On Money - II

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. This process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose. -- J.M. Keynes, The Economic Consequences of the Peace

The most interesting fact about money is it is the most unreal component of all economies. Unless money is based on some commodity, it has no intrinsic value. And if that commodity is gold, it has very little intrinsic value, though it is shiny. Economies, whether they're capitalist, socialist, agrarian, merchant, or industrial utilize money. It is never a neutral agent, but must necessarily be a stable one. An historical example of how important stability is to currency is Isaac Newton. The definer of one of the most stable forces in the universe, gravity, Newton also served as warden of the Royal Mint, where in 1717 he established a link between gold and the pound that would survive for over two hundred years -- that is till the end of the British empire.

Money may best be thought of, to paraphrase Keynes in his Treatise on Money, as both a medium of exchange and a little more esoterically though no less essentially, as a storer of value. Keynes states the creation and defining of money is a natural responsibility of government, "The State, therefore, comes in first of all as the authority of law which enforces the payment of the thing(money) which corresponds to the name(money)..." However Keynes adds the kicker, "...and to vary declaration from time to time—when, that is to say, it claims the right to re-edit the dictionary." Meaning simply, the state creates and defines money, though reserves the right at times to redefine the meaning.

Across history, governments have at many times re-edited the monetary dictionary to both redefine and revalue money. The most recent and cataclysmic re-editing of the money dictionary came in the 1930s. This re-editing occurred across the globe, where prevailing gold standards were thrown-out and currencies devalued in an effort to both inflate national economies and gain global competitive advantage. There was in short a definitional crisis of money.

In half dozen years, almost all countries abandoned the monetary gold standard. Those who jumped first gained advantage. Some countries such as New Zealand and Denmark, at the time still predominately commodity economies, engaged in competitive devaluation known as the "Butter Wars" in order to gain advantage in the British butter market. As the devaluations continued, the world basically split into different trading blocks; the British and their empire, the French and assorted European nations, the Japanese and their growing Asian empire, and two of the largest national economies, the US and Germany basically on their own.

As Jeffry Friedan writes in his book Global Capitalism about Britain:

Trade with the rest of the world fell precipitously, but exports to the sterling area—the empire, the Nordic and Baltic countries, Argentina, and a few others—rose from 50-60 percent of Britian's exports.

Germany to the world's chagrin was probably the greatest loser in the beggar-thy-neighbor devaluations and tariffs. Adam Tooze points out in his excellent book, The Wages of Destruction, in 1934, "German export volumes remained 40 percent below their level in 1932(and) was one of the principal causes of unemployment both in industry and commerce."

It would take another dozen years and a World War to completely "re-edit" the monetary dictionary. The new global officialdom instituted the International Monetary Fund to act as official global currency editor. As the IMF states:

During the Great Depression of the 1930s, countries attempted to shore up their failing economies by sharply raising barriers to foreign trade, devaluing their currencies to compete against each other for export markets, and curtailing their citizens' freedom to hold foreign exchange. These attempts proved to be self-defeating. World trade declined sharply, and employment and living standards plummeted in many countries.

This breakdown in international monetary cooperation led the IMF's founders to plan an institution charged with overseeing the international monetary system.

The IMF created the new global currency standard, which was the dollar tied to gold. This redefinition lasted twenty-five years, when the gold standard was dropped and the dollar in and of itself became the global currency standard. Today, how one defines or values the dollar or other currencies is a open question. One might say, in respect to Mr. Keynes, currency is no longer a dictionary definition, but a Wiki. Today, currency is defined by Treasuries, Central Banks, and large corporate interests in global markets. As the great market propagandist himself Milton Friedman wrote in his 1992 Money Mischief, the contemporary global currency situation has "no historical precedent....It has entered a new and urgent stage as the world ventures into hitherto unexplored terrain."

Now, the great historical tradition that has been shattered in the last several decades is the idea of fixed currency rates. Instead, the idea of flexible current rates, or more accurately, currency values defined by markets, has become dominant in this new era of laissez faire. In support of this "market valuing," events of the past have been reinterpreted, particularly the currency turmoil of the 1930s. Time Man of the Year and Fed Chairman Bernanke is in the forefront of this school and has enacted a policy of dollar devaluation based upon it.

If you've in any way managed to follow this ludicrously glib history of 20th century money, I'd like to re-emphasize several points:

1. Money has no intrinsic value.
2. Times when the value of money is in question, that is it is being redefined, are inherently unstable.
3. While, Mr. Friedman was right the global currency regime is somewhat unprecedented, history still has lessons to teach. The greatest of which is Mr. Bernanke's monetary policy, "Ben's Bet" of dollar devaluation is not only adding instability, but fraught with great risk.