The Social Deterioration of Funny Money


Octcober 28, 2012


(This item originally appeared at Forbes.com on October 28, 2012.)

http://www.forbes.com/sites/nathanlewis/2012/10/28/the-social-deterioration-of-funny-floating-money/


When considering the effects of funny money (floating fiat currencies) upon a society, one of the more difficult things to put your finger on is the effect upon behavior in all sorts of situations, which we summarize as “morality.” Yet, this can be perhaps one of the most important and destructive effects of funny money.

What are “morals?” Mostly, they are rules of behavior; rules which, if commonly accepted, allow humans to interact effectively to mutual benefit. For example, two businessmen can more easily work together, to create new goods and services of value, if each tells the truth and upholds their commitments. The overall societal benefit is greater wealth. One businessman might be able to benefit by lying and generally regarding all commitments as transitory; but that benefit typically comes at the expense of the other businessman, and little of new value is created. The overall societal result is deteriorating wealth.

On a more personal level, one person might calculate that it would be in their perceived benefit to initiate a divorce, and that this process would be helped further by lying in court. However, the overall effect of this, as most anyone who has experienced a divorce can attest, is destruction of physical and financial wealth, and, especially when children are involved, personal hardships.

Most any type of activity that we call “immoral” tends to be about short-term gain for one individual, but even greater losses for others and for the society as a whole.

Money used to be managed according to rules. The most common rule was: the money was to be worth a specified amount of gold. For most of U.S. history, this was 23.2 troy grains of pure gold, or, as it is usually notated, $20.67 per ounce of gold. Lending, employment contracts, and other agreements would be reached with an exact and definitive understanding of what each side was responsible for delivering.

After 1971, the U.S. dollar has been subject to the whims and ignorance of a succession of Federal Reserve boards. What the U.S. dollar will be a decade from now is unknown. What it will be ten minutes from now is unknown. In principle and in practice, it is completely free of any rule-following whatsoever. Everything is provisional, and subject to short-term perceptions of benefit – for example, last month’s employment rate. As is often the case in these sorts of situations, little new wealth is created. More commonly, it is destroyed. But, we aren’t supposed to think about that, because “in the long run we are all dead,” as John Maynard Keynes assured us.

Most of our important relationships with other humans are monetary in nature. We have employment contracts, lending contracts, pension agreements, annuities, welfare, taxes, and, more broadly speaking, the prices paid for goods and services. The basis for all of these relationships is money. When the money becomes “immoral,” all of these relationships also lose their moral character. Instead of investors, builders and producers, we become traders: trading assets; trading jobs; trading money for favors; trading spouses; trading our supposed “beliefs,” for short-term gain in a zero-sum, and in fact negative-sum society. (We all know the real return on the “risk-free” U.S. Treasury bond is negative.) A “promise” is just a marketing strategy, no better than Ben Bernanke’s “promise” that the dollar will hold is value. What is this “promise” supposed to mean? It doesn’t mean anything.

The most basic foundations of a society crumble. The notions of Right and Wrong are seen as obsolete, replaced by a different notion: You Get What You Get. Some traders are better than others.

Humans have had many, many experiences with funny money, and consequently, with the broad societal disintegration it tends to produce. This wonderful quote comes from Ron Paul’s recent book End the Fed. It is in Aristophanes’ play The Frogs, from about 400 B.C.:

I’ll tell you what I think about the way
This city treats her soundest men today;
By a coincidence more sad than funny,
It’s very like the way we treat our money.

The noble silver drachma that of old we were
So proud of, and the recent gold coins that
Rang true, clean-stamped and worth their weight
Throughout the world, have ceased to circulate.

Instead, the purses of Athenian shoppers
Are full of shoddy silver-plated coppers
Just so, when men are needed by the nation,
The best have been withdrawn from circulation.

Art Cashin, of UBS, recently summed up how funny money affected Germany in the 1920s:

“Some sociologists note that it was still an era of arranged marriages. Families scrimped and saved for years to build a dowry so that their daughter might marry well. Suddenly, the dowry was worthless – wiped out. And with it was gone all hope of marriage. Girls who had stayed prim and proper awaiting some future Prince Charming now had no hope at all. Social morality began to collapse. The roar of the roaring twenties began to rumble. All hope and belief in systems, governmental or otherwise, collapsed.”

The German case is an extreme example, but the same processes are at work, in a more subtle way, wherever funny money is found. Cashin continues with a quote from Keynes:

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some … Those to whom the system brings windfalls … become profiteers.

To convert the businessman into a profiteer is to strike a blow at capitalism, because it destroys the psychological equilibrium which permits the perpetuance of unequal rewards.”

Doesn’t that describe our society today, after four decades of funny money — a society not of businessmen, but of profiteers? No wonder people are a bit peeved about “unequal rewards” these days.

The poison of funny money goes far beyond the actual value of the currency itself. The U.S. Federal government, for example, never ran big deficits during peacetime until after 1971. It extends to the legal system, to business in general, to such things as public union contracts which are baldly exploitive, and to our personal relationships. Eventually, a society finds a way to reinstate a sound money system. Sometimes, it has one imposed upon it from without, when a society becomes so weak that it is eventually taken over by a foreign power.

The United States is a young country. In a place like France or China, we can trace thousands of years of cycles between sound money and funny money. The Chinese had their first recorded paper money hyperinflation in the early 11th century; their most recent was in 1949. We will have another era of sound money in the United States. I just hope it doesn’t take too long before then.