Tuesday, June 17, 2014

Sound Money: Justice, Freedom, and Inequality

Andreas Marquart, the executive director of the Ludwig von Mises Institute Germany and an independent financial consultant for more than 15 years has been criticizing the existing global monetary system. In his December 2013 article, he expressed his bewilderment about the silence of "social justice" advocates concerning the destructive consequences of inflationary monetary system. In his article published last May 19, he promotes his recent book written in German that (jokingly?) could be titled in English either as "The State Causes the Poverty It Later Claims to Solve" or "The Austrian Answer to Thomas Piketty". 

Sound Money and Social Justice

Andreas Marquart is puzzled about the absence of protest against existing monetary system from sectors of society who proudly claim to be concerned about general welfare. These sectors include "political and social commentators," "the heads of social welfare agencies and leading religious leaders." He suspects that these sectors either do not understand the operation of the monetary system or they are included among its direct beneficiaries. They fail to grasp the connection of increasing the money supply in the reduction of monetary value and the increase in prices of products and services. Ignorance of this fact leads many critics to erroneously identify the primary cause of the 2008 economic meltdown. 

Marquart identifies at least four destructive results of inflating the money supply. They include the Cantillon effect, asset price inflation, credit market amplification, and unemployment due to business cycle (To know the meaning of these, read the article here).

Reading Marquart's article reminds me of a conversation in a theological forum concerning Micah 6: 8. The prophet said, "He has showed you, O man, what is good. And what does the Lord require of you? To act justly and to love mercy and to walk humbly with your God." I suggested that better read the text from economic perspective so an exegete will see the significance of verses 10 and 11 that most social justice advocates failed to understand. After the prophet declared the requirement of the Lord, he mentioned phrases like "ill-gotten treasures", "short ephah", "dishonest scales" and "a bag of false weights". Obviously, these are concrete economic terms and any talk of social justice without touching these issues is incomplete or will lead to a distorted concept of justice. The challenge is to examine the historical meaning of these expressions, and in what way they remain relevant to our time. And I think the existing monetary system is a concrete example of the violation denounced by the prophet. 

Sound Money and Economic Freedom

In contemporary discussion, sound money is actually one among the several variables in economic freedom. In relation to Marquart's article and the above biblical text, we could say that economic freedom is an integral part of social justice. And two organizations that I just recently discovered that deal with this subject are Friedrich Naumann Foundation and Economic Freedom Network

I mentioned in my June 12 article that Friedrich Naumann Foundation helps me clarify the meaning of freedom. The inclusion of political freedom, rule of law, and economic freedom is an educational tool that deserves widepsread recognition. However, I consider it unfortunate that FNF dropped access to sound money among the variables to determine the economic freedom barometer of 17 countries in Asia. If I were them, since they just derived those variables from the Economic Freedom of the World, I would retain all of them, which include other four variables such as "size of government," "legal system and property rights," "freedom to trade internationally," and "regulation" (Economic Freedom of the World 2013 Annual Report, p. v). 

Moreover, EFW 2013 Annual Report further identifies four components in its understanding of sound money: "money growth," "standard deviation of inflation," inflation in most recent year, and "freedom to own foreign currency bank accounts" (ibid., p. 4). I consider this information a great development in the world's education for freedom. However, the understanding of EFW about sound money is different from the Austrian school as represented by Marquart concerning inflation and idea of sound money. 

Since EFW 2013 Annual Report relies heavily on the intellectual contribution of Milton Friedman, it considers that some level of inflation is acceptable. In other words, it accepts the existing monetary system as given. On the other hand, the Austrian school though it does not deny the reality of inflation, it distinguishes between two forms of inflation, under the current monetary system and under a sound monetary system.

Furthermore, though the 2013 Annual Report repeatedly mentions about "sound money" (ibid., pp. 5-6), its exact identity is not clear to me. Unlike in Marquart's article, which is common to all Austrian economists that whenever they talk of sound money (also described as good money or honest money), they mean commodity money, whether gold or silver, which they consider as the real "free-market money". 

Following the suggestion of Dr. Thorsten Polleit, honorary professor at the Frankfurt School of Finance and Management, the way to restore sound money is to reconnect the existing paper money to commodity money. In other words, I see it as the undoing of the mistake committed in 1971 when President Nixon disconnected the US dollar from the gold. Once this re-anchoring is applied, the world can move from there to privatization and monetary competition. The important thing is to take away the monopoly of money from the government into the market. 

Sound Money and Inequality

Andreas Marquart concluded his first article in identifying the connection between our current monetary system and income inequality. He wrote:

"The reigning paper money system is at the center of the growing income inequality and expanding poverty rates we find in many countries today. Nevertheless, states continue to grow in power in the name of taming the market system that has supposedly caused the impoverishment actually caused by the state and its allies." 

The above paragraph serves as a good introduction to Marquart's next article, "How Fractional Reserves and Inflation Cause Economic Inequality". In it, he introduced his new book co-authored with Philipp Bagus, and talked about income inequality and Thomas Piketty. 

Income inequality is a hot topic revived due to 2008 economic crisis. For Marquart, this term is popularly misunderstood. From the standpoint of free market, "inequality and income inequality are natural phenomena because people are different." And add to it the fact that there are people who are hardworking, and there are others who are lazy. For Marquart, the critical question is: is income inequality the fault of the free market, or is it the inevitable result of state intervention?

If income inequality is the result of state intervention, "the primary source is fiat money inflation and the artificial increase of the money supply by bank credit." He adds: "The greater fiat money inflation is, the more unjust are the consequences." And then he explains further how income inequality was caused by inflating the money supply (To know the details, read here). 

Concerning Thomas Piketty, Andreas Marquart identifies the former's biggest error is the conclusion "that under capitalism the rich get richer" and the poor get poorer. For Marquart, such conclusion is nonsense for Piketty took his data "not from a capitalist world," but from an economic system dominated by crony capitalism or "a system of money socialism," and then blamed capitalism for economic inequality. 

Thomas Piketty's book caught my attention last April 16. As for me, the appearance of the book, and the responses to it shows that the economic debate between capitalism and socialism has not yet been settled, at least in the latter's more subtle form, state interventionism. In this debate, the explanation to 2008 crisis and understanding how the free market works is vital. And so I want to conclude this article with a suggested reading list:
Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse by Thomas E. Woods
The Church and the Market: A Catholic Defense of the Free Economy (Studies in Ethics and Economics) by Thomas E. Woods
Defending the Free Market: The Moral Case for a Free Economy by Robert A. Sirico


Other Reviews of Thomas Piketty's book:


Forces of Divergence - March 31, 2014



The Piketty Panic - April 24, 2014



The crash of 2008 - May 10, 2014

Summarized in 4 Paragraphs - May 14, 2014