I have republished this old article by Friedman, presented to the Mt.Pelerin Society and published originally in The Journal of Law and Economics (UChicago) because an older copy has a broken link.

Joe Cobb comment: Please notice that the hidden premise here is whether or not a National Currency should be the fixed price unit of accounting. Friedman is implicitly arguing for an International Gold Unit of Accounting, which I interpret as The Kilogram of Gold – including smaller convenient sizes for commerce and finance. The pseudo-gold standard is price fixing in terms of a national unit (e.g. dollar, pound, franc) which are neologisms.

Republished without editing from https://uneasymoney.com/2014/08/27/real-and-pseudo-gold-standards-could-friedman-tell-the-difference/#:~:text=One%20of%20the%20first%20academic%20papers%20by%20Milton,Journal%20of%20Law%20and%20Economics%20in%20October%201961.

Real and Pseudo Gold Standards: Could Friedman Tell the Difference?

One of the first academic papers by Milton Friedman that [the author and publisher of the original blog posting] read was “Real and Pseudo Gold Standards.” It’s an interesting paper presented to the Mont Pelerin Society in September 1961 and published in the Journal of Law and Economics in October 1961. That it was published in the Journal of Law and Economics, then edited by Friedman’s colleague at Chicago (and fellow Mont Pelerin member) Ronald Coase, is itself interesting, that estimable journal hardly being an obvious place to publish research on monetary economics. But the point of the paper was not to advance new theoretical insights about monetary theory, though he did provide a short preview of his critique of Fed policy in the 1920-21 Depression and in the Great Depression that he and Anna Schwartz would make in their soon to be published Monetary History of the United States, but to defend Friedman’s pro-fiat money position as a respectable alternative among the libertarians and classical liberals with whom Friedman had allied himself in the Mont Pelerin Society.

Although many members of the Mont Pelerin Society, including Hayek himself, as well as Friedman, Fritz Machlup and Lionel Robbins no longer supported the gold standard, their reasons for doing so were largely pragmatic, believing that whatever its virtues, the gold standard was no longer a realistic or even a desirable option as a national or an international monetary system. But there was another, perhaps more numerous, faction within the Mont Pelerin Society and the wider libertarian/ classical-liberal community, that disdained any monetary system other than the gold standard. The intellectual leader of this group was of course the soul of intransigence, the unyieldingly stubborn Ludwig von Mises, notably supported by the almost equally intransigent French economist Jacques Rueff, whose attachment to gold was so intense that Charles de Gaulle, another in a long line of French politicians enchanted by the yellow metal, had chosen Rueff as his personal economic adviser.

What Friedman did in this essay was not to engage with von Mises on the question of the gold standard; Friedman was realistic enough to understand that one could not reason with von Mises, who anyway regarded Friedman, as he probably did most of the members of the Mont Pelerin Society, as hardly better than a socialist. Instead, his strategy was to say that there is only one kind of real gold standard – presumably the kind favored by von Mises, whose name went unmentioned by Friedman, anything else being a pseudo-gold standard — in reality, nothing but a form of price fixing in which the government sets the price of gold and manages the gold market to prevent the demand for gold from outstripping the supply. While Friedman acknowledged that a real gold standard could be defended on strictly libertarian grounds, he argued that a pseudo-gold standard could not, inasmuch as it requires all sorts of market interventions, especially restrictions on the private ownership of gold that were then in place. What Friedman was saying, in effect, to the middle group in the Mont Pelerin Society was the only alternatives for liberals and libertarians were a gold standard of the Mises type or his preference: a fiat standard with flexible exchange rates.

Here is how he put it:

It is vitally important for the preservation and promotion of a free society that we recognize the difference between a real and pseudo gold standard. War aside, nothing that has occurred in the past half-century has, in my view, done more weaken and undermine the public’s faith in liberal principles than the pseudo gold standard that has intermittently prevailed and the actions that have been taken in its name. I believe that those of us who support it in the belief that it either is or will tend to be a real gold standard are mistakenly fostering trends the outcome of which they will be among the first to deplore.

This is a sweeping charge, so let me document it by a few examples which will incidentally illustrate the difference between a real and a pseudo gold standard before turning to an explicit discussion of the difference.

So what were Friedman’s examples of a pseudo gold standard? He offered five. First, US monetary policy after World War I, in particular the rapid inflation of 1919 and the depression of 1920-21. Second, US monetary policy in the 1920s and the British return to gold. Third, US monetary policy in the 1931-33 period. Fourth the U.S. nationalization of gold in 1934. And fifth, the International Monetary Fund and post-World War II exchange-rate policy.

Just to digress for a moment, I will admit that when I first read this paper as an undergraduate I was deeply impressed by his introductory statement, but found much of the rest of the paper incomprehensible. Still awestruck by Friedman, who, I then believed, was the greatest economist alive, I attributed my inability to follow what he was saying to my own intellectual shortcomings. So I have to admit to taking a bit of satisfaction in now being able to demonstrate that Friedman literally did not know what he was talking about.

US Monetary Policy after World War I

Friedman’s discussion of monetary policy after WWI begins strangely as if he were cutting and pasting from another source without providing any background to the discussion. I suspected that he might have cut and pasted from the Monetary History, but that turned out not to be the case. However, I did find that this paragraph (and probably a lot more] was included in testimony he gave to the Joint Economic Committee.

Nearly half of the monetary expansion in the United States came after the end of the war, thanks to the acquiescence of the Federal Reserve System in the Treasury’s desire to avoid a fall in the price of government securities. This expansion, with its accompanying price inflation, led to an outflow of gold despite the great demand for United States goods from a war-ravaged world and despite the departure of most countries from any fixed parity between their currencies and either gold or the dollar.

Friedman, usually a very careful writer, refers to “half of the monetary expansion” without identifying in any way “the monetary expansion” that he is referring to, leaving it to the reader to conjecture whether he is talking about the monetary expansion that began with the start of World War I in 1914 or the monetary expansion that began with US entry into the war in 1917 or the monetary expansion associated with some other time period. Friedman then goes on to describe the transition from inflation to deflation.

Beginning in late 1919, then more sharply in January 1920 and May 1920, the Federal Reserve System took vigorous deflationary steps that produced first a slackening of the growth of money and then a sharp decline. These brought in their train a collapse in wholesale prices and a severe economic contraction. The near halving of wholesale prices in a twelve month period was by all odds the most rapid price decline ever experienced in the United States before or since. It was not of course confined to the United States but spread to all countries whose money was linked to the dollar either by having a fixed price in terms of gold or by central bank policies directed at maintaining rigid or nearly rigid exchange rates.

That is a fair description of what happened after the Fed took vigorous deflationary steps, notably raising its discount rate to 6%. What Friedman neglects to point out is that there was no international gold standard (real or pseudo) immediately after the war, because only the United States was buying and selling gold at a legally established gold parity. Friedman then goes on to compare the pseudo gold standard under which the US was then operating with what would have happened under a real gold standard.

Under a real gold standard, the large inflow of gold up to the entry of the United States into the war would have produced a price rise to the end of the war similar to that actually experienced.

Now, aside from asserting that under a real gold standard, gold is used as money, and that under a pseudo gold standard, government is engaged in fixing the price of gold, Friedman has not told us how to distinguish between a real and a pseudo gold standard. So it is certainly fair to ask whether in the passage just quoted Friedman meant that the gold standard under which the US was operating when there was a large inflow of gold before entering the war was real or pseudo. His use of the subjunctive verb “would have produced” suggests that he believed that the gold standard was pseudo, not real. But then he immediately says that, under the real gold standard, the “price rise to the end of the war” would have been “similar to that actually experienced.” So take your pick.

Evidently, the difference between a real and a pseudo gold standard became relevant only after the war was over.

But neither the postwar rise nor the subsequent collapse would have occurred. Instead, there would have been an earlier and milder price decline as the belligerent nations returned to a peacetime economy. The postwar increase in the stock of money occurred only because the Reserve System had been given discretionary power to “manage” the stock of money, and the subsequent collapse occurred only because this power to manage the money had been accompanied by gold reserve requirements as one among several masters the System was instructed to serve.

That’s nice, but Friedman has not even suggested, much less demonstrated in any way, how all of this is related to the difference between a real and a pseudo gold standard. Was there any postwar restriction on the buying or selling of gold by private individuals? Friedman doesn’t say. All he can come up with is the idea that the Fed had been given “discretionary power to ‘manage’ the stock of money.” Who gave the Fed this power? And how was this power exercised? He refers to gold reserve requirements, but gold reserve requirements – whether they were a good idea or not is not my concern here — existed before the Fed came into existence.

If the Fed had unusual powers after World War I, those powers were not magically conferred by some unidentified entity, but by the circumstance that the US had accumulated about 40% of the world’s monetary gold reserves during World War I, and was the only country, after the war, that was buying and selling gold freely at a fixed price ($20.67 an ounce). The US was therefore in a position to determine the value of gold either by accumulating more gold or by allowing an efflux of gold from its reserves. Whether the US was emitting or accumulating gold depended on the interest-rate policy of the Federal Reserve. It is true that the enormous control the US then had over the value of gold was a unique circumstance in world history, but the artificial and tendentious distinction between a real and a pseudo gold standard has absolutely nothing to do with the inflation in 1919 or the deflation in 1920-21.

US Monetary Policy in the 1920s and Britain’s Return to Gold

In the next section Friedman continues his critical review of Fed policy in the 1920s, defending the Fed against the charge (a staple of Austrian Business Cycle Theory and other ill-informed and misguided critics) that it fueled a credit boom during the 1920s. On the contrary, Friedman shows that Fed policy was generally on the restrictive side.

I do not myself believe that the 1929-33 contraction was an inevitable result of the monetary policy of the 1920s or even owed much to it. What was wrong was the policy followed from 1929 to 1933. . . . But internationally, the policy was little short of catastrophic. Much has been made of Britain’s mistake in returning to gold in 1925 at a parity that overvalued the pound. I do not doubt that this was a mistake – but only because the United States was maintaining a pseudo gold standard. Had the United States been maintaining a real gold standard, the stock of money would have risen more in the United States than it did, prices would have been stable or rising instead of declining, the United States would have gained less gold or lost some, and the pressure on the pound would have been enormously eased. As it was by sterilizing gold, the United States forced the whole burden of adapting to gold movements on other countries. When, in addition, France adopted a pseudo gold standard at a parity that undervalued the franc and proceeded also to follow a gold sterilization policy, the combined effect was to make Britain’s position untenable.

This is actually a largely coherent paragraph, more or less correctly diagnosing the adverse consequences of an overly restrictive policy adopted by the Fed for most of the 1920s. What is not coherent is the attempt to attribute policy choices of which Friedman (and I) disapprove to the unrealness of the gold standard. There was nothing unreal about the gold standard as it was operated by the Fed in the 1920s. The Fed stood ready to buy and sell gold at the official price, and Friedman does not even suggest that there was any lapse in that commitment.

So what was the basis for Friedman’s charge that the 1920s gold standard was fake or fraudulent? Friedman says that if there had been a real, not a pseudo, gold standard, “the stock of money would have risen more in the United States than it did, prices would have been stable or rising instead of declining,” and the US “would have gained less gold or lost some.” That this did not happen, Friedman attributes to a “gold sterilization policy” followed by the US. Friedman is confused on two levels. First, he seems to believe that the quantity of money in the US was determined by the Fed. However, under a fixed-exchange-rate regime, the US money supply was determined endogenously via the balance of payments. What the Fed could determine by setting its interest rate was simply whether gold would flow into or out of US reserves. The level of US prices was determined by the internationally determined value of gold. Whether gold was flowing into or out of US reserves, in turn, determined the value of gold was rising or falling, and, correspondingly, whether prices in terms of gold were falling or rising. If the Fed had set interest rates somewhat lower than they did, gold would have flowed out of US reserves, the value of gold would have declined and prices in terms of gold would have risen, thereby easing deflationary pressure on Great Britain occasioned by an overvalued sterling-dollar exchange rate. I have no doubt that the Fed was keeping its interest rate too high for most of the 1920s, but why a mistaken interest-rate policy implies a fraudulent gold standard is not explained. Friedman, like his nemesis von Mises, simply asserted his conclusion or his definition, and expected his listeners and readers to nod in agreement.

US Monetary Policy in the 1931-33 Period

In this section Friedman undertakes his now familiar excoriation of Fed inaction to alleviate the banking crises that began in September 1931 and continued till March 1933. Much, if not all, of Friedman’s condemnation of the Fed is justified, though his failure to understand the international nature of the crisis caused him to assume that the Fed could have prevented a deflation caused by a rising value of gold simply by preventing bank failures. There are a number of logical gaps in that argument, and Friedman failed to address them, simply assuming that US prices were determined by the US money stock even though the US was still operating on the gold standard and the internationally determined value of gold was rising.

But in condemning the Fed’s policy in failing to accommodate an internal drain at the first outbreak of domestic banking crises in September 1931, Friedman observes:

Prior to September 1931, the System had been gaining gold, the monetary gold stock was at an all-time high, and the System’s gold reserve ratio was far above its legal minimum – a reflection of course of its not having operated in accordance with a real gold standard.

Again Friedman is saying that the criterion for identifying whether the gold standard is real or fraudulent is whether policy makers make the correct policy decision, if they make a mistake, it means that the gold standard in operation is no longer a real gold standard; it has become a pseudo gold standard.

The System had ample reserves to meet the gold outflow without difficulty and without resort to deflationary measures. And both its own earlier policy and the classical gold-standard rules as enshrined by Bagehot called for its doing so: the gold outflow was strictly speculative and motivated by fear that the United States would go off gold; the outflow had no basis in any trade imbalance; it would have exhausted itself promptly if all demands had been met.

Thus, Friedman, who just three pages earlier had asserted that the gold standard became a pseudo gold standard when the managers of the Federal Reserve System were given discretionary powers to manage the stock of money, now suggests that a gold standard can also be made a pseudo gold standard if the monetary authority fails to exercise its discretionary powers.

US Nationalization of Gold in 1934

The nationalization of gold by FDR effectively ended the gold standard in the US. Nevertheless, Friedman was so enamored of the distinction between real and pseudo gold standards that he tried to portray US monetary arrangements after the nationalization of gold as a pseudo gold standard even though the gold standard had been effectively nullified. But at least, the distinction between what is real and what is fraudulent about the gold standard is now based on an objective legal and institutional fact: the general right to buy gold from (or sell gold to) the government at a fixed price whenever government offices are open for business. Similarly after World War II, only the US government had any legal obligation to sell gold at the official price, but there was only a very select group of individuals and governments who were entitled to buy gold from the US government. Even to call such an arrangement a pseudo gold standard seems like a big stretch, but there is nothing seriously wrong with calling it a pseudo gold standard. But I have no real problem with Friedman’s denial that there was a true gold standard in operation after the nationalization of gold in 1934.

I would also agree that there really was not a gold standard in operation after the US entered World War I, because the US stopped selling gold after the War started. In fact, a pseudo gold standard is a good way to characterize the status of the gold standard during World War I, because the legal price of gold was not changed in any of the belligerent countries, but it was understood that for a private citizen to try to redeem currency for gold at the official price would be considered a reprehensible act, something almost no one was willing to do. But to assert, as Friedman did, that even when the basic right to buy gold at the official price was routinely exercised, a real gold standard was not necessarily in operation, is simply incoherent, or sophistical. Take your pick.

Joe Cobb comment: Please notice that the hidden premise here is whether or not a National Currency should be the fixed-price Unit of Accounting. The pseudo-gold standard(s) are schemes of price fixing in terms of a national unit (e.g. dollar, pound, franc) which are neologisms. Fiat money decorated with the word “gold.”

Friedman is implicitly arguing for something like Von Mises’ position:
an International Gold Unit of Accounting.
All his argument leaves silent is how gold would be traded: by weight. By omitting that detail, he also omits the the development of financial services that could emerge as futures, derivatives, and options became transactions vehicles. A parallel currency legal system would enable banking in the Unit of Accounting in lieu of physical handling of change-in-ownership (and future ownership). It is the national currency values of real elements that vary in the minds of ordinary people. Money illusion.

On the evolution of Morality:
View link: Hayek lecture, video 50 min.
He explores top-down (constructionist) moral ideas vs. bottom-up selection of what has contributed to success.
Any bottom-up perspective implies change following rules of nature and not of a designing mind, as designing “constructer.” To invoke “intelligent design” is to commit a category error.

I once heard Albert Einstein replied to a question about his religion by saying he believed “in Spinoza’s God.” I love that citation, even if apocryphal, because it conforms with my views.
(I am like a Quaker, but with Spinoza’s God at the center of my faith – and a gun at my side.)

Here are two excellent narratives from George H. Smith discussing the ideas of Spinoza. A shorter and more lovely philosophy lesson could not introduce you well enough to this great man.

Spinoza on the Bible. (Libertarianism.org Excursions podcast, – 12:37 min. audio)

Benedict Spinoza. (Libertarianism.org Excursions podcast, – 15:21 min. audio)

Spinoza’s Ethics was not published in his lifetime, due to his fear of persecution. He was the most important atheist in modern history. He influenced all who would come after. Spinoza was rarely cited by followers who also feared persecution by openly praising his insights; but they repeated and elaborated his ideas.

Note specially the Appendix to Part One of his Ethics [Final causes]. In this essay he demonstrates how the arguments of “Intelligent Design” are not valid.
Spinoza wrote in 1674.

Einstein liked him.

Today individuals who buy or sell bitcoin can do it directly with someone else who completes the transaction for both sides, usually outside the Blockchain. This would be a “wallet” agent of some kind, who accepts USD in exchange for a quantity of bitcoin.

A transfer of a value in bitcoin is one direction, one time. There is no waiting period to allow for errors and corrections, as in the ACH system for US dollars. The ACH system is also a fully electronic method, like the Blockchain, of moving ownership, but only bankers can participate. It is, however, a fully duplex payments system. Trade is always two-directions, even if the counterparty is a banker. As always in human society both sides exchanging assets receive satisfaction and ownership.

The Blockchain is one directional, and final. It is a permanent and auditable public record, which a closed bankers’ loop is not. The Blockchain element (asset) is irrevocably transferred to a new owner.

Two-way exchange of assets can be barter, but more sensibly and commonly it uses a common intermediate trade token. A conventional understanding of accounting creates the Unit of Accounting, which can be weight in some cases, volume in others. Governments intervene when they forcibly separate weight from the units and totals of accounting reports.

Your bank balance, which you access for trade by means of ACH or a debit card, is an asset to you and a liability to your banker. It is a special asset due to its liquidity (bid and ask are equal, ideally). When you buy groceries or gasoline, you transfer part of this asset and acquire the new ones. The value of this asset is in its utility as a tool of communication and agreement.

Asset Barter

Macroeconomics was originally formulated memorably in Say’s Law, that “Supply creates its own Demand.” This is code for a detailed description of what could be called Quantum Economics. All human trade begins with ownership by you of an asset you can use to offer other people. With our social division of labor, we all must make these offers continually to live. The alternative to trade is authoritarian distribution and allocations.

The Payments System is an information system, but it has institutional scarcity (the “quantity of money”) and a method of assigning ownership to assets in detail. It is an accounting system, and a Unit of Accounting is central. The Unit of Accounting is no more substantive than a digit on the Blockchain, but it has separate scarcity. A further example of separate scarcity would be the “quantity of money” for UK Pound; for the Euro; and Renminbi.

Balaji Srinivasan:

Wall Street Journal weekend interview, Sept.23, 2017 by Tunku Varadarajan.

“Bitcoin is a way to have programmable scarcity. The blockchain is the data structure that records the transfer of scarce objects.”

“The internet is programmable information. The blockchain is programmable scarcity.” He elaborates: “All of these previously disparate things—from physical mail to television to music to movies to telephony—basically got turned into packets of information and got remixed by the internet. Plus things that we normally didn’t even think of as information—your Fitbit , your steps, your Facebook settings—became programmable.” It’s fair to say, he continues, “that the internet and all things downstream—search engines, social networks, ride sharing, and so on—have basically been the technological story of the last 25 years.”

“With the blockchain, everything that was scarce now becomes programmable. That means cash, commodities, currencies, stocks, bonds—everything in finance is going to be transformed, and aspects of finance baked into everything else.”

The scarcity of the information codified in Blockchain, which has an audit trail and coded ownership for each unit, has only a significant disadvantage. This proposal is one to reduce the cost of asset barter just as the Payments System is able to do – when paper currency and coins are used.

Transferable Bitcoins

The utility of the Blockchain process is that ownership of units can be transferred, one way, with encoding to indicate size, new ownership, and provenance of authenticity [i.e. its history on the Blockchain, from mining to yours].

Visualize a computer chip with all the data of some quality of bitcoin, on a chip, and you can program the chip to be held in your name, your code. If you physically gave that computer chip to someone else, they could then also change the program of the chip to make it held in their name. A process could possibly be developed to link the chip to any connected computer and update records on the Blockchain. Information on your chip could be copied to the blockchain, and you could reprogram the chip to contain a new satoshi value. If you gave it to someone else it would serve as a medium of exchange for whatever programmed quantity it showed.

There seems to be little difference in this concept from what we know as the reloadable debit card, or gift card which might not be reloadable. One uses such a piece of plastic with an embedded chip to hold and allow the transfer of Units of Accounting (dollars, euro, et al.) and such a card can be used by a person different from the original owner (manufacturer; retail store; you

Preface

Leo Rosten, Milton, and Rose Friedman, started a lifelong friendship while attending the University of Chicago in 1934.

“Our long friendship with Leo, now deceased, was one of the great joys of our life. He was a wonderfully entertaining, yet also wise, friend, with incredibly wide interests and knowledge.”
-Milton and Rose Friedman, Two Lucky People, p.55

Leo became a noted and influential writer; Milton became a noted and influential economist. They shared a world-view that placed great value on the pursuit of truth.

Upon agreeing to the suggestion that he host a major PBS TV series, Friedman urged Bob Chitester to contact Leo Rosten to discuss ideas for its content. Leo participated in several early planning sessions for the series.

In his book, People I have Loved, Known or Admired, Rosten wrote an essay titled “An Infuriating Man.” Milton Friedman served as the model for this essay, about “Fenwick,” in which Rosten gives voice, wonderfully humorous voice, to the tendency of most people to wish the truth not be brandished in their face.
We’re grateful to Madeline Lee and Margaret Rosten Muir, for granting us permission to include this essay in our collection of articles about the Friedmans and their ideas.

The Essay

You take my friend Fenwick [Milton Friedman]. He is an exceedingly loveable little man. His disposition is so sunny, his character so open, that even the Most Hardened Cynics, of whom my wife is International Chairman, call Fenwick “utterly adorable.” He is the very incarnation of the Boy Scout creed: “trustworthy, loyal, helpful, friendly, courteous, kind, obedient, cheerful, thrifty, brave, clean (great Scott! but he’s clean), reverent.”

Now you would think that with a personality like that, Fenwick would be just about the most popular man on our block. That is not so. Fenwick is just about the most unpopular man on our block. People can’t stand him. I have seen Sunday-school teachers with unblemished complexions, and account executives with split-level ranch houses, throw conniption fits at the mere mention of Fenwick’s name. Why? Why? I puzzled over this for years, using the finest puzzling equipment money can buy, before I discovered the answer: Fenwick is a man who goes around being logical. He even uses reason at cocktail parties.

Now, most people believe in reason the way they believe in cold showers: It’s O.K. if you don’t overdo it. Very few people are so insensitive as to go around applying logic to other people’s beliefs. The consistent application of reason to human affairs is irrational. It is also dangerous, as you shall soon find out.

The basic trouble is that Fenwick, who is very intelligent, assumes that other people are very intelligent, too. And that, believe it or not, is the way he talks to them. This makes people uneasy, for nothing is more unsettling than to be treated as if you are extremely intelligent—especially by someone you hardly know. To avoid disillusioning such a man requires that you maintain a constant state of alert, and think before you speak, which imposes cruel demands on your brain. It even makes you examine the partly packaged platitudes you have always employed instead of thinking. Few activities tire one out so rapidly.

Fenwick has no understanding of such things. I think I should tell you that Fenwick enjoys reasoning. He uses his mind the way a sprinter uses his shoes: to get from one point to another with a maximum of speed and a minimum of nonsense. Such a discrepancy between the swift and the stupid ordinarily causes hubris in the former and dysphasia in the latter, hubris being the fancy name for cockiness and dysphasia a variety of depression. But these psychological reflexes do not click on where Fenwick is concerned, because the people he outruns (or, more correctly, out ratiocinates) tend to save face by calling his speed a symptom and his skill a neurosis. Such people attain emotional serenity from believing that superior thinking is a sign of emotional disturbance. I am not sure they are wrong.

Of none of all this is my friend Fenwick remotely aware. For although he actually likes to think, even when no one is forcing him to, he also likes people. The exotic combination of cold cerebration and warm feelings throws people for a loop.

Even more enlooping, my friend Fenwick loves to learn. It does not matter what you do, like, think, or talk about: Fenwick is passionately interested in it. He listens intently to anything you have to say, which is both flattering and seductive; but if you mention something Fenwick does not know, his eyes become as wide as Frisbees and he asks where you found that out, how you know it is true, and how—assuming for the moment that you are right, which is conceivable, though unlikely—you can account for any one of fourteen cases which, if true, shoot your case as full of holes as that of the couple with two children who decided not to have a third because they had read that every third child born these days is a Chinaman. And as you bumble and blubber and flounder and flush, Fenwick sweetly soothes your ego by sighing, “Of course, you may be right … but not for the reasons you presented.”

Fenwick appears to own a brain that came equipped with a sorting device that separates inference from information, allegation from argument, illustration from proof, and preferences from conclusions. Despite this, he has more friends than I do. His friends, it is true, tend to have strong nerves and read statistics the way some men read pornography. But they are staunch, stout friends. Even the thin ones are stout friends.

In ordinary conversation, Fenwick is a fellow-traveler. He follows every chug in your train of thought—indeed, he leaps right on the train with you. And you have barely begun to pick up steam before Fenwick excitedly demonstrates that: (a) you have taken the wrong train; or (b) it doesn’t stop where you want to go; or (c) the tracks don’t lead from your premise to your expectations; or (d) you had better jump off while the jumping’s good or you’ll land in the swamp of mushy ideas you never suspected your position rests upon.

Yes, my friends, Fenwick comes pretty (sic) close to being that most odious and exasperating of human types: the persistent thinker. He may even (I hate to suggest this) be an Intellectual. An Intellectual is a man who shamelessly uses his brain most of the time. No one, of course, uses his brain all of the time; such a man would be a monster—he would not dig sand piles by the sea, or fall in love, or observe Mother’s Day.

Oscar Wilde, who was diabolically clever (and just as superficial), once quipped: “I can stand brute force, but brute reason is quite unbearable. … It is hitting below the intellect.” Fenwick, a beamish fellow, never hits below the intellect. He is always kind, fair, patient, moderate—which greatly increases his unpopularity. Do you follow me? Fenwick is so fair in discussions that people can’t even accuse him of using unfair tactics, than which nothing is more aggravating when you are wrong.

I once heard Fenwick explain to a cocktail party full of decent, taxpaying liberals why it is that no socialist society, however well-intentioned, can give its masses anywhere near the standard of living of a competitive or capitalist society. After the dumbfounded humanitarians had finished stamping their feet, screaming “Reactionary!” and otherwise increasing their psychiatric bills, Fenwick kindly compared the postwar achievement of West Germany with East Germany, of Japan with Red China, of Italy with India, of France with Soviet Russia. He gave several of his listeners the veritable jim-jams by going so far as to compare the economy of Cuba before and after Castro, and the G.N.P. of liberated Africa before and after European imperialism.

If that episode doesn’t tell you what kind of screwball Fenwick is, let me cite another. Fenwick and a friend of mine from Washington, a sociological Meistersinger named Rupert Shmidlapp, were talking about minimum wages, which Congress had just voted to raise from $1.25 an hour to $1.40—and ultimately to $1.60.

Fenwick stunned Shmidlapp, whom I had forgotten to brief in advance, by mournfully remarking that the minimum-wage laws would of course create unemployment, and that these particular laws would wreak havoc precisely among those unskilled workers (Negroes, teenagers, Puerto Ricans) they were supposed to help.

“What?” gulped Shmidlapp.

“To begin with,” said Fenwick, “the American wage-earner today gets twice $1.40 an hour, so the bill is not going to affect him——-”

“The bill is designed to help the unskilled and the undereducated,” retorted Shmidlapp.

“An admirable intention,” beamed Fenwick, “because a tragic proportion of that group is unemployed. But if employers aren’t hiring them at $1.25 an hour, is there any reason on earth why they will hire them at $1.40?”

I poured a stiff drink for Shmidlapp.

Fenwick continued: “Surely the unemployed will have less chance of finding a job under the new, higher minimum-wage laws than they had under the old.”

“What?” cried Shmidlapp. “Can you prove that?”

“Yes,” said Fenwick. “Every time minimum wages have been raised, the ratio of unemployed teenagers has risen—and mostly among Negroes and Puerto Ricans, who are the teenagers it seems absolutely insane, if you look at the crime rate, to force onto the streets with nothing to do! … Don’t you agree that every time you raise the minimum, you must push more unskilled or inexperienced or poorly educated or discriminated-against workers onto the unemployment and relief rolls?”

Instead of repairing his fences, Shmidlapp attacked on the flanks. “What about the greedy employers,” he demanded, “who cruelly exploit their workers by not paying them enough to live on?!”

A twinge of pain crossed Fenwick’s boyish features. “Oh, very, very few employers can hold on to their workmen if they pay them less than the workers can get elsewhere.”

“It isn’t what they can ‘get,’ it’s what they’re worth!” Shmidlapp thundered.

“Only God can decide how much a man is ‘worth,’” sighed Fenwick. “Let us consider the best wage a man can get— for his labor, services or talent——”

“Some men just can’t live on that! Or feed and clothe their children! Or pay their medical bills!” This was Shmidlapp at his best.

“We certainly ought to remedy that,” said Fenwick. “No American who wants to work should go hungry because of the objective (and therefore efficient) forces of supply and demand. Let us by all means give and guarantee the poor a minimum income; that does far less economic and political damage than a minimum wage. A minimum income does not discriminate against the black, the illiterate, the inept——”

“Do you mean to stand there and tell me”—Shmidlapp was too agitated to notice that Fenwick was sitting, not standing— “that no workers are actually helped when Congress raises the minimum wage?!“

“Oh, some workers will have their wages raised from $1.25 to $1.40 an hour,” said Fenwick, “but far more will not get a job they might have gotten at $1.25! And fewer teenagers and Negroes will get on-the-job training, which they desperately need. It is just too costly to train them at $1.40, much less $1.60 an hour—especially for skills that take long training periods. This makes a raise in minimum wages absolutely heartless,” mourned Fenwick. “It prices decent, innocent, willing workingmen right out of the labor market!”

“Then why does Congress pass such laws?” shouted Shmidlapp.

Fenwick blinked. “Are you suggesting that Congress never passes foolish or short-sighted——”

“I am asking why, if minimum wages are so goddam stupid, far-sighted humanitarian leaders like Lyndon Johnson and Hubert Humphrey and Governor Rockefeller support them?!”

“Politics,” chuckled Fenwick. “Or innocence. Or ignorance. Or all three. Politicians and labor leaders get a lot of public credit for raising wages, and considerable private satisfaction in imagining all the good they have done.”

“I happen to know that many business leaders, Republicans and conservatives, favor minimum-wage legislation!” swooped Shmidlapp.

“Of course they do. They can be just as wrong, ignorant, or selfish as anyone else,” said Fenwick. “Many of them are manufacturing products in the North——”
“What does geography have to do with it?” demanded Shmidlapp.

“Well, northern manufacturers are delighted to force up their competitors’ costs in the South* ; in that way, businessmen in the North won’t have to face the desirable effects of that free-enterprise system conservatives and Republicans love to extol.”

“But opinion polls show that the public——”

“The public,” sighed Fenwick, “is not well-informed about economics, and will pay for its innocence. Increased minimum wages lead to increased costs, which lead to higher …. Then many honest, low-wage earners in the South (where the cost of living is lower; which is one reason wages there stay lower) will become disemployed. And many more of the young and no-skilled, in Harlem no less than Dixie, will remain more hopelessly unemployed than they already are.” Fenwick regarded Rupert Shmidlapp innocently. “Tell me, honestly: Would you rather work for $1.25 an hour or be unemployed at $1.40?”

While Shmidlapp was wrestling with many unkind thoughts, Fenwick gave his guileless smile: “I am strongly in favor of wages’ rising—which is entirely different from raising wages. Let wages go up as far as they can and deserve to, for the right reasons, which means in response to demand and supply and freedom to choose… Take domestic servants, Mr. Shmidlapp. Why maids, cooks, cleaning women, laundresses have enjoyed a fantastic increase in their earnings. And notice, please, that domestic servants are not organized; they don’t have a union, or a congressional lobby. Or take bank clerks ….”

But I can’t bear to go on. I guess you can see why Fenwick is so unpopular. The man is infuriating.

P.S. Outraged letters should be addressed to P.O. Box 146, Tierra del Fuego, where I shall be spending the long, hard winter.

Reprinted from PEOPLE I HAVE LOVED, KNOWN OR ADMIRED by Leo Calvin Rosten, copyright © 1970 By Leo Calvin Rosten.
Used by permission of The Rosten Family LLC

http://www.freetochoosemedia.org/broadcasts/freetochoose/detail_samples.php?page=article1&type=1

* John F. Kennedy was once quoted a saying he intellectually knew that the minimum wage was harmful, but the owners of the mills in Massachusetts who had to compete with the rising Southern mills convinced him it was politically necessary to change his mind. The first minimum wage law threw something like 400,000 black tenant farmers in the South out of work, replaced by machines.

We understand the Quantity of Money as a “quantity” (trillion dollars, lump sum) but it is not quite the same kind of thing as a trillion “gallons.”
First, to get such a “quantity of money” it is necessary to add up your bank balance and my bank balance, and everyone else’s bank balances. This becomes absurd. Should you include the informal cash accounts and FRN’s circulating in Africa?

But the basic idea is that the sum total of all the “money” anyone might be able “to spend” is an important “quantity.”

Notice which labels, above, I have put into “scare quotes.” I want to emphasize in the comments below how those terms are not what you might have first believed the words mean.

In the Beginning, there was god and he created gold and silver. This is a good enough “creation myth,” and we don’t need to care about it. The central picture from this myth is the idea of a finite quantity in the universe for gold, or silver. The idea becomes fixed that somehow the fixed quantity of these metals is a critical economic detail, because Prices are quoted in the names and references of these metals, throughout history.

But the genuine innovation in the use of money among mankind was when somebody invented the Unit of Accounting. When the first cattle herding early man made a trade with his neighbor, perhaps trading half a bull for the other man’s daughter, the Unit of Accounting was invented, as also was the concept of “CREDIT” = Latin verb = “He trusts, he believes.”

Coinage came along much later, and it was always a free market coinage until the Roman Empire. The advanced Egyptians did not at first make coins. They had excellent scales and could weigh the gold dust and alloy the ore. No problem. No coins needed for repayments of credit-due in the markets of Egypt.

Coinage with government seals was a signal of the alloy or purity of the coinage, as in Lydia, which had a particular alloy of silver to offer in coined form. It made their mining product more exportable, because it was stamped for authenticity and purity: an early trademark.

The Roman victor in the civil war, Octavian Augustus Caesar, came to Rome and closed the mint at the temple of Juno Moneta, where Senators had always had their copper, gold and silver ore hammered into recognizable Units, of relatively standardized sizes. This had been a private-religious, not a government, activity. The Senator who minted his coins chose its face design, often a god or family event.

The family of Marcus Brutus celebrated his assassination of Julius Caesar by coining an image of that glorious republican deed. Augustus did not appreciate this, and closed the mint. Only coins with his face on them were permitted, which he used to buy votes in the Senate and among the Plebeians (he was an elected Tribune, with “veto power” also).

Ever since, a tradition of government monopoly of money has caused much mischief.

What Determines “the Quantity” of Money?

The conceptual Quantity of Money is not a “monetary aggregate,” measured by statistics such as M-1, M-2, M-[et al]. It is the same idea as your own bank account limit today. The hypothetical sum of all bank accounts is an exaggeration, since many such accounts hold fungible credit allowances, not “money.” Aggregates are treacherous epistemologically.

You should think about this idea as if I asked you “What is the quantity of bond asset values in society?” Surely the total quantity of bonds is important, as an asset class. As a macroeconomic valuable, surely this must be important. It certainly represents a monetary quantity, as bonds are a relatively liquid form of financial wealth, easily traded for other assets (houses, factories, government deficit finances). Maybe the total aggregate of corporate Aaa bonds would be something like M-7 and who knows what government bonds are? (Perhaps M-0?)

What makes it possible to calculate the asset value of a bond is to look at its annual dividend payments (or notional future dividend payments) and the current market interest rate for its security class, based on risk, etc. What some buyer will pay for it, based on some valuation calculated on its return.

What makes it possible to calculate the Quantity of Money is to look at the interest rate the Federal Reserve pays on excess reserves, which are the commercial banks’ basis for financing loans and creating new M-1 deposits for borrowers. Reserves are most importantly used for interbank clearings. When the Fed offers an “opportunity cost” of 1.0%, no borrower will get a loan by bidding lower than 1.0% – and higher capital restrictions and regulations will further make the banker cautious about increasing his part of the M-1 aggregate supply.

This is a form of “dynamic control.” It helps the central bank to work toward balancing the aggregate supply of what it can offer (“dollars”) for what the borrowing-part of the world economy wants to have, to make more liquidity in payments and trade. The ACH and SWIFT networks are very important, and need to be kept liquid for daily settlements. The “lubrication” of trade.

Gold as an Asset in the Future Payments System?

So, from an “Austrian Economics” perspective, how does the theory of Von Mises accommodate this new system of the quantity theory? Gold is not part of the “money supply,” nor is any form of specific commodity legal tender. It is all electronic today.

I would point to the later work of the Austrian economist, F.A. Hayek, who published “Denationalisation of Money” (1976) and proposed floating exchange rates as a formal, and privatized, system. He had earlier published “Monetary Nationalism and Economic Order” (1938) and the new global view of currency competition is more realistic. There are seven major currencies traded today, and thus seven central banks are in competition, with a bit also of cartel behavior. The governments believe such power is necessary, as did Augustus. Income taxes depend on these Units of Accounting.

Some new Blockchain products are offering to entitle units of gold weight in ownership on the public ledger. Any asset can be attached and entitled on the blockchain used for it. Logically, units of gold and silver will become popular as a store of value if they can be traded even more liquidly on a blockchain, and cashed for other assets (including one of the seven majors).

Open an account, among the many new ones and see how it works.

[ footnote:

1. Public Law 99-185 (31USC5112) notwithstanding, although I wrote it; defining a bullion ounce of gold as $50 and thus a “dollar” = 2% of the current exchange rate XAU/USD.
2. The ‘$50’ detail was added by Democratic staff, under Rep. Frank Annunzio (D-IL) at the insistence of the numismatic lobbyists, to make obvious the “legal tender” quality of the coin.
3. Curtis Prinz was the chief of staff for Rep. Annunzio.

It plays only a nugatory role in the payments system, but it is “legal tender.” ]

This essay will be expanded.

I wonder if those wild claims of people who sell bonds and gold coins can actually be true? I have my doubts, which I wrote about in 1985, published in Reason magazine.{tk] My claim is that it is not in the U.S. Congress nor Treasury’s self-interest “to inflate” nor even to make people worry about “an intention to inflate” the value of the U.S. currency – down to Zero value, or perhaps merely less than last decade.
[footnote TK: Reason headline writers assigned my essay a misleading title, “A Dubious Debt Doubt,” but that was just being playful.]

It is indeed not only dangerous to talk like that, or suggest it, but it is totally suicidal for a government running a fiscal deficit.

What can “to inflate away the debt” possibly mean, in today’s context?

In the fairy story the king has a big debt and he decided not to pay it off in the gold coins like he received when he sold his bonds. Instead he would print up little paper certificates, saying “this is a coin.” Then the bond owners would have to go away, receiving “payment” in this new “legal tender.” But that tells you about paying off the king’s debt.

What happens the next time the king wants to borrow from the money lenders?

The money-lenders’ demand for the king’s bonds is the dominant factor in this process. The king cannot force people to buy his bonds; they hide their wealth and pretend poverty. What is one supposed to do in confronting a tax on wealth?

The U.S. National Debt Must Be “Rolled Over” about every 6 Months.

In my 1985 article, I showed statistics current at that time about the maturity structure of the U.S. government debt held by the public. I have not done the updating research, but that is a simple search engine question. The situation is undoubtedly worse, with the government running up the entitlement spending.

Interest rates are determined by the Federal Reserve, in relationship to the international capital markets, so it is difficult (i.e. impossible) to predict any future rates, or values, there. Yet, there is a “model” of human behavior that tells me IF the government sent a signal it might “play with the idea” (run a scenario in a computer model?) of inflating away the national debt, indeed the free market, worldwide,

would WANT TO DUMP US TREASURIES AND NOT BUY ANY MORE.

Imagine what would happen to the foreign exchange rate of the U.S. Dollar? The recent years of a “strong dollar” and falling oil (priced in “dollars”) would be ancient history. Consider what has happened to the UK currency exchange rate, an instantaneous indicator of demand for a Unit of Accounting (“pound sterling”).

It would be sudden. No warnings. It would be a sudden “crash” one day, without warning, when something silly like a careless remark by the President – who really does not understand international finance – sends the whole “confidence game” into the toilet. The British experience on June 24 is a lesson worth learning, when a government’s Unit of Accounting falls out of favor with international bond traders.

Wait for it. It is in our future.

On October [tk] 1968, Mark Bickhard and I met in New York city at a “convention” Murray Rothbard had summoned to found his Radical Libertarian Alliance. Karl Hess was there, who left early to lead some confrontation with the military at Fort Dix in New Jersey as an anti-war gesture (“new left style”).

Mark and I visited other people in NYC, among them Murray Bookchin, a well known, published anarchist. Bookchin was expounding to us about his “system” for a communal society. He had some idea of the “distribution” of production using computers, but it was not choate.

Mark Bickhard asked Murray Bookchin what was his “unit of information” in his imaginary computer economic-information system? (“Bits” of some variant; associated with “what value?”)

Mark Bickhard went on to become a Professor of Philosophy, Robotics, and Psychology at Lehigh University. He has published several books and articles further developing his early ideas.

The Unit of Accounting

To me, his question introduced the concept of the “Unit of Accounting” as the key detail to the question about money and “the quantity of money.”

1. The Unit of Accounting is

ADDITIVE.

It can have a Sum Total. That becomes “the quantity.” It also becomes the basis for CREDIT. Credit is any form of “asset” based on a promise of future payments (the “liability” of some obligor), and of course those are traded as well as held to maturity. Some of those liquid assets are called “nearly money” by economists.

For example, what your banker owes you on your current statement is called “money” because it is only one step removed. But it is not as fungible (in some contexts) as BenFranklin F.R.$100 notes.

See further discussion of where this analysis of the Unit of Accounting, and its central role in “money,” are explored:

A Flexible Exchange Rate World.

Units of Accounting example: gold grams.

A “Concrete” Unit of Accounting.

Modest Proposal for Kilo Gold US Treasury bonds.

Gold As a Parallel Currency.

Financial Planning Requires a “Concrete” Unit of Accounting

If you want to see a financial system that promotes savings and investments, a society needs a “concrete” Unit of Accounting. Economists have taught for 100 years that “money” is just worth the trust people put into it. What happens when such trust fades?

The conceptual “concrete” detail of this idea is that it makes the financial paper (bonds, deferred payments), which could use this Unit of Accounting seem “more trustworthy.”

Visualize the problem most people face when challenged by financial planning decisions, such as for a distant retirement. What is the frame of reference in which someone is supposed to weigh some future value (in “dollars”)?

[ Pretend you are not as well-informed about finance and economics as the professionals you are consulting. How well can they predict the future?]

A lifetime of retirement beginning in 20 years, planned in “dollars,” cannot be compared to any standard of living referent (rental costs, food costs, taxation) in terms of familiar “dollars” today. The numbers do not allow a comparison of values because they have no relation except as the passage of time may reveal. You have to predict the Consumer Price Index 20-40 years from now.

What will a dollar get you next year? Less?

No one can successfully do financial planning today in terms of “dollars.”
A gold coin would remain a gold coin and whatever your deferred-payment contract says, it would promise to pay you that equivalent way (in the same kind of gold coinage). Creditors could be paid in a gold coin, but more likely in some transfer of ownership of other paper assets to discharge the debt, but denominated in the gold coinage. Final settlements could be done by any other, different paper-credit methods (at the option of the obligee).

The supposed “stable price level” objective of measuring, would be knowing or trusting the relative value of something you want/need, and what you can trade to obtain it. We might not be able to predict the exchange rate of an ounce of gold vs. a pound of beef in 25 years, but it would not be a whim of imagination.

I would be more comfortable thinking about coin vs. beef than about $100 today vs. $1,000,000 in 25 years, and wondering which would be more valuable?

Net present value calculations collapse to the shortest time horizon when future money values are uncertain. “Uncertainty” is subjective.

The “unit of accounting” in your mind should possess some “object permanence.” It ought to be a foundation of “Constitutional Money” to have the government’s Unit of Accounting be a concrete thing. In the old days of 1785 and 1792, the “dollar” was an object – a silver coin. Your property is your private ownership; so would a coin-object be;

. . . but what is the status of the “account balance” your bankers owe you in promised bank-draft credit to pay your expenses? Do you use direct debits or checking? If your “account balance” happens to be denominated in government-accounting units ( “d-o-l-l-a-r-s” ), you should have a right to know if those are not shrinking or “melting away” as a matter of government (or Federal Reserve “central planning”) policy?

Your banker relies on Federal Reserve Accounting-Unit U$D, his reserves on deposit with the Fed.
“F.R.A.U.D.s” would be an insulting acronym for those accounting units.

See also Gold As a Parallel Currency.