No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Twelve: Money Mischief 280 VALUE OF MONEY I occasionally give away Silver Eagles as gifts at functions, and always with a message. I explain that if they hold on to it, they will surely see an increase in value. And my concluding remark is always the same: when the price of a Silver Eagle goes up, do not think of it as being more valuable; think of the value of your dollar as going down! When you see prices going up in general, it is not due to greedy businessmen or unions, it is because the monetary authority has issued too much money. Yes, individual prices may go up, while others go down. But when most are rising, you can be sure that the Fed has the printing presses running full steam ahead! MISES STOPS THE HYPERINFLATION Skousen (2007) relates a story that at the height of Austria’s hyperinflation in 1922, the League of Nation’s (the predecessor to the United Nations) sent a team to figure out how to stop it. The team asked Ludwig Von Mises what to do. He instructed them to meet at a certain building at midnight. When they got there, they asked him what to do. The city was silent, except one building, which printed government currency; it was humming away. Mises said, “Hear that noise? Turn it off!” They did, and the hyperinflation ended. ARGENTINA: A CASE STUDY IN CURRENCY DEBAUCHERY Argentina’s leaders have impoverished their citizens repeatedly by inflating the currency, most recently with hyperinflations in the 1990s and again in early 2000. They started down that path again in January 2011, when the Argentine central bank increased the money supply by 28%, saying they didn’t see any monetary causes of inflation! So inflation rose dramatically and hit the poor the worst (as usual) since the poor spend a larger fraction of their income on goods that are rising in price. Independent economists called out the government as understating inflation by one-half. What do you think the government’s response to the truth was? Throw the economists in jail! Naughty, naughty economists. Argentina’s failed leadership doubled down and in early 2013 implemented price controls to hide the inflation they created. This lead to shortages, which they then blamed on greedy businessmen. Argentina still has awful inflation rates as they never seem to learn. If the government control of money is awful, maybe they can just replace the currency with bitcoin? So how does this work? Well, we must consider that money is just like any other good or service; its value is determined by supply and demand. Money demand is really determined by summing up the individual demands of the millions of consumers in the economy. Their individual demand curves relate back to the functions of money we discussed in chapter 11; they want some money to meet their needs of exchange and Money is just like any other good or service; its value is determined by supply and demand.