The Monetary Choice We Face Today Is No Different Than In 1375 A.D.
January 16, 2014
(This item originally appeared at Forbes.com on January 16, 2014.)
I noted recently that the monetary discussion in the day of Nicolaus Copernicus, in 1526, was actually much the same as our own. It was a discussion between what I’ve called the Classical view of money, and the Mercantilist view.
The Classical view of money is that it should be as stable, neutral, unchanging and reliable as possible — the monetary equivalent of other weights and measures such as the meter or kilogram. This view was held by those British economists known as the Classical economists, dating from roughly 1750 to 1925. The practical expression of these ideals, in the real world, was the world gold standard system, particularly as it evolved after 1850.
The Mercantilist view was that money should be a tool used to achieve various short-term policy goals, such as funding government deficits or reducing unemployment. Money was to be managed by government bureaucrats, the “statesmen” described by James Denham Steuart in his 1767 book An Inquiry into the Principles of Political Economy. This culminated a long tradition of thinking on the topic by those British thinkers known as the Mercantilists, between roughly 1600 and 1750. The practical expression of Mercantilist ideas is a government-managed floating fiat currency.
Obviously, people have talked about these things for hundreds of years. But, this debate has been around far longer than that. Plato was an infamous soft-money man, or what I am calling a Mercantilist; his student Aristotle was a hard-money guy, or a Classicalist.
The first written work focused on money, in the Western world, was apparently the De Moneta of Nicholas Oresme (1320-1382). The book was written in roughly 1375. (The first written work focused on money is the Chhuan Chih or Treatise on Coinage, written by Hung Tsun in 1149. I hope someone undertakes a translation of it at some point. The Chinese invented paper money in the early 11th century, and soon had many wild adventures with it.)
The De Moneta is not nearly so daunting as its title suggests, but is a rather short and practical essay. Fortunately, it is freely available from mises.org.
Oresme begins his essay — the Introduction — with these words, which perfectly describe the tension between the Classical and Mercantilist strategies.
“Some men hold that any king or prince may, of his own authority, by right or prerogative, freely alter the money current in his realm, regulate it as he will, and take whatever gain or profit may result: but other men are of the contrary opinion. I have therefore determined to write down in this treatise what seems to me from a philosophical and Aristotelian point of view, essentially proper to be said, beginning with the origin of money. I make no rash assertions, but submit everything to the judgment of my seniors. Perhaps my words will rouse them finally to settle the truth of this matter, so that the experts may all be of one mind, and come to a conclusion which shall be profitable both to princes and subjects, and indeed to the state as a whole.”
Oresme makes many arguments in a charmingly fourteenth-century sort of way, concluding that:
“[Altering the value of the currency] does not avoid scandal, but begets it … and it has many awkward consequences, … Nor is there any necessity or convenience in doing it, nor can it advantage the commonwealth. A clear sign of this is that such alterations are a modern invention, as was mentioned in the last chapter. For such a thing was never done in cities or kingdoms formerly or now well governed. … If the Italians or Romans did in the end make such alterations, as appears from ancient bad money sometimes to be found in the country, this was probably the reason why their noble empire came to nothing. It appears therefore that these changes are so bad that they are essentially impermissible.”
Oresme later observes:
“As time goes on and changes [in the value of money] proceed, it often happens that nobody knows what a particular coin is worth, and money has to be dealt in, bought and sold, or changed from its value, a thing which is against its nature. And so there is no certainty in a thing in which certainty is of the highest importance, but rather uncertain and disordered confusion, to the prince’s reproach. Also it is absurd and repugnant to the royal dignity to prohibit the currency of the true and good money of the realm, and from motives of greed to command, or rather compel, subjects to use less good money; which amounts to saying that good is evil and vice versa.”
Oresme had some interesting views on who tends to benefit from floating fiat currencies:
“Some sections of the community are occupied in affairs honourable or profitable to the whole state, as in the growing of natural wealth or negotiating on behalf of the community. Such are churchmen, judges, soldiers, husbandmen, merchants, craftsmen and the like. But another section augments its own wealth by unworthy business, as do money-changers, bankers or dealers in bullion: a disgraceful trade as was said in Chapter XVIII. These men, then, who are as it were unwanted by the state, and some others such as receivers and financial agents, etc., take a great part of the profit or gain arising from changes in coinage and by guile or by good luck, draw wealth from them, against God and Justice, since they are undeserving of such riches and unworthy of such wealth. But others, who are the best sections of the community, are impoverished by it; so that the prince in this way damages and overburdens the larger and better part of his subjects and yet does not receive the whole of the profit; but the persons abovementioned, whose business is contemptible and largely fraudulent, get a large part of it.”
Does that perhaps describe our own situation?
Today we are in a deeply Mercantilist mindset. All of academia insists that government-managed fiat money is the only sensible approach. They do not want to give up their goals of supposedly managing the economy by way of money-jiggering.
But the historical record is clear. It was clear in Oresme’s day; it was clear in Copernicus’ time. It is clear from all that has happened since then, up to our present forty-two-year-old funny money experiment. The Classical approach produces certain predictable results; the Mercantilist approach produces other results, equally certain and predictable.
For 182 years, from its inception in 1789 to 1971, the United States followed the Classical principle of Stable Money — in practice, a gold standard system. The U.S. became a continent-spanning economic and military superpower, with the most prosperous and broadest middle class ever known.
Since 1971, there have been better times and worse times, but the overall trend is clear. The median working male is paid less today than in 1970. For a time, this problem was rectified by putting Mom to work; but even with two incomes, the U.S. median household income today is no better than it was in 1988. The middle class has eroded from all sides, while the working poor, and non-working poor, have multiplied.
The U.S. is in decline. It will remain so until it abandons its Mercantilist money-jiggering fantasies. Eventually another country — China most likely — will discover the economic advantage that sound money brings, and use that strategy to surpass the United States and similar countries, just as the U.S. did in past times. The Classical approach to money will rise again, simply because it produces better outcomes.