circa 1969: Still life of wads of US currency. The packs include five, ten, twenty and fifty dollar bills. (Photo by Lambert/Getty Images)
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“You can keep that crap to yourself.” This is how a beggar in 1920s Germany reacted when a passerby gave him several 100-mark notes.
The beggar’s response a little more than 100 years ago makes evident two truths that still elude economists. First, there is nothing “stolen” about inflation. Since we all don’t pursue money, but what money it can be exchanged for, we know very well when currencies depreciate.
The obvious conclusion of the above is that contrary to the popular belief of economists, central banks cannot “shoot up” the so-called “money supply” or increase the “money supply”. Production is the only source of increases in the medium of exchange, and central banks produce nothing.
For evidence of the folly of governments attempting to design money or expand money in circulation, look once more to Weimar Germany. No doubt governments can print money with abandon it happened in Germany, but as the beggar’s answer reminds us, that hardly increases the use and circulation of print media. The exact opposite.
Look again at the disgusting response of the Munich beggar to 100-mark notes: fully aware that they would not exchange for anything, he threw the worthless paper back. Unclaimed Germans were no different and quickly switched to other currencies. Markets, unlike central planners, work.
In concert with the descent of the mark into nothingness, “dollar booths” proliferated in Germany. With the devaluation having rendered the mark less than worthless, the Germans began to circulate dollars among other currencies. Which was and is a statement of the obvious.
Far from economic theory is the simple truth that production buys production. Money is but the accepted measure of value between producers that producers use to facilitate exchange.
When we put money in our pockets or bring it to any store, we bring production to the store with the goal of exchanging it for that of others. From this simple truth, we hope readers can understand why the mark ceased to circulate in Germany after World War I, only to be replaced by reliable means of exchange.
Crucial to the change was that it was not overseen by economists or Fed officials. They didn’t put the so-called “money supply” in Berlin, Frankfurt, Munich and countless other German cities. It wasn’t necessary. Production entails the circulation of mediums of exchange, always and everywhere.
While economists will say otherwise and literally claim that if they controlled the Fed they could expertly engineer prices, “GDP,” “national income,” and countless other figures popular in Ph.D.’s, the reality is that money is wherever production is. It is not put there, nor printed, nor is it printed to achieve specific M goals that are said to coincide with rapid, non-inflationary growth, rather money is a certain effect of production.
That money in circulation reflects production reveals the folly of economists who claim to have the ability to design the so-called “money supply.” Implicit in this sad conceit is that too many economists believe they can plan production.
No they can’t, but it’s not a big deal. Just as markets are increasingly fast for politicians (see economic growth under Donald Trump), they are very fast for economists. That’s why the dollar, British pound, Swiss franc and euro arbitrate payments in so many cities, states and countries where they are not legal tender. While governments devalue and destroy all forms of legal tender with sad frequency, real markets mitigate their mistakes. Translation, producers, not central bankers, decide what money circulates and in what quantity.
Production is always, always, always matched with reliable means of exchange. One presupposes the other. Which means that when it comes to money, economists are deeply exaggerating.
