citizens, and sometimes this works. One good example is the introduction of the new German mark in November of 1923, which was exchanged for the old mark at a trillion to one. But normally the costs are so high in having people rethink and relearn a new currency unit that governments avoid such an imposition.
Historic Stability
The question policy-makers must ask themselves is this: To avoid the necessity of imposing a totally new currency unit on a population, what can be done to convince people that the future usefulness of the currency in voluntary exchange will remain high? What can be done to improve the historic value of money in the future? In other words, when people in a year or a decade look back at the performance of their nation’s currency unit, will they say to themselves: “This dollar that I’m holding today buys pretty much what it bought back then. I think it’s safe for me to continue to accept dollars in exchange for my goods and services, since people trust its buying power. I have no reason to believe that its purchasing power will fall in the future, so I can take the risk of accepting payment in dollars today.” If people do not say this to themselves, then the dollar’s purchasing power is undermined. Pep-pie will demand more dollars in payment, meaning prices will go up, if they suspect that prices will go up. This, in turn, convinces more people that the historic value of their money has been unreliable, which then leads to higher prices.
The economist will tell you that prices cannot continue to go up unless the government, working with the central bank, accommodates price inflation by expanding the currency base. The economist is correct in the long run, whatever the long run is these days, or will be in a few years. But governments have a pernicious tendency to accommodate price inflation. Dr. Arthur Burns was forthright about this back in 1976:
These days the Federal Reserve is now and then described as pursuing a restrictive monetary policy. The Federal Reserve is described as being engaged in a struggle against inflation. The Federal Reserve is even charged with being more concerned about inflation than about un employment, which is entirely false. It is by generating inflation, or permitting inflation, that we get unemployment on a massive scale eventually. But let us in the Federal Reserve ask this question: Are we accommodating inflation at the present time or not? The answer—the only honest, professional answer—is that, to a large degree, we are accommodating the inflation; in other words, are making it possible for inflation to continue.[2]
So we get a kind of self-fulfilling prophecy. The government expands the money supply in order to finance its deficits, or create a temporary economic boom, or whatever, and the prices for goods and services rise. Everyone in the “great American auction” has more dollars to use in the bidding process, so prices rise. Then the public gets suspicious about the future value of money, because they have seen the loss of purchasing power in the past. They demand higher prices. Then the Federal Reserve System is encouraged by politicians to accommodate the price inflation, in order to keep the boom going (to keep the “auction” lively). The dollar loses its present value, because it has lost its historic value, which encourages people to discount sharply its future value.
The secret of retaining the public’s confidence in any currency unit is simple enough: convince users of the money that the issuers are responsible, reliable, and trustworthy. Government and its licensed agents have a monopoly of money creation. Private competitors are called counterfeiters. Sadly, in our day, it is very difficult to understand just what it is that counterfeiters do, economically speaking, that governments are not already doing. Fiat money is fiat money. (Perhaps the real legal issue ought to be the illegal use of the government’s copyrighted material. Copyright infringement makes a much more logical case for Federal prosecution than counterfeiting.)
Who Guards the Guardians?
There is an ancient question that every society must answer: “Who guards the guardians?” Or in more contemporary usage, “Who referees the referees?” The public needs an impersonal guardian to restrain the actions of those who hold a legal monopoly of money creation: the government, the central bank, and the commercial banks. The public can guard the guardians if citizens have the right to go down to the local bank and receive payment in gold, silver, or some other money metal. The issuers of money need only stamp on the paper money (or check, or deposit book entry) that the holder of the currency unit has a legal right to redeem his warehouse receipt for a stated weight and fineness of a specific metal.[3] Whenever the issuing agencies begin to issue more receipts than they have reserves of metal, the public has the option of “calling the bluff’ of the issuers, and demanding payment, as promised by law. It is this restraint—implicit economically, but explicit legally—which serves as the impersonal guardian of the public trust.
The government can always change the law. Governments do this all the time. Whenever there is a major war, for example, governments suspend specie payments. They also suspend civil liberties, and for the same reason: to increase the power of the state at the expense of the citizens. Governments in peacetime are frequently unwilling to reestablish pre-war taxes, pre-war civil liberties, and pre-war convertibility of currencies, long after the war is over. Civil libertarians have not generally understood the case for a gold standard as a case for civil liberties, despite the obvious historical correlation between wartime suspension of civil liberties and wartime suspension of specie payments.
When the authorities declare the convertibility of paper into specie metals “null and void,” it sends the public a message. “Attention! This is your government speaking. We are no longer willing to subject ourselves to your continual interference in our governmental affairs. We no longer can tolerate illegitimate restrictions on our efforts to guard the public welfare, especially from the public. Therefore, we are suspending the following civil right: the public’s legal right to call our bluff when we guarantee free convertibility of our currency. This should not be interpreted as an immoral act on the part of the government. Contracts are not moral issues. They are strictly pragmatic. However, we assure you, from the bottom of our collective heart, that we shall never expand the money supply, or allow the historic value of the currency to depreciate. It will be just as if we had a gold standard restraint on our printing presses. However, such restraints are unnecessary, and besides, they are altogether too restraining.”