Your Monday morning dose of wisdom comes to you via Stephen L. Hall
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In times gone by, when nation employed specie, that is to say metal coinage of precious metals, as the coins would get worn over time through regular use in commerce, passing from hand to hand, the value of those coins would be in danger of losing value as the metal content of the coins wore away. The nations would recall and re-mint the coins to ensure that the coins were of proper weight and content.
Two hundred forty years ago a certain gentleman* described in painstaking detail the practices of immoral, scurrilous princes and kings who would cut their gold and silver coins with cheap base metals when re-coining their money. By mixing the gold or silver with base metals, they would produce many more coins.
An easy example for reference is to suppose that the coins were cut by half, or mixed so that the amount of gold a newly minted coin would be half of what it was in the old coins.
The effect of this immoral practice was to cheat creditors and relieve debtors of their obligations. A king who had borrowed large sums of money and contracted to repay those borrowed funds would have contracted in the language of the coin of the realm: crowns, lira, marks, dollars, et cetera. Whereas the new coins had the same denomination, the king would only have to pay back half of the gold that he had borrowed.
The creditor to said king or prince would have lost half of his wealth, essentially having the gold stolen by the state. This did not merely affect the king and his creditors, but had the same effect upon every creditor and debtor in the nation. The poor, who were often debtors, would be more than willing to support this immoral theft by the state as they personally benefitted.
In modern language, we refer to such a practice as a devaluation of the currency, and having paper money rather than specie, the state simply prints more money. In fact, it becomes even easier by controlling the interest rates, particularly the prime lending rate to create money on the books of the banks without actually having to even physically print the money. The mechanics of currency devaluation are not important, the important part is the immorality of doing so.
While the immediate effect of such a nefarious practice was massive debt relief across the nation, the long-term effects was to dry up credit and curtail lending. Creditors were considerably less likely to lend money because of the danger of being cheated by such practices. Further, if a creditor did lend a person money, they demanded higher interest rates to make up for the risk of a currency devaluation.
The other side of the coin, so to speak, of increasing the coinage, the money supply is to create an inflation of the prices. Where the number of coins has doubled, the prices of everything will double. A loaf of bread which cost a dollar, will soon cost two dollars simply because there are more dollars in the market. In real economic terms, the cost of the bread has not changed, it is the cost of the dollar which has.
The real hardship comes not from the mere fact of inflation. If the prices of everything doubled over night, there would be no real difference besides the cheating of the creditors and windfall for the debtors. But prices do not change overnight. In fact, the people increasing the money supply have a distinct advantage in their foreknowledge of the coming price increases.
Think of employing the knowledge of increasing money supplies as an opportunity to invest in businesses and properties before the prices rise. One could purchase a million dollar property before the price of that property increases to two million. Remember that prince who cut his debt in half by re-minting the coins? If he then purchases land with those newly minted coins, inflation will kick in and he can resell that property at the inflated prices wiping out the remainder of his debt.
So in addition to cheating the creditors, property owners then get cheated by selling at the old prices because of the lag in information and knowledge of the devaluation of the currency. This is the effects of unanticipated inflation, to defraud property owners and businessmen.
In modern times, devaluation of the currency generally occurs gradually rather than all at one time with a re-minting of the coinage but with an increase in simply printing more bank notes or adjusting the prime lending interest rates of a central bank. The effects of increasing the money supply are the same.
If people know exactly what is going to happen before an increase in the money supply, they will simply adjust their behavior and contracts accordingly. Only if the changes are unexpected and secret does it become immoral, a way of cheating and manipulating people.
The basic Keynesian economic model is to deceive people by manipulating the money supply through increased debt financed spending by the government, or paying down the government’s debt. The Monetarists seek to do the same thing by directly manipulating the money supply through printing and interest rate adjustments. Both economic schools of thought are built upon the immoral practice of using deception and manipulation to cheat people out of the value of their labor and products.
In the decades before Jimmy Carter became president, the government would change the prime lending rate unexpectedly or print more money without letting it be publicly known. This was an effort to fool people into increasing economic investments manipulating a natural relationship between inflation and unemployment, expressed in something called The Phillip’s Curve.
The moral hazard of the government repeatedly lying to the people is that the people begin to expect it. Jimmy Carter was the unfortunate victim of people catching onto this nefarious manipulation. People no longer invested in expanding their business because they were experiencing inflation and prices rising. They broke the Phillip’s Curve by trying to manipulate it.
This lead to both double-digit inflation and double-digit unemployment, what the aspiring presidential candidate Ronald Reagan labeled, “the misery index”: inflation plus unemployment.
Most people are aware that Reagan lowered tax rates to spur investments, but they often neglect the importance of putting Alan Greenspan as Chairman of the Federal Reserve with the stated goal of reducing inflation by limiting the prime lending rate and the money supply, and announcing exactly what they planned on doing.
Reagan reintroduced honesty and morality to our money supply advocating a sound and stable currency in which people could have faith, a strong dollar. During Reagan’s first two years in office the country went into a recession, precisely because the people on Wall Street and on Main Street expected this to be another lie.
What dividends came about from this moral approach to our currency? The country experienced a quarter century of virtually continuous economic growth and prosperity, except for a short recession related to George H. W. Bush’s reneging on his “no new taxes” pledge.
Why is all of this ancient and modern history important? Donald Trump announced his plan to deal with the national debt is simply to print enough money to pay the debt; to devalue the currency; to re-mint our coinage as it were. Donald Trump promises to defraud our creditors by just printing money and giving them the treasury notes. Donald Trump wants our government to be one of those immoral, duplicitous princes of old, to cheat its way out of debts.
What would be the dividends of this immoral approach to our currency?
* That certain gentleman was one Prof. Adam Smith, the father of Economics.
