Tom Woods Answers Three Very Important Questions


A reader wrote to me yesterday to ask about, and politely challenge, some of what I had written. He’s a supporter and sympathizer and not hostile.

But his questions are good ones and come up a lot, so I’m going to answer them for everyone’s sake:

First off, we are in “debt”? To whom? I thought the government is the ultimate higher up. So we borrow? How can you borrow from yourself in other words? The “debt” as I see it is only on paper and has to be therefore fictitious mentioned only for the people to sound important.

The way propagandists for more and more indebtedness used to put it was precisely this: it doesn’t matter because “we owe it to ourselves.”

But as Murray Rothbard quipped, it’s rather important to establish who exactly is the “we,” and who the “ourselves.”

Domestically, Americans lend money to the government when, for example, they buy bonds. Now if we want to, we can make a radical libertarian argument that it’s wrong for people to lend to an evil regime and bondholders therefore don’t deserve to be repaid, in which case we can just repudiate the debt and leave those people holding the bag. But we can’t pretend the whole thing is just a fiction: there are real individuals who have lent real money to the U.S. government.

Internationally, people and institutions around the world have likewise lent money to the U.S. government, expecting those arrangements to be honored.

Next, what difference does it make about the money since all is relative. If something is doubled in paying an employee, so the cost of the item(s) being sold then in theory doubles in price. Ron Paul always spoke about the devaluation of a gold piece as our money has gone down about 96%. So? A gold piece around the turn of the (20th) century would buy a man a nice suit that cost about $35.00 back then. So will a piece of the same gold buy a man a nice suit today. All is relevant to each other.

That’s a great question. Why worry about price inflation if it all comes out in the wash — i.e., if my salary doubles at the same time that the prices of goods I buy double, isn’t it all just the same?

There are two main replies to this question.

(a) When new money enters the economy, it does not enter uniformly, as with a helicopter dropping cash on the population in equal proportion around the country. It enters at discrete points. Those who get the new money first tend to be politically connected: military and other government contractors, for instance.

When those people spend the new money, prices have not yet risen. So they enjoy a pure windfall. But their spending pushes prices up, and now those people who have not yet received the new money are suffering under the higher prices. By the time the last recipients receive it, they’ve been paying higher prices all this time, and are the ultimate victims.

These are called distribution, or “Cantillon,” effects, after economist Richard Cantillon (1680s-1734).

Since this is an injustice, we should oppose it.

(b) But for the sake of argument, pretend the Cantillon effects I just described don’t exist. Pretend that price inflation occurs instantaneously and uniformly throughout the economy, and all prices rise proportionately at once.

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Let’s say, for example, that the money supply doubles and that all prices and wages/salaries exactly double. I may pay double for the things I buy, but I’m also earning double. Would this mean inflation is harmless?

No way.

Because although your wage or salary may indeed double, guess what doesn’t: your savings. Your savings stay nominally the same. So while your salary may eventually double and keep pace with prices, your savings have meanwhile been cut in half in terms of what they can buy.

If you saved that $35 in the hopes that 30 years from now you could buy a nice suit with it, you would have been in for a very unpleasant surprise.

This is what is so insidious about price inflation. It positively discourages saving, or it encourages people to jump into investments they may know little about and that are beyond their normal risk tolerance, just because they’re trying to preserve their money’s purchasing power.

Before the advent of fiat paper money, people could accumulate cash and see its value hold steady or even increase. No longer.

Finally, what difference is there if more bills/money is around in this country. During the 1964/1965 New York World’s Fair there was an exhibit that said our country had 180 million people in it back then and that was over the 140 million people during World War II and just before then. Now we have close to twice that and in a relative short period of time due to an influx of outsiders into this country. If that monetary number never changed, like the amount of gold (and/or silver, i.e. precious metals that exists), then how could there be enough money to go around unless more was created to accommodate that influx of multiples?

Although superficially plausible (shouldn’t we need more money in circulation if we have more people using it?), this is actually an old fallacy that David Ricardo refuted 200 years ago:

“If the quantity of gold and silver in the world employed as money were exceedingly small, or abundantly great…the variation in their quantity would have produced no other effect than to make the commodities for which they were exchanged comparatively dear or cheap. The smaller quantity of money would perform the functions of a circulating medium as well as the larger.”

As long as prices are free to fluctuate, there is never any reason to need the government’s central bank to increase in the supply of money. Such an increase leads to the problems I identified above, as well as the boom-bust business cycle (more about that another time).

Of course the government wants us to think an increase in the supply of money is necessary, because it always wants to cover over its crimes with plausible-sounding explanations. (“Why, we’re increasing the supply of money to provide for the needs of trade” sounds a lot better than “We’re increasing the supply of money to benefit particular constituencies, to prop up certain asset classes for the sake of certain kinds of investors, and to siphon off resources from the public without their knowledge.”)

Imagine a desert island with ten dollars in circulation, and two coconuts for sale for $5 each. If there should suddenly be four coconuts for sale, is it now impossible for them all to be sold? Would we now need $20 in circulation, to buy each of the four five-dollar coconuts? Of course not. The price of the coconuts simply falls in half, to $2.50, and now the ten dollars can buy all four coconuts.

This is how economic progress is supposed to work. Greater production puts downward pressure on prices, and ever-lower prices mean that the money we hold becomes able to buy us more things. This is how wealth is created.

At no point in this process do we need some government-sanctioned monopoly to increase the money supply for our benefit. We should be very happy to see prices falling; we should not be demanding an increase in paper money.

Short lesson: never give the regime or its central bank the benefit of the doubt. Don’t repeat their arguments. Always assume they’re up to something. You won’t be wrong.


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