Frédéric Bastiat's Views on the Nature of Money

Mises.org ^ | 23 June 2003 | Mark Thornton

[sourcery]

FYI

[NativeNewYorker]

mises.org ROCKS.

I subscribe to all their email newsletters and check the various parts of their site daily.

Highly recommended.

[headsonpikes]

Bastiat - possibly the greatest French thinker ever!

(apologies to Cartesians) ;^)

[Tauzero]

they deserve pity, not apologies.

He was a good mathematician, but a bad philosopher.

[Tauzero]

Bastiat rocks.

He's not quite right about trade facilitating peace though. It is not always so.

[RightWhale]

Bastiat - possibly the greatest French thinker ever!

One of the fundamental revolutionaries.

[justshutupandtakeit]

Bastiat explains what must happen when nations are on the Gold Standard. Hoarding, war to keep gold, economic war to restrict imports and push exports all must result from the GS. He is, of course, wrong when he claims governments create the view that money is Wealth. Governments didn't create that view, it goes with the gold standard.

Our nation's use of paper currency has not impeded its progress in the slightest. How much stronger could we have become had we been on metallic standards? Probably no stronger and quite likely weaker due to the inability of gold supplies to increase at a sufficient rate.

Bastiat is wrong if he believes the economy is served by a money supply incapable of growth at least at the rate of population and to keep pace with productivity growth. Otherwise, deflation sets in and that is destructive to an economy. Plus, it would be impossible for a democracy to accept since it would tend to crush borrowers and make the wealthy even more wealthy.

[sourcery]

DESTROY THE DOLLAR--CREATE PROSPERITY

[SuperLuminal]

bttt

[Deuce]

Excellent article, Sourcery.

However, Justshutupandtakeit believes that scraps of paper and electronic blips created out of thin air do create economic growth. In fact, he believes economic growth can not occur without an increase in the money supply. Unfortunately, the entire establishment (Keynsians, monetarists, and supply siders) either agree with this position or pretend to do so (I am actually convinced that at least some of them recognize the validity of the Austrian School's position but prefer, for reasons of self interest, to deny it).

[justshutupandtakeit]

That is false, I do not believe growth CANNOT occur without and increase in the money supply. I DO believe that a money supply which does not gradually increase to accommodate economic and population growth WILL reduce the rate of growth below what it could have been without the OPTIMAL rate of growth of the MS. How anyone can believe that arbitrary and unpredictable surges and spurts in the supply of metals can achieve that opitmal rate is beyond me.

Growth can occur through technological change but without a proper increase (Friedman links it to the growth rate) in the MS it means deflationary pressure on all sectors not undergoing the tech change, even sectors totally separated from the sector undergoing change.

Price stability, a laudable goal, is unattainable if the growth rate of the MS is less than the growth rate of the economy. Since the long term growth rate of gold supplies is only about 1.5% and that of the American economy is about 3% the latter rate would have been lower under a metal standard and the American people would have suffered thereby.

[Deuce]

How anyone can believe that arbitrary and unpredictable surges and spurts in the supply of metals can achieve that optimal rate is beyond me.

There is no optimal rate of growth in the money supply to achieve growth in the real economy. Real growth occurs as a result of real investment, not money creation.

Growth can occur through technological change but without [an] …increase… in the MS it means [the overall price level will decline].

The above comment is certainly true. I merely took the loaded terms out of your comment. The decline in the price level is the natural way that growth is reflected in an honest monetary system. By honest system, I mean any precious metal based system or fiat system that maintains the “scarcity integrity” of the monetary unit.” That means banks can’t lend it into existence and governments can’t spend it into existence.

[justshutupandtakeit]

Money creation facilitates growth. Without money growing at the same rate as the economy disinflation and deflation shuts back on the investment process. Investment is only made in anticipation of sufficient demand to make it profitable. When the money supply is shrinking in per capita or per transaction unit terms it causes demand to grow too slowly.

The entire mechanism of capitalism is short-circuited by insufficient money. Demand should pick up when prices fall yet, when there is too little money it can't. Supply is only increased when it is presumed profitable to do so. When prices are falling there is no incentive to invest, merely hoard. Gold/metals are the perfect monetary mechanism for hoarding.

Money is not ONLY a means of value storage but is a tool for development and transactions. Your view limits it to value storage and indeed causes it to increase in value since prices must fall. The misery caused by this view is exactly why metals were abandoned and why they will never again be more than a pretty decoration.

Money is a form of capital, at times, it provides the Wage Fund for example. Reducing it to what can be supplied by the mines of the world reduces the amount of capital available for investment.

You essentially made the statement you mutilated meaningless. Declining price levels reduce incentive for technological change, investment and growth. Inflation is accually a greater spur for all those things.

Gold standard- a prescription for stagnation.

[Deuce]

Investment is only made in anticipation of sufficient demand to make it profitable. When the money supply is shrinking in per capita or per transaction unit terms it causes demand to grow too slowly.

You fail to distinguish between real demand and nominal demand and continue from there. Real future demand and real future returns are independent of the quantity of money (as long as the MS is sufficiently divisible).

If you wish, periodically declare "money stock dividends" to increase the number of “money shares” however you'd like vis a vis real production because people do confuse nominal and real. As long as the increase is given proportional to the ownership of existing dollars, no harm is done. If it is done, in any other wayyou inappropriately benefit those who receive it first or early at the expense of those who receive it late or never.

[justshutupandtakeit]

No, I don't fail to distinguish between those terms. However, businesses never forecast prices in any but nominal terms since that is how all their inputs prices are measured. "Real" terms are used only in academic circles and for most of economic history were not even spoken of.

Since Friedman made the distinction clear it became useful for analytic purposes and to properly establish theory but it has no use in the everyday world of business.

Money's true economic function is as a flow not a stock thus, your solution to slow growth is not sufficient and would create more problems than it would solve. We don't want money to be withdrawn from circulation as a store of value. It must circulate and facilitate transactions, that is its chief aim. Want to store value-buy land.

[Deuce]

We don't want money to be withdrawn from circulation as a store of value.

In a free society, each person decides for himself. It is not society's decision to make. Unless money is also a valid store of liquid value and a predictable standard of value not subject to the whims of "decision makers" it fails to adequately perform even the medium of exchange value to which you want to restrict it. The relationship of the Euro to the dollar since 1999 is more conducive to a global lottery than it is to global business. Fixed standards are essential to rational thought.

[justshutupandtakeit]

Please, international trade is able to hedge value loses in foreign exchange transactions so that it is NOT a "global lottery." This is elementary.

You are dreaming if you believe money is EVER outside the whims of "decision makers." You seem to ignore the "society" part of "free society." Society got rid of the metal standards and will never allow it to be returned. Monetary values have NEVER been constant over the long run even using metal. What could be less predictable than a huge gold or silver strike? They never provided a "fixed" standard except in the imaginations of anti-paper crusaders.

A medium of exchange must be capable of expansion to meet the needs of trade if that means a slight inflation, so be it. P*Q= M*V which means P must fall unless V continually rises when Q increases. An appreciation of M in real terms means big trouble for an economy and can be easily shown to generate huge political unrest and uncertainty.

Since the wealthy's losses through inflation are compensated for through the nominal interest rate they are not harmed by slight inflations. Yet, the poor and debtors are crushed by deflations. Your ideas would hamstring any economy and that is why they have no following of note. Didn't you ever wonder why?

[Deuce]

Please, international trade is able to hedge value loses in foreign exchange transactions so that it is NOT a "global lottery." This is elementary.

Oh, I see. The international bankers create currencies that are ridiculously volatile but then sell your currency derivatives to protect yourself. Something like the protection rackets of gangland Chicago circa 1930s.

You are dreaming if you believe money is EVER outside the whims of "decision makers."

It can be and should be the goal an honest system strives for. BTW, I favor laws against murder, too, even though it will never be wiped out entirely.

Monetary values have NEVER been constant over the long run even using metal.

There is a difference between standards and values. Inch, pound, year, are standards. A pound of something has changing value---but not changing weight.

What could be less predictable than a huge gold or silver strike?

I said I favored any honest system, not only commodity money---and commodity money, alone, would not be satisfactory with fractional reserve banking. But, you fail to recognize that “big strikes” relative to above ground supply have NEVER occurred AND, much more importantly, it takes work to get it out of the ground. The latter aspect alone demonstrates the difference between an honest system and one in which governments or banks create thin air magic.

Your ideas would hamstring any economy and that is why they have no following of note. Didn't you ever wonder why?

My ideas would not hamstring an economy and I know why they have not been put in place! Those who are close to the money creation process benefit too much from the system they have devised. They have expended much effort convincing people like you, who cheerlead, for a system that is only in the best interest of the handful of elites who have (unjustly) gotten special privileges through government force at everyone else’s expense.

[Deuce]

Please, international trade is able to hedge value loses in foreign exchange transactions so that it is NOT a "global lottery." This is elementary.

Let's say U.S. Company A sells substantial amounts of product to U.S. companies B, C, and D. Let's say Company A does no business in Europe. Companies B, C, and D, however, have substantial sales in Europe where they were very competitive in Jan, 1999 with European companies in the same industry. Because of the strengthening dollar in 1999-2001 against the Euro, Companies B, C, and D could no longer sell at a competitive price in Europe by 2001 and, therefore, cut their purchases from Company A substantially. Company A’s stock price declines, executive stock options are under water, and Company A executives are, understandably, upset. Unfortunately, Company A was unable to establish an effective business plan because of decisions by European bankers and central bankers, the Fed, and individual U.S. banks that company A could neither control nor foretell.

Do you find that conducive to global business? Here's what Paul Volcker has to say on the subject:

A global economy needs a global currency

Within 50 years (probably much sooner) a sensible international clearing mechanism will be instituted. My bet is gold will be the mechanism of choice. 5000 years of history has found nothing even marginally comparable to the monetary characteristics of gold. How else do you explain the fact that over 80% of all gold that was ever mined currently exists in the form of inert bars in vaults---usually the vaults of the very people who disparage it. Do you think, maybe, they know something they are not telling you?