I don’t think I quite made the point I wanted to make about money and why libertarians don’t understand it. Maybe it’s time for me to ask some questions.
Let me start with the Peter Schiff-type view. His basic complaint is that deficit spending is a Ponzi scheme. To finance itself the government sells securities to the public. Later, it pays out on those securities, plus interest, with money that it gets by issuing more securities. Debt is taken on in order to pay debt, and so the pyramid of government debt rises like a Tower of Babel, proclaiming our financial hubris to the heavens. Except Peter Schiff would put it in a more shrill and overblown way.
My first question for the Schiffites is: where do you think people got the money to buy those securities in the first place? They aren’t allowed to print it. Obviously the government printed it, and gave it to them, in exchange for goods and services. Schiff goes apoplectic (well, he starts at apoplectic; he goes into some kind of empurpled realm of frenzy that only devils and sharks can enter) at the idea that the government should print money to pay out on its securities. Printing money, in his funny little inner world, turns everything into Weimar Germany. Even reading the words ‘print money’ sets angry miniature Hjalmar Schachts clambering up your leg. Schiff seems to forget that the government must have printed the money people used to buy the securities in the first place. So if hyperinflation results directly from the printing of money, it’s unclear why we don’t have it already; indeed, why we don’t have it all the time, since the only money there is is money that’s printed.
Next, the Schiffites conclude that this can’t go on forever. Soon enough the citizenry will realize that the money they accept from the government as payment for goods and services isn’t real money: it’s this funny money that the government creates by leveraging up an ever-rising debt pyramid. That’s why government should clear out and stop distorting the free market with its funny money (and meddlesome interest rate fixing). People should exchange in a free, natural way, with real, natural money, just the way that Mother Nature intended when she created capitalism.
Ok. Time for more questions. Yes, the government pays its debts only by taking on more debt, creating new money in the process. If the money the government creates with its Ponzi scheme is funny money, to which people will eventually get wise, then what is real money? It sounds great. Very robust and nonfictional. Very natural and unmaculated by the hideous stain of public spiritedness. I hear that when you hold it in your hand its real, natural, intrinsic value radiates a ghoulish energy through your whole body like the essence of Ayn Rand. Now where can I get this wonderful natural money? Where can anybody get it? Is there some kind of all-natural, organic, macrobiotic bank that you draw it out of? And what is it?
Imagine, as a theoretical exercise, the very first government expenditure. Thog at Treasury want buy spear from Ug for important national defense project. How Thog get money? Not by tax Ug! Ug have no money, only spear. Nobody else have money either – not invent yet. Thog scratch name in rock and say: ‘This money now. Ug give money Thog or Thog send Mog from inland revenue to bash Ug head.’ Ug say: ‘How Ug get money for give?’ Thog reply: ‘Ug sell Thog spear for money.’ Ug say: ‘This mammoth-shit deal.’ But Mog big, so Ug sell spear. Thog do same deal with others.
They start pay each other in rock – everyone wants rock to keep Mog off back. Sheg has many things for sell, so accumulate many rock.
When Thog want spend more rock, he scratch name on mammoth skin and say: ‘Sheg, this Treasury security. Sheg buy for two rock. Tomorrow Thog promise buy back for three rock. Is called repo. Sexy stuff.’ Next day Thog go Sheg cave and say: ‘Sheg: Thog need three rock for pay back Sheg. Sheg buy new repo for three rock? Tomorrow Thog buy back for four and half. In meantime Sheg can buy stuff with own mammoth-skins, backed by Thog promise of rock. Can even lend out multiple claim on same rock. Basically license print rock.’ This go on. Sheg happy. Thog happy. Mog big. Ug have to live with it.
There may be some historical inaccuracies. But I’d like to hear a better explanation for why something intrinsically worthless – rocks, paper, or inert lumps of shiny metal – should ever come to have universal exchange value. Everyone in my story has a reason to accept the money they get, except for Thog – the government – who issues it.
Notice that deficit spending is a necessary feature of the monetary system. The only way the money supply can expand is through the mechanism of debt-pyramiding that Schiff regards as so dangerous. But if the economy grows, the money supply has to expand to accommodate the new transactions. Yes, that builds up the debt, but what exactly is wrong with it? Why is a process that has been going on for as long as money itself suddenly going to become intolerable to Americans in the 21st century, simply because it works precisely the way that it always has? I just don’t get it.