The Value Of Counterfeit Money

By Dan McLaughlin, on December 19th, 2008

Wouldn’t it be nice to have as much money as you wanted? It is expensive to have a family, with food, clothing, taxes, mortgage payment, college costs and so on. There is never enough money for everything we want.

Imagine that you had a printing press in your basement. Whenever you needed to pay that $40,000 college bill, you could just print a bunch of hundreds dollar bills and send them along to the college. When you had to pay the $150 grocery tab, just go downstairs and spin off a few more dollars. Also, imagine that everyone was required to accept your money as payment. There would be no need to do anything productive. Your work could be printing up new dollar bills. Think of how wealthy you could be.

Now suppose your neighbor also had a printing press in his basement and everyone was required to accept his bills for payment. He also has college costs and teenagers with big appetites and pressing needs, like X-box 360’s. It would be nice for him if he could also go to the basement to get whatever money he needed.

Going further, imagine that everyone in the country had their own printing presses. Think of how wealthy and prosperous everyone would be. They would be able to afford anything because they could just print money as they needed it. Poverty would be ended because even the poor could print money to pay for anything their hearts desired.

The absurdity of this scenario should be pretty obvious. If everyone just printed money without producing any value to back it up, there would quickly be so much money in circulation that it would take wheelbarrows full of money to buy a loaf of bread, just as it did in Weimar Germany. Money made out of thin air has no real value and dilutes the buying power of money already in circulation. That is why it is illegal to make counterfeit money. You would be cheating whoever you pay because you are getting value and giving no real value in return.

Consider now the modern, legal method of making money. The Federal Reserve Bank and fractional reserve banks are the only legal source. Consider, now, where the Fed gets it’s dollars. Instead of making new money out of thin air in the basements of millions of homes, it makes it out of thin air in a nice, convenient, centralized location. Under the current system, there is no need to have any value backing up the dollars. However, everyone in this country is required to take the counterfeit money as legal payment.

As with the basement printing presses, the government printing presses allow their owners to buy things without giving anything of value in return. The official process is much more complex, with a host of intermediaries, but the overall concept is simple, and just as destructive.

Government can only spend money it raises in taxes, what it incurs in debt or what it makes out of thin air. Taxation is the most obvious and is under scrutiny by taxpayers. Politicians have to be careful with using taxation. Overuse can get them un-elected.

The second method is transferring the obligation to pay to future generations. By borrowing the money, the government can buy things on credit. Like people who overuse their credit cards, at some point in time the lenders are going to realize that the ability to pay is exceeded, and shut them off. Eventually, someone will have to pay the price, but, lately, that doesn’t seem to bother the folks in charge.

The last method is the silent tax. Making money out of thin air to pay bills is nearly invisible to most people. Expanding the money supply is the only way that a general inflation can occur, but our crafty central bankers have persuaded people to believe that inflation comes from those bad oil producing countries or greedy business people raising prices or hurricanes or frosts. As more valueless dollars are pumped in, the existing dollars are worth less, and prices of goods and services move ever higher. This process is the reason that the dollar has been decreasing in value by over 30% per decade.

Through this process, everyone loses, except those close to the central banking system. The government and financial insiders gain at everyone else’s expense. The poor are hurt most by the inflation tax. Maybe that was the exploitation that Karl Marx mistook for genuine free markets and capitalism.

Counterfeit money does have some value, however. It can teach us some valuable lessons about the ethics of centralized government. The lessons aren’t pretty.



One comment   Monetary Policy   , , ,  

How a Free(d) Market Would Give Us Zero Unemployment

By J.D. Seagraves, on December 19th, 2008

One persistent problem in America’s political discourse is the misuse of the term “free market.” So-called “conservatives” like President Bush and his Republican acolytes like to claim that they support the “free market,” and liberals, normally skeptical of everything that comes out of conservatives’ mouths, take their word for it. The Right defends the system we have as “free market capitalism,” which aids the Left in its straw-man attacks against it. A side effect of this inexact taxonomy is that real free-market partisans are misconstrued as defenders of “Big Business.” But as Austrian theorist and Cato blogger Roderick Long demonstrates , this is far from being the case.

There is currently a debate raging between the so-called “left” and “right” factions of the libertarian underground. The so-called “left” faction, led by Professor Long, insists that businesses would be smaller and more democratic in the absence of the state. The “right” faction, while not defenders of the current system (which many of them consider to be “fascist”) argue that businesses would be even larger under completely laissez-faire, and this would probably be a good thing.

The libertarian-right’s case is based on the size-limiting effects of anti-trust laws and protectionist trade policies, among other regulations. At first, this argument is compelling, but as Long points out, these effects are likely very minimal when compared to the tremendously destructive impact the government has on would-be small businesses. Just imagine, he says, if there were no longer any licensing requirements for starting a taxi service: tens of thousands of cab companies would start up tomorrow. What if you could open a restaurant in your living room? What if you could start a daycare without jumping through burdensome regulatory hoops? What if you could hire people at any wage at which they were willing to work? Indeed, there would likely be no unemployment under laissez-faire.

It should be stressed that, for the most part, the “left” and “right” factions of anarcho-libertarianism agree on the proper role for government: none . Neither faction supports the regulations that keep firms small or prevent them from starting up at all. This is largely an academic debate about how laissez-faire would work if ever adopted, but both sides agree that it would work better than the current system, and that it is more moral.

Personally, I come down on Professor Long’s side, and I think it’s important for libertarians to differentiate themselves from conservatives at every turn. Libertarians are not conservatives — they are liberals in the classical sense. In fact, modern liberalism is merely a variant of classical conservatism, which is one reason there’s so little difference between the two Establishment parties. Long says that today’s liberals attempt to use conservative means to achieve liberal ends, such as full employment. But in reality, classical liberal ends (laissez-faire) would achieve those ends more effectively, and more morally, too.



One comment   Citizen Economists   , , , ,