Money Has NO Market of Its Own Setting the Research Agenda for Monetary Disequilibrium Theory

Figure 3.7 looks dramatically different, to say the least, from the diagrammatics of conventional macroeconomics. The specific relationship between capital-based macroeconomics and, say, ISLM analysis or Aggregate-Supply/Aggregate-Demand analysis is not readily apparent. To compare and contrast Austrian macroeconomics with its Anglo-American counterpart in any comprehensive way would take our discussion too far afield. A few particular points of contrast, however, will help to put the differences into perspective.

First, unlike ISLM analysis, the graphics in Figure 3.7 do not include a market for money. Neither the money supply nor money demand are explicitly represented. Both in reality and in our analysis of it, money has no market of its own. Understanding the broadest implications of this truth sets the research agenda for monetary disequilibrium theory, which we take up in Chapter 11. Austrians, too, recognize the uniqueness of money in this respect. With trivial exceptions, money appears on one side of every exchange. Money, by definition, is the medium of exchange. But neither the transactions demand for money, as embedded in the classical equation of exchange, nor the speculative demand for money, as conceived by Keynes, make a direct appearance in the Austrian-oriented construction. Consistent with Hayek’s understanding, capital-based macroeconomics treats money as a “loose joint” in the economic system. As Hayek ([1935] 1967: 127) indicated early on, “the task of monetary theory [is] nothing less than to cover a second time the whole field which is treated by pure theory under the assumption of barter.” The three-quadrant construction in Figure 3.7 can be taken to depict, if not actually a barter system, a tight-jointed system. That is, money is assumed to allow market participants to avoid the inefficiencies of barter – without introducing any inefficiencies of its own. So interpreted, the interrelationships shown in Figure 3.7 belong to the realm of pure theory.

—Roger W. Garrison, Time and Money: The Macroeconomics of Capital Structure, Foundations of the Market Economy (London: Routledge, 2002), 51-52.

Theft by Devaluation Is the Technocratic Equivalent of Theft by Looting and War that Europeans Set out to Eradicate

At present, Europe’s most tangible and visible symbol is the euro. It is literally held, exchanged, earned, or saved by hundreds of millions of Europeans daily, and it is the basis for trillions of euros in transactions conducted by many millions more around the world. In late 2014 the ECB will occupy its new headquarters building, almost six hundred feet high, located in a landscaped enclave in eastern Frankfurt. The building is a monument to the permanence and prominence of the ECB and the euro.

Many market analysts, Americans in particular, approach Europe and the euro through the lens of efficient-markets theory and standard financial models—but with a grossly deficient sense of history. The structural problems in Europe are real enough, and analysts are right to point them out. Glib solutions from the likes of Nobelists Paul Krugman and Joseph Stiglitz—that nations like Spain and Greece should exit the Eurozone, revert to their former local currencies, and devalue to improve export competitiveness—ignore how these nations got to the euro in the first place. Italians and Greeks know all too well that the continual local currency devaluations they had suffered in the past were a form of state-sanctioned theft from savers and small businesses for the benefit of banks and informed elites. Theft by devaluation is the technocratic equivalent of theft by looting and war that Europeans set out to eradicate with the entire European project. Europeans see that there are far better options to achieve competitiveness than devaluation. The strength of this vision is confirmed by the fact that pro-euro forces have ultimately prevailed in every democratic election or referendum, and pro-euro opinion dominates poll and survey results.

—James Rickards, The Death of Money: The Coming Collapse of the International Monetary System (New York: Portfolio / Penguin, 2014), e-book.

Charlemagne Engaged in an Early Form of Quantitative Easing by Switching to a Silver Standard, and He Created a Single Currency

Charlemagne’s monetary reforms should seem quite familiar to the European Central Bank. The European monetary standard prior to Charlemagne was a gold sou, derived from solidus, a Byzantine Roman coin introduced by Emperor Constantine I in A.D. 312. Gold had been supplied to the Roman Empire since ancient times from sources near the Upper Nile and Anatolia. However, Islam’s rise in the seventh century, and losses in Italy to the Byzantine Empire, cut off trade routes between East and West. This resulted in a gold shortage and tight monetary conditions in Charlemagne’s western empire. He engaged in an early form of quantitative easing by switching to a silver standard, since silver was far more plentiful than gold in the West. He also created a single currency, the livre carolinienne, equal to a pound of silver, as a measure of weight and money, and the coin of the realm was the denire, equal to one-twentieth of a sou. With the increased money supply and standardized coinage, along with other reforms, trade and commerce thrived in the Frankish Empire.

Charlemagne’s empire lasted only seventy-four years beyond his death in A.D. 814. The empire was initially divided into three parts, each granted to one of Charlemagne’s sons, but a combination of early deaths, illegitimate heirs, fraternal wars, and failed diplomacy led to the empire’s long decline and final dissolution in 887. Still, the political foundations for modern France and Germany had been laid. The Frankenreich’s legacy lived on until it took a new form with the creation of the Holy Roman Empire and the coronation of Otto I as emperor in 962. That empire, the First Reich, lasted over eight centuries, until it was dissolved by Napoleon in 1806. By reviving Roman political unity and advancing arts and sciences, Charlemagne and his realm were the most important bridge between ancient Rome and modern Europe.

Notwithstanding the institutions of the Holy Roman Empire, the millennium after Charlemagne can be seen largely as a chronicle of looting, war, and conquest set against a background of intermittent ethnic and religious slaughter. The centuries from 900 to 1100 were punctuated by raids and invasions led by Vikings and their Norman descendants. The period 1100 to 1300 was dominated by the Crusades abroad and knightly combat at home. The fourteenth century saw the Black Death, which killed from one-third to one-half the population of Europe. The epoch starting with the Counter-Reformation in 1545 was especially bloody. Doctrinal conflicts between Protestants and Catholics turned violent in the French Wars of Religion from 1562 to 1598, then culminated in the Thirty Years’ War from 1618 to 1648, a Europe-wide, early modern example of total war, in which civilian populations and nonmilitary targets were destroyed along with armies.

—James Rickards, The Death of Money: The Coming Collapse of the International Monetary System (New York: Portfolio / Penguin, 2014), e-book.

Economic Performance in the US and the UK Was Superior under the Gold Standard to that of Managed Fiduciary Money

Economists are nearly unanimous in pointing out the beneficial economic results of this period. Giulio M. Gallarotti, the leading theorist and economic historian of the classical gold standard period, summarizes this neatly in The Anatomy of an International Monetary Regime:

Among that group of nations that eventually gravitated to gold standards in the latter third of the 19th century (i.e., the gold club), abnormal capital movements (i.e., hot money flows) were uncommon, competitive manipulation of exchange rates was rare, international trade showed record growth rates, balance-of-payments problems were few, capital mobility was high (as was mobility of factors and people), few nations that ever adopted gold standards ever suspended convertibility (and of those that did, the most important returned), exchange rates stayed within their respective gold points (i.e., were extremely stable), there were few policy conflicts among nations, speculation was stabilizing (i.e., investment behavior tended to bring currencies back to equilibrium after being displaced), adjustment was quick, liquidity was abundant, public and private confidence in the international monetary system remained high, nations experienced long-term price stability (predictability) at low levels of inflation, long-term trends in industrial production and income growth were favorable and unemployment remained fairly low.

This highly positive assessment by Gallarotti is echoed by a study published by the Federal Reserve Bank of St. Louis, which concludes, “Economic performance in the United States and the United Kingdom was superior under the classical gold standard to that of the subsequent period of managed fiduciary money.” The period from 1870 to 1914 was a golden age in terms of noninflationary growth coupled with increasing wealth and productivity in the industrialized and commodity-producing world.

—James Rickards, Currency Wars: The Making of the Next Global Crisis (New York: Portfolio / Penguin, 2011), e-book.

A Currency War Is Fought By One Country through Competitive Devaluations of Its Currency Against Others

A currency war, fought by one country through competitive devaluations of its currency against others, is one of the most destructive and feared outcomes in international economics. It revives ghosts of the Great Depression, when nations engaged in beggar-thy-neighbor devaluations and imposed tariffs that collapsed world trade. It recalls the 1970s, when the dollar price of oil quadrupled because of U.S. efforts to weaken the dollar by breaking its link to gold. Finally, it reminds one of crises in UK pounds sterling in 1992, Mexican pesos in 1994 and the Russian ruble in 1998, among other disruptions. Whether prolonged or acute, these and other currency crises are associated with stagnation, inflation, austerity, financial panic and other painful economic outcomes. Nothing positive ever comes from a currency war.

So it was shocking and disturbing to global financial elites to hear the Brazilian finance minister, Guido Mantega, flatly declare in late September 2010 that a new currency war had begun. Of course, the events and pressures that gave rise to Mantega’s declaration were not new or unknown to these elites. International tension on exchange rate policy and, by extension, interest rates and fiscal policy had been building even before the depression that began in late 2007. China had been repeatedly accused by its major trading partners of manipulating its currency, the yuan, to an artificially low level and of accumulating excess reserves of U.S. Treasury debt in the process. The Panic of 2008, however, cast the exchange rate disputes in a new light. Suddenly, instead of expanding, the economic pie began to shrink and countries formerly content with their share of a growing pie began to fight over the crumbs.

Despite the obvious global financial pressures that had built up by 2010, it was still considered taboo in elite circles to mention currency wars. Instead international monetary experts used phrases like “rebalancing” and “adjustment” to describe their efforts to realign exchange rates to achieve what were thought by some to be desired goals. Employing euphemisms did not abate the tension in the system.

—James Rickards, Currency Wars: The Making of the Next Global Crisis (New York: Portfolio / Penguin, 2011), e-book. 

In Zimbabwe, Hyperinflation Made Everyone a Criminal Because You Had to Break the Law to Survive

Zimbabwean society was a paradox. There was tremendous violence and thievery perpetrated in the name of political power, and yet there was respect and relative peace between individuals and communities of different cultures.

The government, in an attempt to maintain control, stirred violence in the rural areas and townships. Opposition party members were brutally oppressed, while those supporting the ruling party were given special favour. There was violent land occupation in the name of land reform and access to food became a political tool. Increased government surveillance and control resulted in great acts of terror.

Yet, in stark contrast, people felt safe to walk home at night without fear of assault.

Instead of the government fostering order through justice, it used the justice system as a tool to oppress and restrict. Ordinary citizens became accustomed to breaking the myriad of new laws that were issued in an attempt to control the population. Slowly, the formal justice system broke down. Respect for authority deteriorated, and the values held dear within the culture slowly began to erode.

Despite the peaceful culture, hyperinflation wore away at people’s ethical resolve over time. As millions were impoverished and government control increased, the only way to survive was through bribery, corruption and illegal activities. To continue about their everyday, peaceful lives, Zimbabweans had to break these laws. The paying and taking of bribes became an accepted norm.

Instead of obedience to the law, people had to use their own personal values and sensibilities in relationships as a guideline for what was wrong or right. Paying someone in US dollars, for example, wasn’t considered wrong by most people even though it was illegal, while stealing bread was considered wrong.

Yet, slowly values deteriorated with the heightening levels of desperation, and petty theft became frequent. Whatever could be stolen in public spaces disappeared. Anything that was made of wood was used for fire. Any movable metal was taken and sold as scrap. At one stage, all the road signs disappeared, many to be used as rudimentary funnels as barter in fuel increased.

Petty theft grew to be a big problem. There are stories of entire automatic gates being stolen (but very rarely would the thieves then go on to break into the house). Businesses struggled with inventory theft because staff just didn’t earn enough money to make ends meet. Truck drivers would siphon off fuel from truck tanks. Farmers’ crops and livestock were often stolen — particularly the livestock, which would typically disappear during the night.

In summary, theft revolved around stock shrinkage and theft of public property. Violent and aggressive disrespect for private property, muggings and house break-ins only started becoming a problem once hyperinflation had completely destroyed the economy and social values had deteriorated considerably.

—Philip Haslam and Russell Lamberti, When Money Destroys Nations: How Hyperinflation Ruined Zimbabwe, How Ordinary People Survived, and Warnings for Nations that Print Money (Johannesburg: Penguin Books, 2014), e-book.

With a 900 Per Cent Interest Rate in September 1923 the Reichsbank Was Practically Giving Money Away!!!

In these circumstances it is easy to understand that the German books dealing with the history of the Inflation Period are for the greater part of little value. They are so full of prejudices, and are often so entirely lacking in the theoretical insight which must necessarily precede all historical description that they cannot even give an adequate picture of the great historical event. For this reason this work by a learned American is all the more welcome. In his Exchange, Prices and Production in Hyper-Inflation: Germany, 1920-1923, Professor F. D. Graham of Princetown University has taken great pains to provide a reliable narrative. . . .

In reading Professor Graham’s historical survey even those who were witnesses of the Inflation must again and again be amazed at the incredible incapacity evinced in regard to the monetary problem by all sections of the German nation. For the economist the most astonishing fact is the inadequacy of the Reichsbank’s discount policy. This is Professor Graham’s verdict: “From the early days of the war till the end of June 1922 the Reichsbank rate remained unchanged at 5 per cent; it was raised to 6 per cent in July, to 7 per cent in August, 8 per cent in September and 10 per cent in November 1922, to 12 per cent in January 1923, 18 per cent in April, 30 per cent in August and 90 per cent in September. But these increases were as nothing when measured alongside the progressive lightening in the burden of a loan during the time for which it ran. Though, after September 1923, a bank or private individual had to pay at the rate of 900 per cent per annum for a loan from the Reichsbank, this was no deterrent to borrowing. It would have been profitable to pay a so-called interest, in reality an insurance, charge, of thousands or even millions of per cents per annum, since the money in which the loan would be repaid was depreciating at a speed which would have left even rates like these far in the rear. With a 900 per cent interest rate in September 1923 the Reichsbank was practically giving money away and the same is true of the lower rates in the preceding months when the course of depreciation was not quite so headlong.

—Ludwig von Mises, “The Great German Inflation,” Economica, no. 36 (May 1932): 230-231.