3. The Importance of Money

Today, it’s hard to believe that it was a major breakthrough in economics for Mises to show logically that under socialism prices cannot be established and economic calculation is impossible. Is it any wonder that socialist nations, without subsidies from a capitalist nation, are unable to feed themselves? This is why the threat of communism would be greatly reduced if only we could stop our elected officials from bailing these countries out. Only force enables a system to survive without a free-market pricing mechanism.

Against a background in free-market economics, the disastrous effects of wage and price controls are never a surprise. In spite of both recent and ancient failures of wage and price controls, they—as well as credit controls, currency controls, and an attack on hard assets—will be used to our great economic detriment, because the political pressures to continue the tremendous deficits are so strong in Washington and, inevitably, the dollar will be destroyed.

Since we cannot predict the future because we cannot know the subjective decisions of millions of consumers and producers, we cannot know exactly when this will come about. Yet we can be certain, from history, that the politicians will continue to destroy our money, and that they will put off for as long as possible the consequences that must follow.

Mises writes that eventually we must make a choice:

Men must choose between the market economy and socialism. The state can preserve the market economy in protecting life, health, and private property against violent or fraudulent aggression; or it can itself control the conduct of all production activities. Some agency must determine what should be produced. If it is not the consumers by means of demand and supply on the market, it must be the government by compulsion.⁶

Understanding money is the key to restoring a sound economy. Since entering politics, I have spent more time on the money issue than any other. Austrian economics, and especially Mises’s writings, have been especially helpful to me. Mises’s explanation of how money originated in the market as a useful commodity convinced me that money once again must be returned to the market as a commodity.

Politicians inevitably destroy money when they gain control of it, and attempt to make it a mere product of the State, completely separate from any commodity sought by the consumer. Mises understood how the money issue became as much a political issue as an economic one. His insights helped me to oppose both liberal and conservative excuses for deficits. Both factions, regardless of rhetoric, depend on a fiat money system and inflation. These hide the exactions necessary to continue government financing while serving the special interests who get the new money before the depreciation is recognized by the general public.

My support for legalizing competition in currencies has obviously been influenced by the Misesian explanation of money. This is one area where we can even get the monetarists to agree. Mises explains that money—like any commodity—has a marginal utility, and its value is set subjectively. This has helped me refute the pure quantity theory of money as presented by the Chicago School. Money as a commodity must have a quality to it, and consumers must trust the money for it to function—something increasingly absent today. Once this is understood, there is no mystery as to why the bond market acts as it does, and why interest rates are “too high,” as the monetarists and Keynesians have proclaimed.

The most common misunderstanding in Washington regarding money is the conviction that economic growth depends on money growth. Ricardo mentioned this, but it was Mises who emphasized and clarified this point—duplication of money units bestows no social benefit. If it did, we’d have a hard time explaining why economic growth did so poorly in the 1970s when the Federal Reserve Board nearly tripled the money supply (M3). Yet today, the vast majority of the bureaucrats and politicians believe that without money growth, economic growth cannot occur. They see money as separate from taxing, spending, and regulatory policies; without an understanding of value, pricing, and money quality, it is virtually impossible to explain to them that prices can easily adjust downward if a free market requires it. The prevailing opinion is that falling prices are synonymous with depression—an obviously erroneous idea. Those who believe this do not understand the nature of capital—that it comes from productive effort and savings. They believe capital is something you get when the Fed increases the money supply.

In A Critique of Interventionism, Mises wrote:

By its very nature, a government decree that “it be” cannot create anything that has not been created before. Only the naive inflationists could believe that government could enrich mankind through fiat money. Government cannot create anything; its orders cannot even evict anything from the world of reality, but they can evict him from the world of the permissible. Government cannot make man richer, but it can make him poorer.⁷

In applying the concept of the marginal utility of money, Mises superbly explains the befuddlement expressed by the conventional economist about government’s velocity statistics. The propensity of consumers to hold cash or to spend explains why sometimes prices go up more slowly than some say they “should,” and why they go up more rapidly than they “should” at the end of a currency destruction, in spite of the slowing of new money creation. Only Austrian economics can adequately explain these economic occurrences.

In 1913, Mises published The Theory of Money and Credit.⁸ In this masterpiece he gave us all we would have needed to avoid the financial calamities of the 20th century and possibly even the wars fought with the weapon of inflation. Tragically, the U.S. took another course; with Colonel House advising President Wilson, we established a powerful central bank and introduced the destructive graduated income tax, all in that same year. The subsequent cost in human suffering and loss of freedom has been immeasurable.