Tuesday, April 19, 2011

A-Team: Money Monopoly and Counterfeit

The plot of the A-Team movie inspired this essay. It revolves around some bad guys who have stolen a dollar printing press. For this crime, Mr. T abandons his pacifist tendencies and starts killing fools.
The A-Team 
But what’s wrong with printing money? How does the manufacture of money differ from the manufacture of other goods? What is the effect of a monopoly of the money supply?

Money is the unit by which the value of all other goods is measured. It is the common denominator. You can imagine the chaos that would ensue if our units of measurement were arbitrarily altered on a daily basis. Imagine an inch, for example, about the length of your thumb today, the length of your body tomorrow, and the next day the length of a football field. It would be impossible for an architect to communicate to the builder just how big a house should be. It would be impossible to safely build or engineer anything. In fact, measurement differences between the U.S. and European standards have caused multi-million dollar rockets to violently crash or to hurtle off course into the emptiness of space.

Because money is the basic unit of economic measurement, its stability is important, otherwise all entrepreneurial planning and business building would be impossible at best, and destructive at worst.

How do you keep money stable? We all know that a dollar is worth 100 cents, but how do we make sure no one meddles with its worth?

The value of the dollar is measured in its purchasing power, or how much you can buy with it. You’re used to hearing old people say they used to buy a loaf of bread for a nickel, whereas now it costs us several dollars. By that measure, we know that the purchasing power of the dollar has gone down since their time. How did this happen?

 The value of anything is determined by supply and demand, i.e., how much of it there is (supply), and how much we want it (demand).

On the supply side, the purchasing power of money can increase if—

1. the amount of goods increases.
2. the amount of money decreases.

The amount of goods increased rapidly in the 19th and 20th centuries, thanks to the entrepreneurial endeavors of heroic capitalists such as Vanderbilt, Carnegie, and Ford, who invented ways of mass producing goods that, once the luxuries of the rich, soon became the necessities of the masses.

This mass production of goods caused the value of the dollar to increase in value by nearly 50% from 1800 to 1912. So a dollar saved in 1800 would buy $1.50 worth of goods 100 years later. But from 1913 until now, the dollar has decreased in value by about 95%, meaning that a dollar saved in 1913 would buy a nickel’s worth of goods today.
Chart by Sean Malone
What changed in 1913?

In 1913, the U.S. federal government granted a monopoly of money production to a private corporation, called the Federal Reserve, a cartel formed by several wealthy bankers. It gave them sole power over the manufacture of dollars and outlawed all competing currencies. In the 1930s, it even outlawed the ownership of gold.

Why outlaw gold?

Gold is the greatest threat to a monopolized paper currency. It has been used as money for thousands of years. Unlike paper, gold is rare. It is therefore difficult to manipulate its value for political gain. It is also very difficult to counterfeit, being an element with easily discernable characteristics.

What’s wrong with counterfeiting? When gold and silver were money, counterfeiters would use other, more abundant metals as coins, and pass them off as gold and silver. This is the equivalent of using sand instead of flour to bake a loaf of bread. A merchant who received this counterfeit money would exchange, say, a perfectly good loaf of bread, for a piece of garbage. Imagine selling your TV on ebay, and getting monopoly money instead of dollars. Counterfeiting is a deceptive form of theft.

But in the case of the A-Team, the bad guys had an actual press, the same exact machine that the Federal Reserve uses. This would be the equivalent of someone stealing a bread machine, and manufacturing perfectly good bread. This “counterfeit” bread would be the same exact good to the consumer. So we see that counterfeiting, as currently defined by the U.S. Treasury, does not mean what kind of dollars are manufactured, but who does the manufacturing.

All men desire the mighty hand of Midas, the power to create wealth out of nothing. Is this not sufficient reason to place the power to print money into the hands of the government? To protect the money supply from manipulation?

Why is it harmful for someone other than the Federal Reserve to manufacture dollars? As we’ve seen, increasing the supply of dollars decreases their purchasing power. But that also happens when the Federal Reserve manufactures dollars.

The only discernable difference between legal and illegal money production is who does it. In other words, money production is a state-enforced cartel/monopoly.

A monopoly in money production may sound safe and reasonable. Rogue money producers could tamper with the value of the dollar. On the other hand, if the monopoly itself is mass-producing dollars, there is not an optional, competing currency to use to preserve the purchasing power of your hard-earned wealth.
Preserving purchasing power is important for people who want to save their money. For those who are saving to buy something expensive, like a house, business, or wedding ring—and especially for people saving for retirement—stable purchasing power is of the utmost importance.

The Federal Reserve has abused its money production monopoly. As we’ve seen, from 1913 (when the Federal Reserve was established) until now, the purchasing power of the dollar has exponentially decreased. Our saved dollars are secretly leeched away, just as if a thief had ATM access to your account, which brings us back to the demand side of money.

This unsafe savings environment, in which your dollars continuously lose purchasing power, makes people want to spend dollars as fast as they can get them, because their dollars will purchase more now than they will a year from now. For this reason, inflation (the increase of the money supply) boosts consumption and punishes savings.

Just as you have to produce a loaf of bread before you can consume it, the inflationary practices of the Federal Reserve are causing us to consume our wealth faster than we can produce it, so that we are consuming ourselves into poverty, becoming poorer year by year. It’s the same as eating not only wheat set aside for bread, but the seeds that were meant for next years crop, making future harvests smaller and smaller.
I PITY THE FOOL who does not understand the economic implications of money production.
Creating money does not create wealth. King Midas was a fable. Wealth is created by producing goods and services that people want. For this reason, it doesn’t matter how many dollars we have. We don’t need money producers. If we had only one dollar in the U.S. economy, we would divide it into millions of micro-cents, and do just fine, because the purchasing power of that dollar would be tremendous.

We need to de-monopolize money production, and allow for free market competition in currencies. Some currencies would do better than others. Some would hyperinflate. Those that succeed would be those that prove to be a safe store of purchasing power. It is good to have lifeboats when sailing on the Titanic.

There are several steps we could take. The most obvious one would be abolishing the Federal Reserve. We could also legalize competing currencies, which would accomplish the same thing, since the Fed has proved to be an unwise money manufacturer, and would not last a day in the free market.

For further reading, see:
1. The A-Team Stands For Anarcho-Capitalism by Mateusz Machaj
2. What Has Government Done to Our Money? by Murray N. Rothbard
3. The Ethics of Money Production by Jorg Guido Hulsmann

No comments:

Post a Comment