Bad Money Drives Out Goods; P.L. Poirot

People will hang onto their good money and meet their financial obligations with bad money so long as the government declares the bad money to be legal tender. What makes money "good" is its redeemability or its purchasing power in terms of goods and serv ices; sellers are happy to receive it in exchange for their wares. So, what the bad money really drives away from the market are the suppliers of goods, the savers and investors of the capital that ac counts for employment opportuni ties. These people will hoard their current holdings or else take them to some other mar ket where a bet ter money can be had in exchange. The President's problem, or 678 rather, the problem of the people of the United States, is that bad paper money has flooded the coun try. The Federal government is printing this money to pay its ob ligations. Another name for the process is i,njlation: monetization of the Federal deficit.

Now, when people recognize that dollars are rapidJy depreci ating, their first response is to get rid of their bad money just as fast as they can, spending it for almost anything in the way of tangible goods or services. Of course, they still try to find bar gains; and it may happen that for eign suppliers afford the best bar gains. Why would that be the case? Why, because in a somewhat strange and roundabout way for eign suppliers had, up to the time of the freeze, been able to claim payment for their wares in "good" money rather than bad. In effect, they were buying gold from the United States at the price set in 1934 - $35 an ounce. Because that 1971 BAD MONEY DRIVES OUT GOODS 679 bargain was available to them in the U.S., they were most willing and anxious to exchange cars and steel and textiles and all sorts of goods and services at prices Amer ican customers recognized as bar gains.

Because the American people responded as they did to protect themselves against inflation, the Federal government was obliged either to outlaw such response or else stop its deficit spending and expansion of the money supply. Quite contrary to most of the pub licity, the wage-price freeze of August 15, 1971, announced the intention of the Federal govern ment to persist in its policy of in flation - not stop it, but step it up; reduce some taxes, cut down the supplies of foreign goods, and make it illegal for an American citizen to offer more bad money for any product than he had paid for a similar item before the freeze. Certainly, there could be no reason for such measures if the government meant to stop print ing bad money and balance the Federal budget. The mislabeled "balance of pay ments" problem, implying that for eigners aren't paying us what our exports are worth, is simply the strictly domestic problem of an unbalanced Federal budget...:: defi cits printed out as money. It's hardly the sin of foreign governments if they show greater fiscal responsibility than does our own; that sin is ours, for urging or al lowing our government to spend more than it collects from us in taxes. Unless other national gov ernments sin in sympathy and un balance their budgets to match our reckless rate of inflation, we can't long maintain the fiction that our paper money is as good as theirs. They may continue to sell us their goods at our inflated prices but will not be so anxious to buy our goods at our inflated prices; they'd much prefer gold, if they could get it, at $35 an ounce; hence, a so-called "balance of payments" problem, all of our own making.

If the Federal government were seriously determined to stop infla tion - that is, balance its budget then it would have to seek politi cally possible ways to shut off the spending. The process is simple enough to describe: identify which subsidies or spending programs are least attractive to U.S. voters and repeal them in that order. Whether that would be the War in Vietnam, the exploration of outer space, foreign aid, farm supports, environmental improvement, un employment compensation, urban renewal, medicare, compulsory un ionism, or any of hundreds of other uneconomic and unprincipled governmental ventures is strictly 680 THE FREEMAN November a political decision. But one thing is certain, there is no way to main tain U. S. credit in the world mar ket without curbing domestic in flation,and the only way to do that is to whittle off some of the Fed eral boondoggles. If politicians in power believe in voluntary con trols, let them voluntarily curb their spending. They then should find neither reason nor excuse to control ours.

The Frozen Laborer Government control of prices and wages, as distinguished from market determination in open competition, boils down in reality to control of people. l Peaceful per sons are compelled by the govern ment to use their lives and their property for purposes or in ways other than they might have chosen. The most common justification given for wage and price control is inflation; people are said to be investing or spending their lives and .property recklessly, causing prices to rise. But the fact is that inflation is simply another form of people control-a process by which government takes scarce and valuable resources from pri vate owners in exchange for ir redeemable promises to pay. Infla1 See "Government should control prices but not people," by Dean Russell, Cliches of Socialism (Irvington, N. Y.: Foundation for Economic Education, 1970), p. 222. tion is effective as a form of peo ple control so long as, and to the extent that, people believe the gov ernment will redeem its promises in whole or in part; they accept and hold money today in faith that it may later purchase at least as much as now, and possibly more.

The people are controlled through their blind faith, their property taken without their knowledge. Once the people open their eyes to the nature and effect of infla tion, lose faith in the govern ment's promise to pay, then gov ernment must resort to sterner measures such as a price and wage freeze if it expects to control the people, take their property with out their consent. The government, no doubt, will continue to print and spend money for its purposes, while denying individuals the right to spend their money for their own purposes. In other words, governmental control of prices and wages reduces the own er's bundle of rights concerning the use and disposition of private property; that is a long step back toward feudalism. 2 Private property exists in many shapes and sizes, but one of the , most neglected and perhaps most important forms pertains to the right of the individual to direct 2 See "Changing Concepts of Private Property," by Bertel M. Sparks, THE FREEMAN, October, 1971, p. 583.

1971 BAD MONEY DRIVES OUT GOODS 681 and control his own efforts, to sell his services for the most attrac tive bid in the market as distin guished from involuntary servi tude. The so-called Industrial Revolu tion, involving specialization, trade, saving, investment, and nu merous job opportunities in vari ous industries, did much to free the laborer from the lowly status of serfdom - a steadily strength enedand expanded bundle of rights to his own efforts. Then, government was asked, or volun teered, to intervene on the labor er's behalf - and, in the process, damage was done to his rights. The labor union that was em powered to help him bargain exer cised that political power to bar gain for him, without his express consent. The power of the union to arbitrarily exclude ,any laborer from bargaining for a given job opportunity diminishes that labor er's property and his right to his own efforts. One laborer's political power to strike or picket a given job opportunity jeopardizes every laborer's right of access to the job opportunity of his own choice.

Laws such as the Wagner and Taft-Hartley Acts in the United States extend political privilege to union bosses and the favored few, but at the expense of the property rights of laborers in general. Vari ous State and Federal minimum wage laws exclude from the mar ket those least skilled laborers un able or unwilling to earn the mini mum wage, thereby diminishing rather than enhancing their bun dle of rights. The regressive social security tax discriminates against laborers in the lower wage brack ets. And what some refer to as "the Welfare State against the Negro" really concerns the mod ern infringement of government regulation and control upon the property rights of the least skilled and lowest paid laborers. The government attempts too much in its various welfare meas ures, spending more, much more, than it dare try to collect through direct taxation of the supposed beneficiaries. Such deficit spend ing, Federal borrowing from its captive banking system, is the process of inflation which in due course manifests itself in what is called wage control and what is in reality the regulation and control of the laborer - much as in the days of feudalism.

Laborers and others who would defend their lives and property against inflation and controls and confiscation must first insist that government mind none but its own business: policing the market to keep it open. And in any event, Gresham's Law does prevail: bad money drives out goods. ~ Conflict of WHOSE interests? BERTEL M. SPARKS A FEW YEARS AGO the president of one of America's major manufac turing corporations was named Secretary of Defense. Prior to his assuming the duties of his new job he was called upon, not only to resign his position as corporate president, but to arrange for the disposition of all his stock in the corporation. It was felt that this was necessary in order to avoid a possible conflict of interests. Even after he had disposed of his holdings, he continued to be the subject of much criticism because of his former business connec tions. It seemed that every major decision he made in his capacity as Secretary of Defense was care fully examined with a view toward finding some reason to believe that it might have been influenced by Berte! M. Sparks is Professor of Law at Duke University School of Law, Durham, North Carolina.