The Myth of Money Shortage

Inspired by a discussion over at the libertyhq forum, Smiling Dave has decided to explain why there cannot be a shortage of money, that the whole idea is born of ignorance, as J. B. Say rightly wrote in Chapter 15 of his classic work.

To make sure there is no foul play, Dave has invited his friendly adversary, Devil’s Advocate, to debate the topic. What follows is a verbatim transcript of their epic meeting.

ID-100100894Image courtesy of Stuart Miles / FreeDigitalPhotos.net

DA: Up to your shenanigans again, hey Dave?

SD: If you mean am I about to debunk yet another economic fallacy with rapier sharp insight, why yes.

DA: Rumor has it you are about to take on not only Keynes and all his merry men, but a group of scholars who call themselves Austrian Economists, who purport to march under the banner of the mighty Nobel Prize winner, Friedrich August von Hayek.

SD: If I’m gonna hang myself, may as well be from a big tree. Besides, Ludwig von Mises is on my side, who wrote in Human Action that “The quantity of money available in the whole economy is always sufficient to secure for everybody all that money does and can do”.

DA: And what topic is it this time, Smiling Dave?

SD: Cast thine eyes up to the title of this article, DA, and you’ll see it’s about the myth of money shortage.

DA: I don’t think it’s a myth at all. I personally could use a few more bucks, and I know plenty of other people who feel the same way.

SD: Hey, I could use more money, too. But we are not talking about individuals here. The question under discussion is whether there can be such a thing as not enough money in the economy as a whole. That the whole country would be helped if instead of, say, ten trillion dollars in existence, we have fifteen trillion dollars in existence.

DA: Why would I be better off, if I don’t get any of that extra five trillion?

SD: Exactly. And yet, you can fill a library as big as the one in ancient Alexandria with books and scholarly articles claiming that if only there was more money in the economy when the need arose, there would be no recessions, no unemployment, in short a Biblical Paradise.

DA: And you are going to take on this mighty array of scholars singlehanded, hey? Dave, they wrote whole books. You have one article, and we’re getting close to its end. So yours better be as powerful and decisive an argument as one of Einstein’s thought experiments.

SD: It is a thought experiment, actually. Let’s say our fearless leader, Barack Hussein, issued one of his famous executive orders that from now on the Dollar is to be called the Obama, in honor of his father. Would that end the recession and guarantee full employment?

DA: Dave, Dave, thou slippest. Of course such an executive order would not change anything about the economy. Nothing would be improved at all. A dollar by any other name is the same old dollar.

SD: Ah, DA, you have yet to hear the brilliant stroke fearless leader has in mind. About a month or two after everyone got used to buying and selling with Obamas instead of dollars, he would issue a second executive order, one that will lead us to the Promised Land, economics-wise.

DA: And that would be?

SD: That every Obama is now to be renamed “Ten Dollars”.

DA: And that helps why?

SD: Don’t you see, DA? He has increased the money supply tenfold. Before the first executive order, you had, say a dollar in your wallet. After the smoke clears from the two exec. orders, you have ten dollars in your wallet. And not just you, everyone in the whole world who had any dollars now has ten times as many.

DA: Don’t be silly, Dave. Just renaming things doesn’t change anything at all.

SD: Exactly. And an increase in the money supply that is arguably fair, in that it gives everyone some of that new money in proportion to what they had before, is really just doing the exact same thing. It is just renaming the existing money.

How right ole von Mises was when he wrote “The monetary crank suggests a method for making everybody prosperous by monetary measures.”

DA: OK, you’ve convinced me. Changing the money supply does nothing. Fine. But now you will have to erase 90% of your blog, where you go on and on about the horrors of printing money. You’ve just proved a claim of those you scorn, who wrote that printing more money will not damage the economy at all.

SD: Printing new money would not damage the economy at all if it was done the way Barack did in those executive orders, making sure everyone got some. But in practice, when new money is printed, you don’t get any of it, do you? Nor does anyone else, except for a very small handful of Barack Hussein’s pals. That’s where the problem is. The ones who get the new money get to spend it, raising prices for everyone who didn’t get any. Inflation. Do a search for Cantillon effects; he’s the one who first explained it.

DA: Wait a minute, now, Dave. You’ve confused the issue. First you said that adding more money into the system does nothing. Now you say it’s harmful. What gives?

SD: Those who talk about a money shortage never spell out who will get the new money, do they? There are only two possibilities. Either everyone will get a proportional amount, or else some folks will get all the new money and others will get none. In the first case, we’ve shown that the new money is just the old money, renamed. In the second case, we know for sure there are big losers from this scheme, the vast majority of folks who don’t get any of the new money. So how can these people argue that it’s a good thing to print more money, that everyone will be better off? Especially since we know full well that nobody will get the new money but the govt and its pals.

DA: You think you’re so smart, Dave, but you haven’t really proven anything. You made up one artificial case, which is basically everyone taking a Sharpie and adding a zero to the denomination of their bills, and shown that in that one case an increase in the money supply is meaningless. But what about all the many other, much more realistic ways of increasing the money supply? Take, for example, Ben Bernanke’s brilliant Quantitative Easing, where he gave all the new money to the banks. You haven’t shown anything about that case, have you?

SD: What you are saying is that increasing the money supply per se is not the answer. It’s increasing the money supply and giving the new money to the right people.

DA: Exactly.

SD: So how come that huge array of economists never go into that? They don’t say “Print new money and give it all to the banks.” They just say “There is a shortage of money. Print some more and save the world”. As if any way you divvy up the new money will solve the problem.

What’s more, their theories all talk about a shortage of money in the aggregate, not a shortage of money in the banks’ coffers, or the govt’s wallet, or Smiling Dave’s checking account. Their theory is that the mere existence of more money will help. And I’ve clearly shown that just having more money in the aggregate doesn’t do anything.

DA: Dave, don’t be naive. When the masses of unemployed read that the reason they are broke is because the banks need more money, or the govt needs more money, that won’t go down very well. They are sure to say, “What about me? I certainly need more money.”

SD: So instead of the unpleasant truth, that giving a bank more money will make Smiling Dave richer, they waffle and talk about creating more money, not spelling out who gets it.

DA: Yup.

SD: Sorry, that makes no sense. We already wrote about how giving all the money to one small group hurts everyone else; it doesn’t help them. Have you done the search for Cantillon effects yet?

DA: So what you’re saying, basically, is that printing new money is just a renaming of the existing money. And whatever economic effects that happen are just the result of giving some people free money by depriving others of purchasing power. And those economic effects are just enriching a small group at the expense of the masses.

SD: Exactly. Too bad that array of scholars in love with printing money don’t come out and say, “We want to give free gifts to some people to be paid for by everyone else.” Put that way, they would have a hard time claiming they are ending a recession or curing unemployment.

And the Devil can but nod his head abashedly, stricken by the simple logic of Smiling Dave.

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3 thoughts on “The Myth of Money Shortage

  1. Etjon Basha 01/22/2013 at 11:10 Reply

    I will admit that I find the idea that any supply of money is the optimal supply as not entirely convincing anymore, though I still find the arguments for alternate setting less that OK too. It is a complex issue which still leaves me uncertain. Thankfully, none of this matters for actual policy recomandations.

  2. sdavesblog 01/23/2013 at 09:00 Reply

    Përshëndetje!
    Thank you for your comment. Why do you think none of this matters for policy recommendations? If we assume there is such a thing as a money shortage, would not the correct policy be to print some? That’s what I seem to be reading.

  3. Etjon Basha 01/23/2013 at 11:09 Reply

    The debate which bothers me is not that between the Austrians and Keynesians and their ilk. Rather I’m referring to the debates between the Rothbardians (the money supply must not change at all, if possible) and the Free Bankers (the supply should match the demand for money).

    I say that these two positions are the same in terms of policy since both would agree to a free market in money and banking as the best alternative. What they disagree upon is on what would such a market then become, one of 100%-gold backed nor FR banks, one of gold-backed FR banks, or one of privately issued fiat money along with many piggybacking banks?

    And, although fascinating in terms of advanced theory, all agree on having a free market, and that is what’s important.

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