No, really, the Senior Lecturer still doesn’t understand money

Adam Sawyer offered a number of powerful comments on MMT on this blog yesterday, one of which included this para, which I thought worth sharing. It was written to compare old, effectively gold standard money systems that existed pre 1971 with what we have now, which is fiat (government promise to pay) money:

We aren’t just cycling existing money around as we do the same thing our grandparents did 50 years ago. Instead we’re creating vastly greater quantities of money to facilitate completely different projects using new technology to serve three times the number of people as our grandparents’ economy was capable of supporting.

Imagine we had restricted ourselves to the supply of money available in 1945, what would that look like? Well we’d have had a massively deflationary currency and economic growth and technological innovation would have ground to a halt. There could have been people sitting around willing and capable of doing useful stuff, there would have been mountains of unexploited real resources. In the end 2018 would look exactly the same as 1945! We would not have had sustained economic growth and so would not have been able to support population growth. Many of us who now enjoy being alive would never have been born. That’s the power of fiat currency!

I think he’s right. Fiat money has made our modern world possible.

Not all of the change has been desirable, but let’s not ignore much that not only has been, but which remains so.

I do agree that commodity money isn’t all that good a thing. Even, as with a restaurant tripling its custom needing more plates to do so with, an expanding economy does need a larger money supply.

However, let’s just run that same thought back. 1850 to 1950 was, roughly enough, the era of the gold standard. Commodity money therefore, not much expansion of the money supply either. And yet I’m pretty sure the global economy expanded, population rose, technological innovation didn’t stop.

Hmm, so, perhaps a stagnant money supply isn’t all that much of a problem.

We could also go back a bit further. To Spain in the 16th and 17th centuries. Vast expansions of exactly that commodity money supply in the form of S American gold and silver. Almost no technological advance (in Spain) at that time, little population growth nor increase in living standards. Hell of a lot of inflation though.

I fear the Senior Lecturer hasn’t quite thought through the issue of money supply.

5 thoughts on “No, really, the Senior Lecturer still doesn’t understand money”

  1. In Spain they spent on palaces, churches, monasteries, nunneries and conspicuous consumption. Also, they exported the poor and inconvenient people. What could be described as public sector investment.

  2. Surely the contrasting developments in places with almost unlimited fiat money, like Venezuela and Zimbabwe, and those stunted by ‘limited money’ like Switzerland, prove that the Professor is right?…

  3. Anecdote, even anecdata, isn’t going to prove.

    You could take a spectacularly racist view and say that Venezuela and Zimbabwe, versus Switzerland, prove that only white people are capable of running an economy. Although more objectionable than what you said, it is no more wrong.

  4. If we have deflation then don’t we need less money to buy the same stuff so it makes no difference?

  5. The dollar has lost 95% of its value in the last century, the local Walmart has lost more than 100% of its current merchandise to pilferage since it went up, and more than 99% of the human race is dead. It happens slowly enough that we can adapt and prosper.

    If decades of technological improvement were not met by even more aggressive government deficit spending, then the supply of money would be low, prices would be low, salaries would be low, and everyone would still be doing business. The lessons of Zimbabwe and Venezuela do prove that we do no good by contriving to make prices different. At worse, we censor important information. Commodity money removes this destructive power from government (until “reformers” take the currency off the commodity).

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