Reserve Currency, III: Money Manipulation

A Third essay from Mr Greaney on money and currency.

From The Just Third Way

As we saw in the previous posting in this series, the invention of “currency” — “current money” of a recognized and standard value in an economy — was a great boon to progress.  The idea that money, defined as “all things transferred in commerce,” could have a standard unit of measure meant that people could make plans for the future more easily and with more confidence that a project would have the anticipated results.

For example, a farmer who planted a field to wheat could reasonably anticipate that if the crop came in as expected, he could sell enough of his crop to generate currency of a certain amount that could be used to pay his debts and provide for future needs.  Of course, the farmer had to be reasonably certain that the unit of currency would have the same value when he harvested as when he planted, especially if he “pre-sold” the crop by pledging it as collateral for a loan or agreeing to a contract for a certain price for the wheat even before it was planted.  It would, after all, do the farmer no good, but a great deal of harm, to discover that the crop he had agreed to sell for X units of currency each worth Y, had decreased in value by half because in the interim someone had redefined the unit of measure as being worth one-half Y instead of Y.

Assigning an arbitrary value to a currency and then changing it at will sounds like a very dirty trick — and it is.  If the official definition of a unit of currency is one measure of wheat when a farmer plants his crop and enters into a contract to sell each measure of wheat for one unit of currency, he is cheated out of half the value of his wheat if the official definition of a unit of currency is changed to be one-half measure of wheat when harvest comes.  In effect, the farmer becomes legally obligated to deliver the value of one measure of wheat for which he receives the value of one-half measure of wheat.

John Maynard Keynes

That sounds crazy, but the whole of Keynesian economics is built on the assumption that the government not only has the right to do precisely that, it has the duty to do so!  And if you think we made that up, here is the key opening passage in A Treatise on Money (1930), which John Maynard Keynes intended as his magnum opus:

It is a peculiar characteristic of money contracts that it is the State or Community not only which enforces delivery, but also which decides what it is that must be delivered as a lawful or customary discharge of a contract which has been concluded in terms of the money-of-account. The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing which corresponds to the name or description in the contract. But it comes in doubly when, in addition, it claims the right to determine and declare what thing corresponds to the name, and to vary its declaration from time to time — when, that is to say, it claims the right to re-edit the dictionary. This right is claimed by all modern States and has been so claimed for some four thousand years at least. It is when this stage in the evolution of money has been reached that Knapp’s Chartalism — the doctrine that money is peculiarly a creation of the State — is fully realized. (John Maynard Keynes, A Treatise on Money, Volume I: The Pure Theory of Money. New York: Harcourt, Brace and Company, 1930, 4.)

In other words, as far as Keynes was concerned, the State has the absolute power to interfere in any and all contracts at will and change the terms unilaterally, simply by altering the definition of value.  Life, liberty, and private property — all the natural rights, in fact — become changeable or voidable at the will of the State.

Thomas Hobbes

Is, however, a natural right really a natural right if, at best, it is a grant from the community or the State?  In that were the case, the community or State could take ownership away as easily as it was granted, if those in power decided the greater good demands it.  This is on the totalitarian grounds that the community or State has a “higher” right that really means the private individual has no real rights.  As Thomas Hobbes asserted in in Chapter 29 of his manual for absolutist State power, Leviathan, regarding private property,

A Fifth doctrine, that tendeth to the Dissolution of a Common-wealth, is, “That every private man has an absolute Propriety in his Goods; such, as excludeth the Right of the Soveraign.” Every man has indeed a Propriety that excludes the Right of every other Subject: And he has it onely from the Soveraign Power; without the protection whereof, every other man should have equall Right to the same. But if the Right of the Soveraign also be excluded, he cannot performe the office they have put him into; which is, to defend them both from forraign enemies, and from the injuries of one another; and consequently there is no longer a Common-wealth.

That is, private property (according to Hobbes) is prudential matter.  Citizens are only permitted to own so long as the State permits it or finds it useful, e.g., the Nazi law on landed property, which permitted “private ownership” of land only so long as the “owner” could prove he or she was using the land in ways the State deemed expedient or useful.  To Hobbes and other totalitarians, the State is the real, ultimate owner of everything in the country and can, if it so wills, levy a 100% tax on anything or everything, e.g., the “single tax” of the agrarian socialist Henry George that would consist of a 100% tax on all rentals or profits from “owning” land.  On socialism, therefore, ordinary people only enjoy “ownership” so long as the State permits it.

John Locke

In other words, no matter what the form of socialism, even if it permits “private property,” only the State or community really owns.  Private property has been abolished.  As John Locke pointed out,

It is true, governments cannot be supported without great charge, and it is fit every one who enjoys his share of the protection, should pay out of his estate his proportion for the maintenance of it. But still it must be with his own consent, i.e. the consent of the majority, giving it either by themselves, or their representatives chosen by them: for if any one shall claim a power to lay and levy taxes on the people, by his own authority, and without such consent of the people, he thereby invades the fundamental law of property, and subverts the end of government: for what property have I in that, which another may by right take, when he pleases, to himself?  (John Locke, Second Treatise of Government, 1690, § 140.)

It is, therefore, no more legitimate for the State to manipulate the value of the currency than it is for the State simply to take what it wants without the consent of the governed.  Yet that has been standard procedure from the inception of currency.

For example, when Solon the Lawgiver set the value of the currency in ancient Athens, he reduced the amount of silver in a coined drachm to meet the expenses of coining.  This made a coined drachm of silver weigh less than a regular drachm of silver or anything else, and inflated the currency.

This was under the illusion, still prevalent today, that the difference between the face value of the currency, and the cost of manufacturing the currency (including the material out of which the currency is made) represents a profit to the issuer.  That difference, however, is not a profit to the issuer, however, but a liability of the issuer!

Solon of Athens

Essentially what Solon and generations of governments after him did was pledge the sacred word of the State that each coined drachm contained exactly one drachm of silver, no more, no less . . . and then put less than one drachm of silver in each coin.  People not being stupid, the coined drachm of silver would purchase less than a non-coined drachm of silver.  If and when the coin was redeemed by the government, it would be at the face value of the coin at the current exchange rate, not the actual market value of a drachm of silver.  The government had made a promise it did not have to keep simply by changing the terms of the contract to suit itself.

Not surprisingly, the more governments think they are making money by cheating people in this fashion, the worse the economic situation becomes.  When people don’t know what their money is going to be worth from day to day, panic can set in, and people will do almost anything to restore some semblance of order.

One of the things that got Adolf Hitler elected Chancellor of Germany was the stark terror that the hyperinflation that followed World War I would return.  One of the things that kept Hitler in power was that he promised a stable currency and jobs for everyone and kept that promise.

At the same time, many governments in the 1920s and 1930s took their currencies off objective standards such as gold or silver and backed their currencies with government debt in order to try and control their economies.  Naturally, all they really did was load future generations with debt and embed uncertainty and chaos into the global economy.

Capitalists blamed socialists, socialists blamed capitalists, and everybody blamed the Jews, but nobody thought to blame Keynes and his fellow economists for undermining any possibility of a stable economy and a chance for ordinary people to get ahead and become capital owners.

And the irony is that it was all completely unnecessary, as we hope to show in the next posting in this series.