Thursday, March 7, 2013

Gold is Not Enough, V: Debt Money v. Asset Money


As we have seen, the Keynesian solution to shortfalls in income is to increase government spending.  This can be done either by raising taxes, which leaves people less money to spend, or by issuing more debt to inflate the currency . . . which increases prices, causing people to spend less money.

To give people more money to spend, the government funds redistribution by raising taxes or by issuing more debt to inflate the currency.  The former leaves people less money to spend, while the latter increases prices, causing people to spend less money.

To get more money into people’s hands, . . . but you get the idea.  An all-gold currency can’t fix this problem, because it deflates the currency even worse than taxation — but an all-asset money supply can easily do the trick.  That’s why we’ve kept requesting that Virginia Delegate Bob Marshall talk to CESJ president Norman Kurland.  If you think that’s a good idea, send Bob an e-mail to that effect at delegatebobmarshall [at] Hotmail [dot] com.

So, as we’ve seen, because the problem seems to be lack of money, the remedy usually chosen is to increase the amount of government debt to back more currency and increase spending.  This will increase the money supply and presumably alleviate the shortage and solve the problem.

This is what happened in Great Britain following the Bank Charter Act of 1844.  The imposition of an inelastic currency by imposing a debt ceiling triggered a series of “currency crises” in Great Britain as a result of the amount of currency, both gold and paper, not being matched to the transactions demand for cash.

Consumer demand, limited largely to wage income, simply couldn’t keep up with productive capacity.  Trapped by the “slavery of past savings” and refusing to understand that the currency would be more stable and secure if backed by private sector assets instead of government debt, the British government continually raised the debt ceiling and increased spending.

Of course, had people who were limited to wages been able to acquire and possess capital, and if all increases in the money supply came from discounting and rediscounting bills of exchange instead of non-existent increases in the gold supply or increases in government debt, the system would have been in balance.  As it was, limiting increases in the money supply for consumption to new government debt and forcing more and more people to subsist on wages and welfare instead of profits from ownership ensured that the system would be permanently out of balance.

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