Is It Real Money or Just Artifice?

In his 1884 article “Mind as a Social Factor,” Lester F. Ward attacked the laissez-faire doctrine in an “inversion of values” that would have made Friedrich Nietzsche blush. “But how shall we distinguish,” Ward asked,

this human, or anthropic, method from the method of nature? Simply by reversing all the definitions. Art is the antithesis of nature. If we call one the natural method we must call the other the artificial method. If nature’s process is rightly named natural selection, man’s process is artificial selection. . . .

The fallacy [in the laissez-faire doctrine] is a non sequitur. . . . [E]very mechanical invention proves that nothing is easier than to interfere successfully with the operation of . . . uniform natural forces. They have only to be first thoroughly understood and then they are easily controlled.

One could hardly find a better expression of the postmillennial progressive agenda to remake the world in man’s image. Because man has “mind,” his species (or at least the enlightened members of it, like Ward) will overcome the “blighting influence” of natural laws and usher in a utopian new age, an entirely artificial world impervious to the physical limitations of scarcity. Ward’s vision of artifice continues to plague public discussions on monetary policy today. This monetary artifice has gone largely unchallenged primarily because of the promiscuous use of the word “money,” allowing Ward’s artificial vision to shape public perceptions of monetary policy. To counter the artifice that currently afflicts popular understanding of monetary policy, a more analytically rigorous use of the word “money” is required.

The ruthless success of progressive artifice is evident in the current global monetary order. Since the US default in 1971, the global economy has been built on the artifice of money. What could be more artificial than a currency valued against a “basket of currencies” which themselves have no original use value? What exactly is a “basket of currencies”? Where does it come from? Where do I exchange my dollars for said baskets? The short answer is that there is no “basket of currencies.” The basket is simply an artifice invented to mask the reality that the US dollar is entirely artificial, created, as Murray Rothbard put it, “out of thin air.”

Thus did a small number of “enlightened” individuals gain a global monopoly on the issuance of the universal medium of exchange—a control that infiltrates the most intimate decisions of individual human action. The “people” could choose an alternative medium of exchange or even revert to barter temporarily until a new medium of exchange emerged, its value set by the demands of the market. However, although rejecting the monopoly money is possible, the consequent inconvenience and privation make it unlikely that a critical mass of people will make that choice. Therefore, according to Ludwig von Mises and Rothbard, what we face today is a de facto monopoly on “money” which will continue as long as the majority consents to its use.

In 1912, Mises defined money simply as a medium of exchange. However, within that broad category, he distinguished between different kinds of money, noting their heterogeneous effects on the economy. These distinctions are lost in the public discourse since the word “money” is used indiscriminately to refer to mutually exclusive media of exchange. In her recent defense of modern monetary theory (MMT), for example, economist Mariana Mazzucato pointed out that “governments create money all the time.” The critical point here is that Mazzucato is not referring to what Mises called money in the “narrower sense”—also referred to as money proper—which means either the commodity itself (commodity money) or paper claims representing that commodity at par (credit money). What the MMT camp is talking about is not money proper, but rather “fiduciary media.” Because fiduciary media do not represent a claim to any physical commodity, they can in fact be created at will in unlimited quantities.

Free-market economists have also used the word “money” loosely, but unlike Mazzucato, when Austrians think of money, they mostly imply money in the narrower sense, which emphatically cannot be created “out of thin air.” In response to Mazzucato’s assertion that the Germans had simply created 100 billion euros “overnight,” Jeff Deist and Bob Murphy posed the question, “Can the US realistically implement a permanent wartime economy?” Assuming that the money creation required to implement such an economy refers to money in the narrower sense, Deist and Murphy are correct to assert that the answer is no. However, with no distinction between money proper and fiduciary media, both assertions—in reality mutually exclusive—appear to be correct. Clearly, although both sides use the word “money,” they are actually talking about two entirely different media, each with different consequences for the economic order.

Unlike commodity money and credit money, fiduciary media are not bound or constrained by the scarcity of an actual commodity and therefore are artifice. Thus, in 1971, when Richard Nixon closed the gold window, leaving the value of the dollar to float in a “basket of currencies,” the progressive dream of a completely man-made, artificial economy was finally achieved. Since the source of money in the economy is completely disconnected from the reality of scarcity, the answer to the question about the feasibility of a permanent wartime economy has to be yes. As long as nations and individuals agree to use the monopoly money, the wartime economy of the US (and the world) can go on indefinitely. This, then, is the artifice of money.

Since, as Mises and Rothbard argued, all governments ultimately rule by consent, it is possible to dismantle the artificial economy by means of education. In his essay, “Anatomy of the State,” Rothbard emphasized that “‘we’ are not the state; the government is not ‘us.’” Imparting to the public at large the instrumental distinction between money proper and fiduciary media is the most direct and visceral way to demonstrate this fundamental principle. If people understood the difference between commodity money that must be acquired through labor and fiduciary media that can be created at will out of thin air, they might be outraged when unelected bureaucrats like Mazzucato brazenly assert that governments, unlike “households,” do not have to “earn tax revenue.”

Predictably, this line of thinking leads to the following question: If the government can print money out of thin air, then why can’t I? Deploying careful distinctions between money proper and fiduciary media would make it painfully obvious to individuals that the government arbitrarily imposes a scarcity of fiduciary media for individuals. Having realized that there is no logical reason, apart from the arbitrary decisions of the self-appointed enlightened ones, for individuals’ want of fiduciary media, the public would understand, quite viscerally, that the government is “not an institution of social service.” Thus, with a precise understanding of the different kinds of money, we see immediately that not only is the government is not “us,” but it is rather, as Bertrand de Jouvenel described it, “a band of brigands.”

Money proper is not artifice; it is a physical thing of value, acquired through labor and subject to scarcity, that emerges out of the needs of individuals, who alone, through myriad daily, voluntary exchanges, determine its objective exchange value. An economic order based on government-issued fiduciary media, on the other hand, will always be, as Ward predicted, “easily controlled.” However, once people understand the artifice of money and see its real effects on their economic condition, they might indeed withdraw their consent to the state’s “monopoly money.”