|
|
|
|
|
|
|
|
|
|
Theory v facts |
|
|
|
|
|
|
|
© Christian Müller 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
page 2 |
|
|
|
|
|
|
|
«home |
|
Historically, money
has assumed many guises such as gold and precious metals in general,
pearls, stones, cigarettes, coins and notes and so on. It is tempting
to label money according to these phenomenological attributes as
metallic money, paper money or commodity money. These labels do,
however, veil the fact that the crucial difference between any types
of money lies with the institutions that justify the confidence in
using money in the first place. |
|
|
|
Let us consider
gold, for example. Gold seems to be a «natural» choice for money
because it serves most money functions very well. However, underlying
the «value» that gold is associated with is a cultural institution
that assigns this value. Cultures across the globe hold gold in high
regard and this respect which is based on a culturally determined set
of rules is what gold qualifies as money. |
|
|
|
But what is this
«quality»? The essential quality is that any owner of gold can
trust in anyone else to also share in the high regard for gold. This
property even goes as far as being able to rely on the «value» of
gold even if oneself, individually, does not have any respect for it.
In fact, it is sufficient to believe, or better trust
in anybody else holding gold in high regard to also accept and use
gold as money. |
|
|
|
A situation in which
there is trust in money must hence be distinguished from a situation
when there is no trust in money. For simplicity, let us assume that
in the latter case, there is no money at all. The situation without
trust in money is obviously associated with considerable uncertainty
with respect to the outcome of the production and exchange process.
This uncertainty arises because it is very difficult to gauge the
eventual proceeds (if any) from producing and selling one's goods due
to the necessity of the double coincidence. In contrast, money
dissolves the need for the double coincidence which simplifies and
eventually facilitates the exchange. |
|
|
|
However, when
accepting money with the intent to satisfy own needs the money holder
depends on the confidence the potential seller has in that the money
will serve him too, or in other words, that those third parties also
trust in money. |
|
|
|
Inflation can now be
understood as a phenomenon that has its roots in the deterioration of
trust. Trust can be diminished by pretty much everything that shakes
the institutions which generate the confidence in money. Therefore,
government crisis as well as strikes or the abuse of monopoly power
can result in inflation. Printing too much money also has the
potential to destroy the confidence in money. In contrast to the
monetarist view, however, money «supply» is just one factor that
affects the trust one has in the relevant institutions. |
|
|
|
This observation is
an accurate copy of the earlier statement that it is those who accept
money who decide about its worth. Returning to Sargent's examples,
we can now see that without the prospect of the money (Sargent,
1982, «unbacked of backed only by treasury bills”, p. 89f) being
honoured by the government through taxation, there was no reason to
believe that prospective business partners would accept it as a means
of payment. |
|
|
|
Therefore, and in
contrast to Sargent's claims, one has to concede that it neither was
the «the growth of fiat currency» nor the «increasing quantity of
central bank notes» (alone) which caused inflation. Rather, the
inflation was caused by the fast deterioration in the trust of money
due to the apparent inability of the government to match its promises
which were manifested as newly issued money with future revenues. It
was this bleak prospect about the usefulness of the money which
eventually created inflation. |
|
|
|
According to the
lessons from Sargent's examples as well as from the principle
considerations, money as trust implies that the initial trigger for
inflation will always be some impairment of the belief in the
respective money's ability to satisfy needs. And in fact, wars,
corruption and grave economic mismanagement usually cripple inflation
infested economies first. The growth in money stock hence is a
response to these ails and must be regarded as attempts to
create more money in order to compensate for the loss in trust in the
existing stock. Printing more money, however, is a sure means of
destroying trust even further. Therefore, the excessive creation of
money reinforces but does not cause an ongoing
inflation. |
|
|
|
When it comes to
inflation, matters are apparently somewhat more complicated than the
simplicity of Mankiw’s ninth principle suggests. Maybe as a sign of
acknowledgement, Mankiw dropped the case study on Germany, Austria,
Poland and Hungary starting with the third edition of his textbook
(Mankiw, 2014). In its stead he refers to the case of Zimbabwe but
only in passing (Mankiw, 2014, p. 11) and without any further
elaboration. The more recent editions thus provide support for the
ninth principle only on theoretical grounds (Mankiw, 2014, p. 590).
In view of the full factual evidence, it would probably be even
better not only to drop the mis-placed proof by example but to
re-write the ninth principle altogether: |
|
|
|
|
|
|
|
Prices rise when people lose trust in money. |
|
|
|
|
|
|
|
|
|
|
|
Footnote |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
References |
|
|
|
Aristoteles (1951).
Nikomachische Ethik, Artemis-Verlag, Zürich. |
|
|
|
Aristoteles (1971).
Politik, 2 edn, Artemis-Verlag, Zürich. |
|
|
|
Mankiw, N. G.
(2011). Economics, 2nd edn, Cengage Learning, Andover. |
|
|
|
Mankiw, N. G.
(2014). Economics, 3rd edn, Cengage Learning, Andover. |
|
|
|
Sargent, T. J.
(1982). The End of Four Big Inflations, in R. E. Hall (ed.),
Inflation: Causes and Effects, University of Chicago Press, Chicago,
pp. 41–98. |
|
|
|
|
|
«home |
|
|
page 2 |
|
|
|
|
|
|
|
|
|
|
|
© Christian Müller 2017 |
|
|
|
www.s-e-i.ch |
|