"The sole use of money is to circulate consumable goods." - Adam Smith, The Wealth of Nations
Regularly absent in the discussion of money is the simple truth that it is not wealth. Money is not an investment either. Money is an effect of wealth that facilitates its exchange, while also facilitating investment in the creation of future wealth.
Money can’t be eaten, nor would any reasonable person stuff it in large amounts under a mattress. Money is just a way for the producers of actual wealth - meaning goods and services – to exchange it with other producers. That’s why the obsession with so-called “money supply” is a wasted one. Where there’s production there’s always money simply because we produce goods and services (wealth) with an eye on exchanging them. Money is the medium that makes trade – the reason we produce – much easier, and much more frequent.
It should never be forgotten that with trade, it’s products for products. Nothing more, nothing less. And since it is, money that is stable in value is the best trade facilitator. Logically so. Stable money enables producers to quickly and reliably receive commensurate value in return for their production. If money is unstable, winners and losers are created by exchange despite trade by its very name signaling an even transaction that elevates both sides.
Interesting about all this is that the Chinese were the first to introduce paper, or fiat money. Since heavy gold coins had made trade somewhat difficult, paper money exchangeable for gold would fill in as a way to enable the dealing that is the driver of all economic activity.
So while China moved to paper money out of convenience before the Song dynasty (960-1279), the initially enlightened Songs understood that money's only purpose was as a ruler, or measuring rod. From that a debate ensued as to whether “money” should be a public or private creation. As Cornell professor Eswar Prasad put it in his 2017 book Gaining Currency, the Songs resisted private money given their belief that "only the government could ensure a reliable supply of a currency stable enough to support economic activity."
Most interesting here is that the Confucians of the time disagreed. They desired private paper money given their belief that "the market would compel private issuers of money to maintain its value." Ultimately the government won on the matter of who would issue currency, but that’s almost immaterial when we consider how correct both sides were. Each saw money as David Ricardo did. To be perfect, its value should be as close to invariable as possible. Money is to varying degrees deprived of its singular purpose as a facilitator of wealth exchange, the storing of wealth, and investment in the creation of wealth when its value is uncertain.
Which brings us to J.P. Morgan CEO Jamie Dimon’s recent assertion that the private currency known as Bitcoin is a “fraud.” What’s important is that Dimon is half right. He perhaps doesn’t know why he’s half right, but he is for the exact reasons that private money has grown in popularity in modern times. To state what’s obvious, the demand for alternative, privately issued money has grown in concert with government mismanagement of the money it issues. Since 1971, the dollar has had no definition, or no golden anchor.
That the dollar’s been floating for decades has unsurprisingly been detrimental to a world that is still essentially on a dollar standard. With the greenback’s value uncertain, and floating up and down, so have the currencies of the world moved all over the place; opposite what the Songs, Confucians and Classical thinkers like Ricardo saw as the purpose of money. Since 1971, the mutually-enhancing act of trade has sadly unearthed winners and losers where winners had once been the norm. In that case, is it any surprise that global trade disputes have become more frequent in an era of uncertain money? With each lurch, trade becomes more of a 60/40 concept, as opposed to 50/50.
Bitcoin is a fraud because, much like government money, it has no fixed value. Because it doesn’t it’s become an investment, or a speculation, as opposed to a measure that facilitates trade and investment. Sorry Bitcoin enthusiasts, your coin is not money. Money is a stable measure, while Bitcoin’s value bounces around. While some are free to view it as a refuge from the U.S. Treasury and other monetary authorities, it’s incorrect to call it money. Dimon is again half right. He’d be 100% right if he acknowledged that the dollar similarly has fraudulent qualities for its value – like that of Bitcoins – constantly moving around. That money is no longer stable in terms of value runs counter to the correct thinking of Classical economic thinkers, and Austrians too. Here’s how Austrian School founder Carl Menger described money:
“The economic importance of the coin, therefore, consists in the fact that (apart from saving us from the mechanical operation of dividing the precious metal into the required quantities) its acceptance saves us the examination of its genuineness, fineness, and weight. When we pass it on, it saves us from giving proof of these facts. Thus it frees us from many irksome, wearisome, procedures involving economic sacrifices, and as a consequence of this fact, the naturally high marketability of the precious metals is considerably increased.”
Menger was describing money as it should be, and long was. Once again as a measure that enables trade. Bitcoin is once again not a measure, hence it is not money.
So while Dimon was half right, his dismissal of Bitcoin speaks to opportunity for J.P. Morgan, and other blue chip companies. They and others would, in a perfect world, start issuing private, stable money. Who among us wouldn’t prefer to earn J.P. Morgan, Apple and Walmart dollars over the dollars issued by Treasury, and that bounce around in value every single day? Who wouldn’t prefer to be paid in money that Treasury wouldn’t persistently devalue? Going back to the Confucians and their view that private issuers should oversee fiat money creation, "the market would compel private issuers of money to maintain its value." Yes indeed.
Dimon is once again right, but perhaps doesn’t know why. A read of Menger would enlighten him. Money wasn’t initially a creation of the state. It was instead a creation of producers eager to get commensurate goods and services for those supplied. Money was stable with the latter specifically in mind. We produce so that we can trade. Governments have shirked their duties on the matter of money, but at the same time the highly volatile Bitcoin hasn’t emerged as a replacement precisely because it’s been volatile. Jamie Dimon could do for earners what Bitcoin hasn’t.
John Tamny is a Forbes Contributor, editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research & Trading. He’s the author of the 2016 book Who Needs the Fed? (Encounter), along with Popular Economics (Regnery Publishing, 2015).
