A recently published article "Is Inflation In Our Future?" drew some spirited response from one reader. I have engaged in many online discussions and debates about inflation, deflation, monetary policy and other subjects. Deeply embedded in those discussions is ALWAYS the definition of money. It is inescapable. Following is my latest response, also available in that article's comments, to one who calls him/herself "Voice of Reason".
"Lenin is said to have declared that the best way to destroy the Capitalistic System was to debauch the currency... Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose."
“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
- John Maynard Keynes
It is difficult, or even impossible, to discuss economics without agreeing on definitions. It appears to me that Vox and I do not agree on the definition of money. I think this is a critical distinction between our positions. If we can't agree on what money is, then our debate consumes more time than it produces value. I use a lay definition of money.
In my opinion, money has three defining characteristics:
1.Unit of Account
2.Medium of Exchange
3.Store of Value
Monetarists seem willing to consider money in a more abstract sense, in which all the different manifestations of money do not necessarily exhibit all three of these characteristics simultaneously. This view is substantiated by the extensive Wikipedia presentation for the definition of "money", some of which I quote here in the following three paragraphs:
"Money is generally considered to have the following characteristics, which are summed up in a rhyme found in older economics textbooks: "Money is a matter of functions four, a medium, a measure, a standard, a store." That is, money functions as a medium of exchange, a unit of account, a standard of deferred payment, and a store of value."
"There have been many historical arguments regarding the combination of money's functions, some arguing that they need more separation and that a single unit is insufficient to deal with them all. One of these arguments is that the role of money as a medium of exchange is in conflict with its role as a store of value: its role as a store of value requires holding it without spending, whereas its role as a medium of exchange requires it to circulate. Others argue that storing of value is just deferral of the exchange, but does not diminish the fact that money is a medium of exchange that can be transported both across space and time. 'Financial capital' is a more general and inclusive term for all liquid instruments, whether or not they are a uniformly recognized tender."
"To act as a store of value, a commodity, a form of money, or financial capital must be able to be reliably saved, stored, and retrieved — and be predictably useful when it is so retrieved. Fiat currency like paper or electronic money no longer backed by gold in most countries is not considered by some economists to be a store of value."
I am especially interested in the "store of value" function of money and its role as "financial capital". I wish to understand these functions in light of a physical reality which seems to be often ignored in discussions of monetary policy: THERE IS NO FREE LUNCH.
That last point is pivotal to this debate. The question that I want to answer can be summed up by this current event: "Can money produced by Quantitative Easing be viewed as financial capital?" My gut tells me the answer is "No it cannot". QE seems to me to be a violation of "no free lunch". It seems to me that we are attempting to create "store of value" via the output of a printing press. My unanswered question is whether or not the output of a printing press has value. If it does, then we should just continue printing ad infinitum. If it doesn't then it is merely the modern equivalent of coin-clipping.
Vox and others contend that the question is more one of "confidence". My problem is this: my above questions remain unanswered. As a hard-money advocate, I am able to simply state that precious metals have been valued by humans for thousands of years, and for that and other reasons have served as money. The confidence issue is important. Humans have had confidence in precious metals because they are hard to fake or counterfeit. Vox and his ilk would prefer that we humans could be convinced that we can have confidence in paper currency and want desperately to continue that particular modern delusion. That delusion enables value to be created out of thin air. This is counterfeiting, plain and simple. Precious metals require no legal tender laws to support their value, while fiat currencies do. Perhaps this is what Keynes was referring to in this quote:
“The difficulty lies not so much in developing new ideas as in escaping from old ones.”
It is with at least some sense of satisfaction that I was finally able to get Vox to admit that banks create money, and that credit is not money, though he did so begrudgingly:
"the original $100K isn't included in money created through lending."
"I CONFLATE nothing. This is completely different from the question you pushed before, which was "is credit money," the answer to which is "no, of course not, don't be silly." The answer to this question is "yes, banks create money, of course they do, don't be silly."
This process of creating "store of value" without work is one that escaped mankind all through history. Alchemists unsuccessfully tried to create gold out of lead. Little did they know was all they needed to do was to pass legal tender laws, open a bank and engage in fractional reserve lending or, more effectively, become a central banker.