By Karl Smith
Will Wilkinson notes the intuition behind the golden warriors.
"Our currency should provide a reliable store of value — it should be guided by the rule of law, not the rule of men," Mr. Ryan informed Mr. Bernanke. "There is nothing more insidious that a country can do to its citizens than debase its currency." And who would disagree?
I would disagree.
First, that money is a reliable store of value is not a virtue but a regrettable defect of our economic system. It is extremely difficult to create money that is a workable medium-of-exchange without it having some value-storing properties. This is a fundamental problem that industrious minds work to solve whenever faced with it.
The less fundamental value money has the better. An item that is used as a medium-of-exchange cannot be put to productive use otherwise.
More to Ryan’s point, attempts to store value as money have the potential to collapse our entire economic system.
Money does not create anything. Value stored as money is value lost; lost because it represents resources not directed towards capital. Capital, unlike money, does create things. That people sometimes see it as advantageous to stop investing in capital and start holding money is the source of enormous economic instability.
A sudden hoarding of cash means that businesses at once have fewer customers, fewer investors and fewer creditors. They have no choice but to retrench. They have to lay off good workers and shut down good machines.
Unemployment rises. Capacity utilization falls. We have men that – for lack of a machine – do not work; and machines that – for lack of a man – do not run.
It is economic loss of the highest order. Perhaps attempting to take away the government’s primary tool at alleviating this loss is a more insidious act than two or three percent per year increases in prices?
This problem could be eliminated if the entire economy adjusted as instantaneously as the markets for stocks and bonds. If the prices of everyday things soared and collapsed within seconds. In that world both monetary policy and demand driven recessions would be impossible.
Yet, a world like that would be a world where money as a medium-of-exchange was much harder to use.
Bad news about Russian crop harvests would have you dropping everything to run to the grocery store. The price of bread would be rising the moment the news report hit the AP wire. Stock boys would be sent running at the first mention that Florida frost was to be less severe than expected, lest oranges be for one moment overpriced.
God forbid both things happen at once, for coffee shop patrons should have no idea what to expect when they order orange-wheat scones. People in the back of line might find great deals over those at the front, as orange bears sold-short against wheat bulls.
There would never be a market out of equilibrium, but there would never be a moments peace either. We would all be day traders in our daily lives, worried about what the next moment would bring.
For this reason we tolerate money as a store-of-value. We shouldn’t, however, pretend that it is an unmitigated good.