Measure & Money by Louis Boulanger

Money today; what a mindjob!  We work hard for it, we covet it, and we never seem to have enough of it.  Yet, we generally haven’t got the slightest idea of how money originally came into existence, nor do we fully realise that what is considered to be ‘money’ today is a fraud, a pale reflection of its true self.  Such ignorance is the root cause of our predicament: debt and delusion.

After all, if you know the truth about money, which must include its origins and true nature, you can no longer be fooled by the deceit.  The money in circulation today is a trick of the mind, an illusion made possible only because of our ignorance.  The monetary delusion that humanity now suffers from is not new.  But its scale is.  Never before has the monetary delusion been global.

Money is no good anymore because there is no limit to how much can be made, and no standard to maintain its value; in other words, it has lost its measure.  Of course, we all use currencies as money, yours truly included.  How else could we survive?  By law, only currencies are legal tender in most places around the world.  We use currencies because there is no choice in the matter.  When it comes to monetary matters, there is no freedom of choice.

Because currencies are not redeemable on demand for a set unit of weight in gold, as would be the case if we did have sound money and freedom of choice, they are simply bank notes or debts of the central bank that issues them.  Currencies only represent credit money or, if backed by the credit of a government (in which case the debt is then no longer that of the central bank that issues the notes but of the government), can also represent fiat money.

But how can money also be debt?  Who pays the government debts if not the people with their hard earned ‘money’ in the form of taxes??  The mind boggles.  But let us put aside the problems of debt and come back to the nature of money.  What I mean by ‘money’ here are all the circulating currencies, none of which have any absolute measure and all of which are money only because they are declared by a sovereign government to be legal tender.  That is not how things were before the monetary tragedy of the twentieth century…

Today, total confusion prevails, even among so-called experts, in the usage of basic words such as capital, money and wealth.  There can be no reasonable conversation or debate if there is total confusion about the very meaning of those words in society.  Yet, here we are.  We have confused ourselves beyond belief!  We must walk away from this modern day Tower of Babel and reconnect with the truth about money.

In his 1849 essay on money (‘Maudit Argent!’ or ‘What Is Money?’), Frédéric Bastiat uses dialogue to good effect to argue that our mistaking money for wealth is the root cause of all economic errors.  Not so much because any individual would make this error of judgment as such, but because it is a widely held (false) belief encouraged and reinforced by the State’s influence over our so-called education.

The true function of money is to facilitate exchange.  In order that economic activity may be multiplied, and accomplished independently of time and place amongst people unknown to each other, and repeatedly so, an intermediate agent has been by necessity found over time for exchanges – namely money.  Money, whether gold or paper, is but a means to an end: wealth.  Our habit of mistaking the means (money) for the end (wealth) is an error of the mind.

Sound money must also be a good store of value and unit of measure.  But the value of money (sound or unsound) itself can vary.  This seems to be where much of the confusion lies.  Money is not the measure of value.  Value is a measurement of human desire.  Each person’s scale of values is graded upon a different measure and no common standard exists between these various scales.

This aspect of human nature clearly presents the need for the establishment of an accurate and reliable standard of measure, for exchanges to be fairly valued for both parties.  This is the role of a numéraire in a monetary system.  Unfortunately, this has been removed from our system in 1971, when the United States government defaulted on its international obligations under the Bretton Woods Agreement, and it remains absent to this day.  We are drifting in unchartered waters.

Very briefly, what was the Bretton Woods Agreement?  It was the global monetary system agreed upon by nations at the end of World War II.  Under this system, the US dollar became accepted as the new standard for money.  The Bretton Woods system defined the measure of the US dollar as 1/35th of a troy ounce of gold.  Other currencies were pegged to the US dollar at fixed rates.  Any trade imbalance between countries was to be settled in gold.

This system collapsed when US President Richard Nixon unilaterally announced on 15 August 1971 that the US government would no longer
redeem dollars for gold as required under the system.  All of a sudden, the world found itself using money without any agreed standard measure of value.  In other words, what was once defined as a monetary unit valued at 1/35th of an ounce of gold, simply became a floating abstraction of the mind.  Not only was the US dollar no longer defined; it lost its measure and became the symbol of the new monetary disorder we find ourselves in today.

It is true that the US had an exorbitant privilege under the Bretton Woods system, as was argued by French President Charles de Gaulle.  But it is also true that this privilege came with an equal measure of required discipline for the system to work as it was intended to.  Unfortunately, the US abdicated their responsibility to maintain that discipline and seem to have gotten away with it.  But the vision of forever floating currencies is just an illusion; sadly, it is an illusion we seem strongly attached to as we drift further and further away from sound money.

Sound navigation requires sound measurement.  Measurement in economics is carried out in terms of currency units; only economic activities measurable in that unit of account are recorded.  But, as experience shows, the value itself of any floating currency fluctuates greatly.  So what does that say about our measurement of economic activity, of ‘economics’ as a science?

Without a reliable and precisely defined unit of measure or standard to maintain its value, I would argue that economics is the worst of sciences.  Indeed, in all scientific endeavours, precision in the definition of the unit of measure used has improved over time.  The only exception is economics, in particular monetary economics.  ‘Money’ today, is based on government fiat, which is itself a highly elastic measure.

What should have been seen in 1971 as an outright default by the US on its obligation to maintain measure in the monetary system, and the onset of what was to become monetary disorder, was instead quickly overshadowed by concerns about rapidly rising inflation.  But what is inflation, if not a measure of the depreciation of the purchasing power of the money we use to determine prices?  We became captured by the effect (price increases) rather than become aware of its cause (the removal of the discipline of gold redeemability).

Money, I find, has much to do with the level of ignorance that prevails in society.  What we have today reflects that.  William Rees-Mogg tackled inflation most insightfully, in my opinion, in his book published in 1974: The Reigning Error – The Crisis of World Inflation.  He postulated that inflation is a disease of inordinacy.  Like anarchy represents the inordinacy of the people and tyranny represents the inordinacy of the ruler, inflation is an inordinacy of money.  It is money without order.

He argued that the problem of inordinacy, like the problem of inflation, is far from being a new one: “it is rooted in the nature of man, as inflation is rooted in the nature both of man and of money”.  He also argued that because the inordinate is always insane and always ends in destruction, the insanity of inflation leaves a mark of insanity on society: “it changes a good society into one which, so long as inflation lasts, is wholly and fraudulently unjust.”

Well, inflation is on the rise again, so it is high time that we bring measure to our money again.  In other words, it is time to restore discipline in the governance of the global monetary system.  After all, human institutions do require a limit, if they are not to become inordinate.  For money, gold plays that role.  Why?  That alone could well be the subject of another essay.  For now, let us simply recognise the historical fact that gold has always been and remains the only real global money.

It can be argued that the reigning error of the twentieth century was the rejection of the idea of discipline.  John Maynard Keynes was the key protagonist of the sustained attack on the idea of discipline in money.  He greatly abused his influence, in my view, when he declared that: “In truth, the gold standard is already a barbarous relic”.  In fact, nothing could be further from the truth.

That vain idea of Keynes has done much damage since postulated (in 1924).  We allowed this to happen, by simply letting our guards down and allowing a persistent illusion to prevail.  The true nature of money has been kept hidden from us through ignorance.  But the consequences of our acceptance of that false idea are manifesting themselves more and more clearly.  So, what matters now is that we carefully examine our quiet assumptions about money.

So it comes down again, as it always does, to that most fundamental choice we each must make every day of our lives: consider any new evidence presented for what it is or choose to ignore it.  Lifting the veil of ignorance is our challenge.  This applies to all things, money included.  I hope that we will again, soon, return measure to money.  Human progress depends on it.

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“It is usually some quiet assumption taken for granted by men of every degree that blocks the road to the great advancements of which mankind is capable.  These false beliefs, if they persist too long, are very dangerous to human progress.”

– Leon MacLaren, (1910 – 1994), Scottish barrister and Founder of the School of Philosophy

 

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Precious Metals Investment Symposium