What’s Wrong with the World

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What’s Wrong with the World is dedicated to the defense of what remains of Christendom, the civilization made by the men of the Cross of Christ. Athwart two hostile Powers we stand: the Jihad and Liberalism...read more

American Affairs

A new quarterly called American Affairs earned some surprisingly good press when it first appeared. I would not have expected a magazine of scholarly Trumpism, unveiled a month after his nomination, to walk away with warm and whimsical write-ups in the The New York Times and the New Yorker; but then again a lot of things happen that I don’t expect.

The bad press came a bit later, when, driven by an entirely foreseeable trajectory of events, the journal’s Editor publicly repudiated his vote of a year ago for the aforementioned Trump. (But even then, the Times gave him prominent space for the mea culpa.)

However they voted, I’ll grant that the editors and writers of American Affairs have indeed produced some interesting and provocative copy.

[edited for some embarrassing typos]

Take, for instance, this essay by two men of plainly socialist disposition. “Make the Left Great Again,” an inspired headline, supplies in readable and mostly jargon-free prose, a kind of paleo-Leftist argument against (a) pigheaded identity politics, and for (b) the integrity of the nation-state. Eschewing a distorted overemphasis on American developments, the authors persuasively argue that international or globalized socialism is an illusion. The only possible route to socialism lies in an appeal to each nation with a political agenda that respects its integrity as a nation.

Even if we limit our analysis to core capitalist countries, it is apparent that virtually all the major social, economic, and political advancements of the past centuries were achieved through the institutions of the democratic nation-state, not through international, multilateral, or supranational institutions. Rather, global institutions have in many ways been used to roll back those very achievements, as we have seen in the context of the euro crisis, where supranational (and largely unaccountable) institutions such as the European Commission, Eurogroup, and European Central Bank used their power and authority to impose crippling austerity on struggling countries. The problem, in short, is not national sovereignty as such, but the fact that the concept in recent years has been largely abandoned to those who seek to push through a xenophobic and identitarian agenda.

There are strong Marxist strains in this essay: no doubt about it. Class-based analysis frames much of the argument, and hostility to free enterprise permeates its premises. But there is also some level-headed self-reflection:

Following its historical defeat, the Left’s traditional anticapitalist focus on class slowly gave way to a liberal-individualist understanding of emancipation. Waylaid by postmodernist and poststructuralist theories, Left intellectuals slowly abandoned Marxian class categories to focus instead on elements of political power and the use of language and narratives as a way of establishing meaning. This shift also defined new arenas of political struggle that were diametrically opposed to those defined by Marx. Over the past three decades, the Left’s focus on “capitalism” has given way to a focus on issues such as racism, gender, homophobia, multiculturalism, etc. Marginality is no longer described in terms of class but rather in terms of identity. The struggle against the illegitimate hegemony of the capitalist class has given way to the struggles of a variety of (more or less) oppressed and marginalized groups and minorities: women, blacks, LGBTQs, etc. As a result, class struggle has ceased to be seen as the path to liberation.

In this new postmodernist world, only categories that transcend class boundaries are considered meaningful. Moreover, the institutions that evolved to defend workers against capital—such as trade unions and social democratic political parties—have become subjugated to these non–class struggle foci. What has emerged in practically all Western countries as a result, as Nancy Fraser notes, is a perverse political alignment between “mainstream currents of new social movements (feminism, anti-racism, multiculturalism, and LGBTQ rights), on the one side, and high-end ‘symbolic’ and service-based business sectors (Wall Street, Silicon Valley, and Hollywood), on the other.” The result is a progressive neoliberalism “that mixe[s] together truncated ideals of emancipation and lethal forms of financialization,” with the former unwittingly lending their charisma to the latter.

It’s almost as if solidarity and fellow-feeling among neighbors and countrymen — call it, I don’t know, “patriotism” — works better at preventing pernicious accumulations of wealth and power, than massive continental structures of regulation and bureaucracy. And it’s almost as if an unending obsession with diversity, difference, peculiarity, accompanied by a relentless denigration of the culture men once held in common, undermines that fellow-feeling, thereby clearing the path for the most cynical capitalists to accumulate wealth and power.

I mean, wow: it’s almost as if the enterprising minds in Silicon Valley figured out that, by flattering American liberal preoccupations with diversity, they could gain for themselves a free hand to monopolize the technology sector. (Conveniently, many of those pliantly diverse non-Americans also sell their engineering labor at a cheaper rate than American citizens.)

My sarcasm aside, I count it as encouraging that at least some on the Left are starting to wake up to the malignancy and cynicism of the diversity project.

As societies have become increasingly divided between well-educated, highly mobile, highly skilled, socially progressive cosmopolitan urbanites, and lower skilled and less educated peripherals who rarely work abroad and face competition from immigrants, the mainstream Left has tended to consistently side with the former. Indeed, the split between the working classes and the intellectual-cultural Left can be considered one of the main reasons behind the right-wing revolt currently engulfing the West. As Jonathan Haidt has argued, the way the globalist urban elites talk and act unwittingly activates authoritarian tendencies in a subset of nationalists. In a vicious feedback loop, however, the more the working classes turn to right-wing populism and nationalism, the more the intellectual-cultural Left doubles down on its liberal-cosmopolitan fantasies, further radicalizing the ethnonationalism of the proletariat.

That’s a pretty penetrating paragraph.

A final point that I’ll mention about this essay. In a series of asides, never fully formalized as an argument, the authors demonstrate a marked impatience with the prevailing assumptions of public finance. Specifically, in line with their defense of nations, they think sovereign states should have access to currency devaluation as a respectable policy tool; and they reject the “household budget analogy,” “which suggests that currency-issuing governments, like households, are financially constrained, and that fiscal deficits impose crippling debt burdens on future generations.”

Now the idea that currency-issuing governments are not, in any way, “financially constrained” is clearly absurd; but in my view it is not at all absurd to conjecture that maybe we’ve got the details of those constraints quite wrong. The massive monetary and considerable fiscal response to the financial crisis was greeted by a chorus of minatory predictions concerning runaway inflation, ruinous interest rates, and so forth, none of which materialized over the past decade. The idea of currency as an actual storehouse of value persists in the minds of millions; but the evidence is piling up to the contrary. Perhaps the time has come for both Right and Left to recognize that a currency is ultimately nothing more than a medium of exchange, which should be saved only for that purpose and not on the presumption that it has any intrinsic capacity to store value or preserve capital.

Comments (41)

Hmm, I have to admit that I'm having trouble warming to a bunch of class-warfare Marxists just because they oppose LGBT identity politics. And the idea of such people even temporarily supporting Mr. "I'm Very Rich" (presumably because of his campaign's anti-trade populism) tends to decrease the warm fuzzies even more. Certainly it's true that the Democrats long ago lost any credible claim to be the Party of the Little Guy, but I'd rather have a conservative point that out than someone who is going to support the proles in opposing sexual perversion, but only because it's classist. Or something. Collectivism doesn't become even remotely attractive just because some old-style collectivists decide to oppose the most recent insanity of the parochial American left.

"I count it as encouraging that at least some on the Left are starting to wake up to the malignancy and cynicism of the diversity project."

Yes, and some who were never with that program to begin with are speaking up -- both old-school liberals and the "traditional" Lefties who didn't buy into the whole New Left thing. Some of their concern is no doubt tactical, in that it reflects a fear of a further loss of white working class support. But there also seems to be a genuine concern among many that PC/diversity ideas have run amok.

An encouraging sign running parallel to this is an increasing interest in class issues on the Right, accompanied by the growing realization that Big Business is not the conservatives' friend. The cultural Left has largely forsaken class as a concern, and the mainstream Right really never had it. Wake-up calls by folks such as J.D. Vance, Yuval Levin, and Ross Douthat are starting to change that.

The idea of currency as an actual storehouse of value persists in the minds of millions; ...

That idea persists in my mind, at any rate.

... but the evidence is piling up to the contrary. Perhaps the time has come for both Right and Left to recognize that a currency is ultimately nothing more than a medium of exchange, which should be saved only for that purpose and not on the presumption that it has any intrinsic capacity to store value or preserve capital.

Once I have recognized it, what then serves to store value?

Or were you speaking only macroeconomically—such that fiat currency would meet my expectation privately but not for the whole country?

I have to say I'm all on board with the household model of national finance. As far as I'm concerned, we need way more of that rather than less. The argument that we need less of it and that countries *can* (contra the apocryphal Abe Lincoln) stay out of trouble even while spending more than they bring in is simply a recipe for governmental irresponsibility. Naturally socialists are all on-board with that, since they think the government is where all the goodies come from and (evidently) creates wealth by creating handout programs. Deficit? What's that? Santa is expected to take care of it. Or heck, just print or e-print more money. Something can come from nothing, right? But conservatives of all people should be urging fiscal responsibility on government, not the opposite.

Lydia, in my view the analogy of a family household to a nation is mediocre at best. It may obscure more than it illuminates. A nation may licitly stake its (say) second-best port revenues, in order to service a debt, in a way in which a family in debt may never stake their daughter's sexual organs. And what currency price, what household analogy, might we assign to the detail that American JSOC personnel, conveyed by V-22 Ospreys, could forcibly confiscate enough wealth in a weekend, from direct-action raids on subjects under surveillance etc., to fix any immediate national cash shortage?

Mr. Harrison: Let not the idea persist.

Once I have recognized [that currency is only a medium of exchange], what then serves to store value?

As a non-exhaustive list, I'll offer furniture, gemstones, preservable produce, musical instruments, baseball cards, books, beer, wine; alongside, of course, equity in companies, corporate debt, government debt, mutual funds, commercial paper, options, swaps, etc.

Also, please remember that deposits in the bank are actually debt instruments lent to the bank. If I take some currency and lend it to the bank, that's no longer currency as I speak of here.

Lest I be thought unclear, in my mind it is worth storing some currency; some percentage of your income you should keep as currency. But rationally this should not be thought a way to store wealth: only as a way to have enough medium of exchange around, should the necessity of selling wealth press upon you.

A nation may licitly stake its (say) second-best port revenues, in order to service a debt, in a way in which a family in debt may never stake their daughter's sexual organs.

What an utterly bizarre analogy. A better analogy would be a family's actually having something that it could, y'know, put up as collateral or sell to service a debt. The point is that of fiscal responsibility. The U.S. just happens to have more stuff than ordinary people do. That doesn't mean money comes out of thin air to pay for whatever deficit the U.S. wants to rack up in secula seculorum.

As for money as a store of value, saying that money isn't a store of value is a convenient way to blame the poor working stiff who puts hard-earned savings in the bank and whose savings loses value if inflation occurs, but it doesn't actually make it perfectly okay for a government to inflate its currency, it doesn't actually make the working stiff to blame, and it doesn't actually mean that he would have been more fiscally reasonable to have gone through the far more complex and arduous process of trying to save up for a car or even for the down payment on a house by buying gemstones instead. I could list you quite a few reasons (which you can probably think of for yourself, since you, unlike some others, are not fantastically wealthy and live in the real world) why telling a guy that he ought to save for what he needs to save up for over the next ten years by buying objets d'art or stock would be giving him bad advice.

I realize that you've said that you're not using "currency" to cover bank savings, but since nobody *does* save for a car or for the college tuition he'll need to pay in a few years by putting cash in his mattress, there's very little point in excoriating people who do so. Generally people who are bugged about losing value of their money to inflation are speaking (loosely, perhaps, but by an understood convention) of "their money" in the bank, inter alia. And presumably those who grump about not "treating money as a store of value" aren't too happy about their seeing their bank accounts as a "store of value," either. Because those folks should be saving up the $50 a month they can afford to save, in order hopefully to avoid a car payment or in order to get that needed trade school credential, by buying fine wine instead. Or something.

Since a huge number of people now use very little cash anyway and yet nonetheless think of money as in some sense a "storehouse of value," anyone arguing against it is going to find his argument very outdated if he is speaking only of physical currency. Many employers insist that their employees have a bank account and do not issue physical paychecks but rather electronic "checks." The working person then pays for his groceries with a debit card on the bank account or, sometimes, a credit card, which he then pays by direct electronic transfer from his bank account. On-line bill pay is making even physical checks obsolete, and of course almost nobody pays his electric bill with physical dollars anyway even if he pays with a physical check.

If all you want to say is that physical currency is not a storehouse of value while remaining neutral on whether e-dollars in a bank account *are* a storehouse of value, or even affirming that they are (!), your argument is losing relevance very fast. This is what leads me to think that the latter as a "storehouse of value" is a target as well. But of course if virtual dollars in the bank *are* a "storehouse of value," then we can't blame people for not wanting them devalued by government e-printing, or for not investing in something more concrete rather than saving in the bank, can we?

I will just add that it is intrinsically impossible for money to be a "medium of exchange" without it also being a storehouse of value. Being a medium of exchange JUST IS being a storehouse of value. When Bob sells his used but nice lawnmower for $150 to Bill, and then the next day he takes the $150 to the store and buys a tool to work on lawnmowers, the $150 stored value overnight. The whole point of it being a medium of exchange is that it stores value from the exchange where you GET the money to the exchange where you GIVE UP the money.

Arguing about whether it stores value very well, or whether it does so over a longer versus shorter time period are just quibbles on the basic point. Money would cease to be any sort of thing at all if its ability to store value between exchanges became completely unpredictable: If the $150 that Bill got were to fluctuate in value (against every other item of value) according to a random number generator factor, so that it was worth 1 piece of gum, or 20,000 bananas, or 5 minutes of labor from my mechanic; and then CHANGE AGAIN in value against all of those items of value at short but completely random intervals, it COULD NOT BE A MEDIUM OF EXCHANGE. The only reason it succeeds in being a medium of exchange is that it does NOT fluctuate in these ways, instead it has some degree of stability and some predictability about how its value changes. But that stability JUST IS its being a storehouse of value.

Of course money does not retain a completely fixed and definite relationship to other goods over long periods of time without alteration - neither does anything ELSE do so. Everything of (economic) value is in relationship to all the other things of value, and these relationships constantly vary as things become inherently more desirable or less due to changes in usefulness, need, etc. Money will, also, undergo some variation. But saying that it is not a storehouse of value because it undergoes variation is just like saying your house, boat, car, stock, and gun are not storehouses of value because their values change. Non sequitur.

It may be true that money in our current monetary arrangement tends not to be a VERY GOOD storehouse of value over a long period of time. This would be an idiosyncratic feature of our particular arrangement, since there were lots of times in the past where a certain gold or silver coin held its value against other goods really quite well. It then must become a policy question, whether we WANT to manage our monetary system so that the money is a better or worse storehouse of value, and over what kind of time horizon. As a policy question, this cannot be dismissed by merely noting the fact THAT currently it is fairly limited as a storehouse of value. Such an empirical state of affairs is capable of being changed.

Excellent points, Tony!

Nor is there any moral requirement to try to make our political policies discourage people from thinking of things as "storehouses of value" except insofar as those things have some particular use or insofar as their value reflects some deeper metaphysical reality. Milk is very useful while drinkable but is de facto a poor storehouse of value because it spoils. Antique baseball trading cards pretty much define "practically useless" and have their market value entirely by human convention but might be a perfectly ethical investment nonetheless. There is no imperative for government to try to force people to *admit* the intrinsic valuelessness of baseball trading cards or to "value milk more." By the same token there is nothing particularly virtuous about a governmental policy that "forces people to recognize" that currency or e-currency is not intrinsically useful, that you can't eat it or use it to make something, that it doesn't (now) represent a claim on gold, or whatever, and to try to pressure people to invest in some kind of more tangible property instead. It is not as though investing in gems or real estate is *intrinsically* smarter or more in touch with deep metaphysical reality than putting money in the bank, so that the former should be encouraged by policy and the latter represents a bad or "usurious mindset."

Tony's correction is well taken. Sorry I've been confusing.

Lydia, I'm certainly not recommending some kind of government policy to "force" people to think of currency in a different way. Nor am I "blaming" or "excoriating" working stiffs or anyone who takes a different view. I'm suggesting a framework for better understanding of how things work. Tony's point that everything in economics fluctuates in value is another way of making the point. But folks operate on the (in my view faulty) assumption that currency is the only thing that doesn't fluctuate, or least least shouldn't. Assets of all kinds are adjusting values in relation to each other constantly. The primary source of value in currency arises from its use as a medium of exchange (secondarily because the government requires payment of taxes in it). Thus (to repeat) it is only useful to store it for that purpose. It is unwise to store it expecting it to retain value.

I'd also say the fact that we're rapidly moving away from physical cash strengthens my point, not weakens it. And yes, most people regard their deposits as cash. One reason is that the banks have government backing: a promise to print money to make depository lenders whole in the event of the banks' failure. Take that away, and folks would quickly see that deposits are a financial instrument quite different from cash on hand.

The only policy I'd recommend is that sovereign nation-states retain authority over their sovereign currency. They should increase or decrease the money supply as circumstances require. Currency devaluation is a legitimate tool of statecraft, often misused but not made illegitimate by examples of misuse.

On the "household model": as long as we recognize its limitations, I'm fine with it. The key thing to understand is that nations have assets and resources which have no analogy to a human household.

The primary source of value in currency arises from its use as a medium of exchange (secondarily because the government requires payment of taxes in it). Thus (to repeat) it is only useful to store it for that purpose. It is unwise to store it expecting it to retain value.

Whether that's unwise or not depends on how well it does, in fact, retain its value. That was part of Tony's point. Obviously it retains its value for some period of time, or one couldn't use it as a medium of exchange. And as things have been going recently, currency remains more stable in value than many other goods and stocks. Moreover, the use of e-currency, at least, as a storehouse of value has advantages in that it is less burdensome than buying and selling other goods, especially given the tax reporting requirements. If I need to save money for, say, three years to try to buy a car, trying to do it by buying some property rather than putting the money in the bank may well mean that I have to report capital gains at the end of the period. I also have to find a willing buyer for the property (whatever it is) that I buy to store the value. I also may not be able to save in the relatively small increments that I'm able to put away as I gradually save for a car. And so forth. I would never tell a young person saving for a car, which he expects to have to buy within five years (say), that he would be wiser to try to store the value he is slowly saving up by buying stock or tangible property than to store the value by putting the money in the bank. The complications and uncertainty of the former, some of which might sap some of the money saved (e.g., having to pay more to have his taxes done--tax preparers charge more for more complex returns) in contrast to the latter would not make it, in most circumstances, the better way to try to store the value of what he is slowly saving.


They should increase or decrease the money supply as circumstances require. Currency devaluation is a legitimate tool of statecraft, often misused but not made illegitimate by examples of misuse.

The combination of that attitude with the blanket statement that it's "unwise" to keep money expecting it to retain its value basically lets the government morally off the hook for what it does to people's savings if it does, in fact, inflate. The unstated implication seems to be that the "circumstances" that might "require" inflation are divorced from the impact upon people's bank accounts, since the people should have known better than to treat money as a "storehouse of value."

By the way, on a slightly different topic, one advantage to the household model of government spending is that it doesn't say, "Deficit, shmeficit." It holds governments responsible for trying to balance their budgets and, inter alia, is consistent with the fiscally conservative emphasis on cutting spending. *Of course* socialists don't like it, because they want government to be able to spend like a drunken sailor. The proposition that governments are just *different* somehow, in a way that makes it fine for them indefinitely to spend more than they take in, goes beautifully hand-in-hand with the idea that government projects and handouts are entitlements and are paid for ex nihilo. This takes governmental activities out of the realm of reality and into the realm of god-like fantasy, which is precisely what fiscal conservatives are trying to counteract.

I would never tell a young person saving for a car, which he expects to have to buy within five years (say), that he would be wiser to try to store the value he is slowly saving up by buying stock or tangible property than to store the value by putting the money in the bank.

Neither would I. The first and most important question for a hypothetical young person would be, "do you have a steady income?" Assuming the affirmative, the first piece of advice would be to develop a plan to save some of the income in deposits at a bank. But let's assume the young person's income does come in cash (unusual these days, admittedly). Would it be good advice to tell him to stash, say, 10% every month as cash in a lockbox? Probably not. Deposits at a bank are the way to go. But I would make it clear, as I've said to my own children: "Kid, keep in mind that those deposits now make you a creditor to the bank. You are lending your cash to a financial institution, which is then authorized to use it for its own purposes. And that institution will almost never have enough currency on hand to return all cash deposits to all customers." To imagine that deposits are the same as cash money in hand is a mistake.

(Now, as you pointed out above, most people nowadays with steady income use direct deposit: the income goes from bank to bank electronically, from a corporate account to personal account. Companies frequently cover payroll via the issuance of commercial paper, a short-term debt instrument that pays out interest and is held by all manner of funds and institutions as a no-risk investment.)

A car purchase can, of course, be made in straight currency; but that is very rare. I'm sure the whole dealership would be atwitter if someone came in to buy a Honda Accord with a briefcase of $100 bills. Usually people use a small amount of cash (or maybe an electronic bank withdrawal) as down payment, and then finance the rest with a loan. But if you can avoid the interest of the loan, it's probably a good idea to do so: the rate on that loan is probably higher than anything you can get on the market without dangerous risk. Still, debt-based purchases can be utilized effectively. My wife and I bought a new minivan last summer, made only one payment, then paid off the rest of the debt on the car with the money that came out of the sale of our house. It was much better for us, financially, to extinguish the car loan than to hold the proceeds of the house sale on deposit. Years ago, we supplied the down-payment on house in part with liquidated stock options, which originally came to me as a benefit from the company I work for; in other words, as a part of my income package.

The point being that you don't have to be some financial whiz (I am certainly not one) to work out wise strategies to convert your income into the necessities and desirables for life. Hoarding currency, even piling up massive deposits at multiple banks, is, at least in most cases, an unwise strategy. Hold on to some currency, for sure; as Tony says, its use as a medium of exchange is itself an important source of value. But beyond that, your income would be better utilized by converting it into other assets.

Paul, I find it interesting that in your examples you are talking about situations where the choice lay between paying off one's *own* debt (or decreasing the amount of debt one had to take on by paying a bigger down payment on a house) and putting money in the bank. There, of course, I agree wholeheartedly that it would be very foolish to keep money in the bank rather than paying off one's own debts or decreasing them.

But that really has little to do with whether or not currency is a storehouse of value. Once we're talking about whether *you* should be in debt or trying to get out of it, then we're in (as it were) negative value territory. The debts you owe are claims against your assets.

The better way to talk about what is or isn't a storehouse of value is to leave personal debt out of the picture for the moment and imagine that a person genuinely has money to save. *Of course* paying off debts comes first. In a sense, if you owe a car loan, you should probably think of yourself as not having money to save. Because the car loan is in a sense a claim against what you save. (If you were to default, for example, or if the car is underwater.) But suppose you have no debts and you are trying to save up for the "next thing" so as to avoid debt. That might be the next car, or the new roof the house is going to need, or some educational expenses, etc.

Now, if the "next thing" is not going to come up for twenty years (say you're saving for your kid's college, and he's a baby now), then I can see going to the hassle of investing in some more solid property that does better (on average) than deposits in the bank at holding value.

But if the "next thing" is going to come up a lot sooner, say more in the five year range, then saving in the bank is usually the better way to go, especially if the savings are gradual (some small-ish amount per month, for example).

And that says right there that it's actually fine and dandy to regard the bank account as a storehouse of value.

Mr. Cella: I see. That makes sense, especially in combination with Tony's explanation. It sounds right. I had not thought of it in that way.

Incidentally, it seems to me that Lydia makes the right argument for state finance on a household model.

it's actually fine and dandy to regard the bank account as a storehouse of value

I didn't say otherwise. I've made several attempts to explain why, despite the common perception, deposits at the bank are not the same as currency. Here's another: when you deposit (read: loan) your $100 to the bank, the bank may immediately use that money to generate $500 worth of assets. Did your currency just magically multiply itself?

The better way to talk about what is or isn't a storehouse of value is to leave personal debt out of the picture for the moment and imagine that a person genuinely has money to save.

Right, so start with storing some currency, maybe quite a bit, if you're a worrier. Next step: lend some money to the bank, in return for a small interest payment. Okay. Now what? If your employer offers a 401k with a company match, max it out. Then what? Then I'd say, find something you think is of value, long-term, and buy some of it.

I just think the household model has real limitations, which need to be recognized. Military might -- particularly things like the capacity to equip and maintain nuclear carrier fleets -- really has no "household" analogy. What is the household comparison to, for instance, the Gerald R. Ford-class supercarrier? Unit costs of $11 billion dollars. What does that even mean? We're talking about the most sophisticated piece of naval machinery ever devised by man. Affixing an assets vs. liabilities calculation, like a family deciding on a Honda or a Toyota just doesn't really work.

Just to be perfectly clear on that last point: in my view the American military, particular the US Navy, is dangerously underfunded for the tasks we ask it to accomplish. Since it seems absolutely impossible to cut middle class entitlements, I would be fine with larger deficits in order to properly fund our armed services. The logistical requirements of preserving a modicum of peace on the high seas around the globe are mindboggling. But the benefits clearly exceed the costs, in my estimation. Fund the Navy, Deficit, shmeficit.

I've made several attempts to explain why, despite the common perception, deposits at the bank are not the same as currency.

But as I said from the beginning, that makes your statements in the main post increasingly irrelevant.

The idea of currency as an actual storehouse of value persists in the minds of millions; but the evidence is piling up to the contrary. Perhaps the time has come for both Right and Left to recognize that a currency is ultimately nothing more than a medium of exchange, which should be saved only for that purpose and not on the presumption that it has any intrinsic capacity to store value or preserve capital.

Very few people these days even think about "currency" in the sense of literal, physical currency as distinct from bank deposits. I understand the distinction. But what "persists in the minds of millions" includes both of these and does not treat them as sharply distinct.

Moreover, let's please not pretend that we don't know where these ideas that currency "should be saved only for the purpose of being a medium of exchange" are coming from. I truly, truly doubt that those from whom these ideas are coming would be *happy* at the idea of saying, "If you save it in the bank, it *is* in an important sense a storehouse of value, and you *should* be able to expect it to keep its value, and the government *is* doing something dubious in terms of the common good if it inflates the currency and causes my savings in the bank to lose value."

Would *you* endorse those statements? Would *you* blame the government for its effect on savings if it engaged in inflation? Wouldn't that be endorsing a "usurious mindset"?

Because here's the thing, Paul: If we grant that, and if policy is influenced accordingly--if, for example, we take an anti-inflationary stance and ask that the "sovereign" try to preserve the value of savings in the bank by not inflating the currency--then physical cash's value will be preserved inter alia. And once again, there will be no point in having the debate over physical cash as a separate matter.

Let's face it: Physical cash, like e-dollars in the bank, like collectible knick-knacks, stock, etc., etc., etc., has more or less ability to "store value" depending on other circumstances, and the government has a special power to *change* those circumstances concerning both physical cash and e-dollars. And maybe it should. There is nothing "intrinsic" about physical "stuff" that makes it REALLY a "storehouse of value" or able to be such, while currency isn't--regardless of whether we're talking about physical currency or electronic savings. The value of a work of art or a 1970s toy varies with the feelings of collectors or the fads of fashion! There is no particular reason to preach that currency, as opposed to other stuff, is especially *not* a storehouse of value but *really is* just a "medium of exchange."

Your statements in the main post are made like some sort of deep, timeless, metaphysical insights. But they aren't. To some extent they aren't even true at all. As Tony pointed out, currency *does* store value for some period of time. And, yes, that's true of physical cash as well as electronic currency in a bank. Moreover, to the extent that both physical cash and e-dollars are *less* good at storing value than some other things (gilt-edged stocks, for example), this could *change*. There is no "ought" that says that people "ought" to "understand" some metaphysical truth and act accordingly. The slogan, "Money isn't a storehouse of value" really can't be supported in any way that would allow it to influence policy. After all, the anti-inflationist can always say, "It does to some extent, and it should do so better, and the sovereign should aim policy to that end," and just repeating the slogan isn't going to help anything.

Fund the Navy, Deficit, shmeficit.

Hmm, not so good. The problem, in no small part, lies with the political difficulty of cutting middle class entitlements. Responsibility, responsibility, responsibility. Don't let those guys in Congress off the hook.


We're talking about the most sophisticated piece of naval machinery ever devised by man. Affixing an assets vs. liabilities calculation, like a family deciding on a Honda or a Toyota just doesn't really work.

Believe it or not, differences of scale do not amount to, "Deficit, shmeficit" or, "So it's really a totally different *kind* of thing" or "We don't need to think in terms of assets vs. liabilities." They are just bigger assets and bigger liabilities. Otherwise our heads are just being addled by sheer bigness, to the point where we're saying that...well...if the government gets big enough, it can stop worrying about being responsible fiscally and can think like something comes from nothing. Bad idea.

Banks are giving really lousy interest rates these days. In many cases, especially for people who have small savings, the only difference between putting your money in a bank account and putting it in a locked safety deposit box is that at least (if you're careful to get a no-fee account) you don't have to pay the fee for the box! It's just safer than putting it under the bed; it won't get burned up in a fire and is unlikely to be stolen.

When people think that their money in the bank shouldn't lose value because the government inflates, it isn't chiefly because they are thinking about getting interest. If they think about it at all, it's pretty much exactly the same way of thinking that causes them to think that physical currency shouldn't lose value because the government inflates. And indeed, if the government doesn't inflate or does inflate, this will affect both in pretty much the same ways.

"If you save it in the bank, it *is* in an important sense a storehouse of value, and you *should* be able to expect it to keep its value

Yes. But likewise a T-bill or an investment of commercial paper. Also: let me ask, the value vis-a-vis what? Some basket of goods? Foreign currencies on exchange markets? How do we establish that something kept its value?

and the government *is* doing something dubious in terms of the common good if it inflates the currency and causes my savings in the bank to lose value."

Inflating the currency can just be a loaded way of saying expanding the money supply. It's not inherently nefarious. When the free economy grows, when new wealth is generated, when new goods and services are produced by human ingenuity, the money supply should expand to accommodate it. Why should it stay static? It would be lunacy to recommend that the 2017 American economy carry on activities with the money supply of 1980.

That said, yes, the government is doing something dubious, and probably nefarious, when it just adds new dollars in order to fund goodies and pork and idle largess. New dollars should be added to reflect growth in productivity and creative achievement.

Put another way, a healthy economy is one where no one's much concerned about hoarding currency or making sure all their income above expenditures turns into reliable savings accounts, or worry that the value of a dollar in 2017 will be notably higher than one dollar in 2020. Instead, they convert their excess income back into productive activity; they invest in the younger generation, take calculated risks in ventures, etc.

Now, of course, bad government and unfaithful stewardship by politicians can and does distort this, thereby generating an unhealthy economy where everyone seeks to grab and hold currency as best they can.

Moreover, let's please not pretend that we don't know where these ideas that currency "should be saved only for the purpose of being a medium of exchange" are coming from.

Not really sure what to make of that. Probably these ideas germinated out of the seeds planted by an old friend of mine from the heyday of Redstate, a New York conservative who later did a popular podcast but who has departed from public life for a few years. I checked these ideas with a former contributor here and was (at the time) somewhat astounded to find them confirmed. Also my reading of the early Reagan years. Finally and above all, my own observations since the financial crisis of 2007-8 and particularly since the Euro crisis a few years back.

I've made several attempts to explain why, despite the common perception, deposits at the bank are not the same as currency. Here's another: when you deposit (read: loan) your $100 to the bank, the bank may immediately use that money to generate $500 worth of assets. Did your currency just magically multiply itself?

It seems to me that this introduces an important distinction that must be made. When people talk about a government "devaluing its currency", it has different meaning for different people, because (I believe) there are REALLY different things that can go under that name. The critical point is: "what kind of money is it? Because there are different kinds of money, there are different kinds of "devaluing" that are possible. As far as I can figure, the main types of money are the following:

1. Money as valued item (e.g. metal coin, cowrie shells, etc)
2. Money as bank note receipts of stored coin or other valued item.
3. Money-of-account as (fractional-reserve-created) bank notes on security assets mortgaged under loans (real assets that actually exist right now).
4. Money-of-account as bank notes on promised future receipts (such as against my future earnings. These future earnings are not real things, they are expectations).
5. Money-of-account as central bank notes that are an additional layer of abstraction from regular bank note money of account.
6. True fiat money printed by an authority who can command its use (taxing authority is just one example, there are others).

It has always been held that when a government quietly dilutes its gold or silver coin without telling everyone, this is immoral, a crime very nearly the equivalent to counterfeiting by individuals. It is, certainly, an attempt by the government to gain specifically via the subterfuge of having people think these diluted coins are just like the old ones. It is, effectively, selling goods under false pretenses, and is immoral at least for that reason.

If a bank in the early 1500's (before the advent of fractional reserve banking and deposits constituting credit / debt instruments) handed out bank notes that were represented to be RECEIPTS of deposits on hand rather than money-of-account - but were in excess of the actual deposits - this too would be immoral for much the same reason as above.

If a bank had hitherto operated (and had publicly stated that it operates) on a 10% ratio for fractional reserve banking (i.e. where $10 deposit is converted into $100 loaned out as money-of-account), for that bank to quietly and without saying so to its depositors switch to a 5% ratio so that it now loans out $200 on $10 of deposits, this sort of devaluing would ALSO be immoral, for exactly the same reasons. However, if it previewed the bank's change with an announcement to its creditors and depositors and the public that they would be changing, and gave the depositors the opportunity to take their deposits out if they didn't like the new arrangement, then no, that would not be the same immoral act, even though from there on out its money-of-account would be worth less than its previous money-of-account.

If a government prints its own fiat money with an official policy that it would print additional money at the rate of the growth of the GNP, and then quietly went about printing more than that to be able to buy shiny new aircraft carriers that it could not otherwise pay for, this kind of devaluing would be equivalent to the above sorts of devaluing that are also immoral. However, if a government prints its own fiat money with an official policy that it would print additional money to represent the difference between the approved budget each year and expected revenue for that year, it would not represent the same sort of immoral act - unless there were an implied standard for how far above the expected revenues the budget would be allowed every year.

In all cases, there is a kind of immorality to the agent in control of the creation of new money to do something different from what people have a right to expect that diminishes their money's value in a way that is contrary to what they had a right to expect. Generally, creating and handing out money DOES have (at least implied) obligations about the value _standard_ that underlies that money. Reneging on that obligation is wrong.

What we seem to have landed into here, is a disagreement on the degree to which people have a right to expect our current government not to devalue our current-cy. The problem is immensely complex, because while we no longer have any significant coin money, we do have an immense amount of bank money-of-account based on actual assets, a non-trivial amount of bank money-of-account based on future expectations, and (interconnectedly) central bank money of account, which central bank is in bed with the federal government but puts out its own Federal Reserve notes which are not DIRECTLY fiat government money. We have, further, a government which "guarantees" a portion of the banks' money-of-account (actually, the FDIC, an insurance plan, provides the primary guarantee, but we believe that the government itself would bail out the FDIC if needed), and which government has a troubled and varying standard about creating new money. We have a central bank that has been willing to change its fractional reserve ratio recently, without announcement.

Clearly, in an environment such as this, relying on the Federal Reserve and the federal government not to alter the basis of the money supply is less than wise (if you have a choice about the matter, that is) - in much the same way that relying on all 1,000 of your borrowers will actually pay you the amounts they owe you, it is foolish to expect everyone will do as they ought, especially when they have proven untrustworthy. Nevertheless, just as a bank has a RIGHT to expect of those borrowers that they pay the amounts owed, so too the people who hold money have a right to expect of the banks, the Fed, and the government that they not alter the basis of value of the money already issued in a way that contradicts the basis of value under which the money was generated and distributed to begin with.

Inflationary printing of new fiat money, by itself and in principle, makes the money less perfect as a medium of exchange, but modest inflation does not completely defeat that use, nor does it completely contradict the "basis of value" of the prior money. Yet it tends in that direction: high inflation (such as Venezuela's was) does generally end up defeating the use of money as a medium of exchange, and brings down an economy. This has been demonstrated repeatedly. Even more certainly, wildly fluctuating inflation undermines money as a medium of exchange, and high inflation usually is accompanied by a lot more volatility, and so is extremely dangerous to an economy.

Can we agree that a government knowingly engaging in monetary practices which can be reasonably determined beforehand will wreck the economy is immoral?

Yes. But likewise a T-bill or an investment of commercial paper. Also: let me ask, the value vis-a-vis what? Some basket of goods? Foreign currencies on exchange markets? How do we establish that something kept its value?

Usually, there is some kind of averaging of the types of goods that people typically buy, and inflation (in the sense of loss of value of a dollar) is thought of vis a vis that average. Not vis a vis something really esoteric that a vast majority of people don't buy, and not vis a vis just one thing. Does that have fuzzy edges? Sure. But it still has rule-of-thumb meaningfulness for the life of the average Joe.

But once again: Once you say "yes," the money in the bank should keep its value, I really think that undermines the whole set of statements about some sharp distinction between those things that are "storehouses of value" and those that aren't. Because honestly, if the "money" in the bank doesn't lose value due to governmental inflation, then neither will the physical money in the mattress. Both will be about equally good or bad as "storehouses of value" in that sense. Of course, the money in the mattress can get chewed up by mice or burned in a fire, which is why I really don't recommend hoarding it. But "Your physical money might get chewed by mice," was, I take it, *not* what you had in mind when you made the original comments in the main post about how money should be deemed as definitely a medium of exchange *rather than* a storehouse of value. After all, in that case the problem could be taken care of by keeping it in coins instead! You appear to mean something about the *nature* of currency as opposed to "real stuff." And I'm just not at all sure that that point can be maintained. Pretty much anything can be either a storehouse of value or a medium of exchange, or both. And money is clearly the kind of thing that not only can be, but is, both to a greater or lesser degree. There's just not a sharp metaphysical division here between what is and isn't a storehouse of value. And that seems to be equally true for bank deposits and for physical currency.

Can we agree that a government knowingly engaging in monetary practices which can be reasonably determined beforehand will wreck the economy is immoral?

Yes, I think we can.

Tony, you make a lot of good distinctions. Another one is that the ordinary appropriation of money by Congress (for aircraft carriers or goodies or whatever) is funded by Treasury with extant money. Treasury either uses tax receipts or sells debt instruments to willing buyers in return for their money. It's the Federal Reserve where the power to print new money resides.

Lydia --

Here's historical data for the Consumer Price Index, going back over a century. You'll note that the last twenty years have experienced very mild inflation -- never even 4% and only cracking 2% once in the last five years. You may note, as well, that the big outlier is the recession year of 2009, when inflation turned fractionally negative. (I suspect if you dug into it more granularly, late 2008 would show sharply negative inflation as well, but that is concealed in the annual data by the spike in energy prices in early 2008.) In fact, it is a simple matter to strongly correlate negative inflation with the worst economic conditions. Remember, negative inflation ("deflation") means that currency is gaining value against a basket of goods: that is the most unhealthy of economic conditions, as I put it above, "where everyone seeks to grab and hold currency as best [he] can."

Once you say "yes," the money in the bank should keep its value, I really think that undermines the whole set of statements about some sharp distinction between those things that are "storehouses of value" and those that aren't.

What I say is this: generally speaking, money should very moderately lose value over time. When a 2017 dollar is 2% more valuable than a 2018 dollar, we're probably in good shape. There are exceptions, of course. (For instance, I'd conjecture that the very elevated inflation numbers for 1946-47 are more a sign of health than misgovernment: the demobilization of the war military, the flood of men back into the workforce: the economy needed new dollars to circulate, in a hurry.)

As for "sharp metaphysical division," I conceded Tony's well-made correction upthread. My phrasing in the OP, "currency is ultimately nothing more than a medium of exchange" was too strongly worded and misleading. But, the OP (on this subject) began with an observation about empirical facts: despite a great chorus inflation warnings, inflation has remained mild for a long time. In mid-2008, the Federal Reserve's balance sheet was around $800 billion. It spiked late in that year to above $2.5 trillion and has hovered around $4.5 trillion for the past three years. Those were securities purchased with brand new money, added, not transferred, digitally to the accounts of commercial banks and other institutions by the Fed in return for a huge pile of distressed assets. And yet, barely noticeable inflation ever since.

I'm not sure that I would agree that deflation is the most unhealthy of all economic conditions. I can certainly imagine deflationary scenarios that would be unhealthy--for example, where costs are low in terms of currency because everybody has become extremely poor, driving prices down for many things. OTOH, the increased value of currency vis a vis some goods and services has been a sign of increased wealth--just think of all the things we can afford today such as electronics that no one could afford before. Even in the area of, say, food, a product like Honeycrisp apples was literally developed in a lab several years ago, has been quite expensive, but the price is steadily decreasing, especially noticeable in the fall, as various manufacturers are allowed to compete at growing them. So there is such a thing as very healthy deflation in the sense of "decreased prices." Nor is a situation unhealthy where saving one's money is a profitable thing to do rather than spending it quickly before it loses value.


Those were securities purchased with brand new money, added, not transferred, digitally to the accounts of commercial banks and other institutions by the Fed in return for a huge pile of distressed assets. And yet, barely noticeable inflation ever since.

And you yourself have said, multiple times, that what has happened to all of that newly created money is something of a mystery and that nobody knows what's going to happen later if it crops up again. "Barely noticeable inflation" has occurred in the sense of increased prices. But obviously a lot of inflation occurred in the sense of increase of the money supply.

But of course, the "barely noticeable inflation" in the sense of increased prices just means that actually, currency has been de facto a pretty good storehouse of value, and fine to regard as such, at least on crudely inductive grounds.

Which I guess we agree on, now?

What I say is this: generally speaking, money should very moderately lose value over time. When a 2017 dollar is 2% more valuable than a 2018 dollar, we're probably in good shape.

I agree...more or less. That is, I believe that in the ideal, the money supply should grow at about the same rate as the wealth grows - i.e. (roughly) the rate of increase should align with the increase in the GNP. However, it is impossible to certainly and definitively identify the rate at which the wealth grows. (And there are also twists on the difference between the TOTAL wealth, and the monetizable wealth, which need to be considered). And, since Paul is right that deflation is very disturbing to the economy, erring on the side of inflation rather than deflation is better for almost all purposes. Hence, slow inflation is, all other things being equal, a pretty good way to peg policy. The conditions over the last 6 years have been fairly good on that score. Indeed, such low rates make it very difficult for a bank to pay interest on ordinary savings and checking accounts - which (if this state of affairs lasts long) would condition people OUT of the habit of thinking they should realize a return on saved money "just because".

Another one is that the ordinary appropriation of money by Congress (for aircraft carriers or goodies or whatever) is funded by Treasury with extant money. Treasury either uses tax receipts or sells debt instruments to willing buyers in return for their money. It's the Federal Reserve where the power to print new money resides.

Absolutely true. However, in our system, the Fed and the government are in bed with each other in a way that is very difficult to pull apart. The notes are "Federal Reserve" notes...but they are also "legal tender for all debts public and private", notably, for all debts to the US government. They are also "backed" by the full faith and credit of the US government. Also, the Fed is a regulated entity, a corporation created BY the government, and limited in certain ways by that charter. But within that framework, granted a broad monopoly. There is no practical way, for example, for a bank to say "we don't want to play by your rules" and issue its own bank notes. More likely than not, one would have to characterize the current money supply as a public / private mostly fiat money, historically rooted in the prior commodity-backed-money (of redeemable notes) but no longer directly related to that historical money. It's a mixed bag, a hybrid.

Part of what has me bothered about all this is that although the standard reserve ratio for banks' creation of money-of-account is set at 3% (10% for big banks), the Fed, for a brief time (I think it was maybe 5 years ago, can't remember) had in effect on its own account a reserve ratio of LESS THAN 1%! Without fanfare, without notice, without anybody saying anything like "gee, you just made my money almost worthless." Thank goodness they recovered quickly and set things back to "normal", but still.

Perhaps one of the least savory of the results of the distinctions I made above is that nobody, neither the banks nor the Fed nor the government, bothers to attempt to distinguish between bank money-of-account that is generated on the back of ACTUAL assets held under collateral (i.e. such as mortgages) and bank money-of-account that is generated on the back of EXPECTATIONS of future wealth, both of which go into the bank's "reserves" to figure the reserve ratio. When one bank with high "asset" reserves consisting of future expectations interacts with another bank with low "assets" like that and high asset reserves based on actual present wealth, at the end of the day (when the Fed settles up accounts between all players) such distinctions are completely lost and it is all just "money" based on "reserves". The net result is that no such distinction actually matters to them.

which (if this state of affairs lasts long) would condition people OUT of the habit of thinking they should realize a return on saved money "just because".

Yep. I'm certainly telling my kids not to expect any interest worth speaking of for money in the bank. I don't press kids to start a bank account until they have a significant amount to put in it for safety reasons or until they need a way to cash or deposit checks from work, etc. Interest on ordinary bank accounts is almost nil. One local bank offers .05 percent on "money market" savings while another offers .4 percent on the highest tier of "money market" savings. That's eight times better but still quite low.

OTOH, the increased value of currency vis a vis some goods and services has been a sign of increased wealth--just think of all the things we can afford today such as electronics that no one could afford before. Even in the area of, say, food, a product like Honeycrisp apples was literally developed in a lab several years ago, has been quite expensive, but the price is steadily decreasing, especially noticeable in the fall, as various manufacturers are allowed to compete at growing them.

That kind of thing is almost certainly not a monetary phenomenon, but rather one of improved productivity and innovation, and most likely accompanied by a gradual increase in the money supply. Recall that real deflation is an actual shrinking of the money supply, mostly by terrified savers hoarding currency and creditors call in debts.

Honeycrisp is actually a fine illustration for my position here: an entirely new product appears and the economy looks for new dollars, new instances of the medium of exchange, to trade in this new product. Could the same money supply accommodate it? Sure, but as Tony says, we want the money supply to grow with the growth in wealth. Honeycrisp (supposing it is popular and profitable to produce) is a perfect example of entirely new wealth.

what has happened to all of that newly created money is something of a mystery and that nobody knows what's going to happen later if it crops up again.

I believe the Fed has started selling back the assets, in small increments, that it purchased during the crisis, and then extinguishing, vanishing, removing -- I don't know what the jargon is -- those dollars it gets in return. But some of these purchases have been on the Fed's balance sheet for almost a decade. I suppose we could see a spike in inflation, but more likely that new money is just part of the new normal, as they say.

the "barely noticeable inflation" in the sense of increased prices just means that actually, currency has been de facto a pretty good storehouse of value

Okay, fair enough. But keep in mind that over the last five years of extremely low inflation, numerous asset classes have done a lot better than merely hold value. Dow Jones and S&P 500 have both almost doubled in value, while NASDAQ has more than doubled. Facebook stock is up 8x since 2013. Broad-based equity has been a solid investment, way better than physical currency or any kind of bank account.

(I know what you're going to say next, heh. "Aren't we due for a recession, in which case a lot of that equity value will vanish?")

Of course, the money in the mattress can get chewed up by mice or burned in a fire, which is why I really don't recommend hoarding it. But "Your physical money might get chewed by mice," was, I take it, *not* what you had in mind when you made the original comments in the main post about how money should be deemed as definitely a medium of exchange *rather than* a storehouse of value.

Oops. I meant to address this earlier.

There are two clear hazards that strike me as important and were unmentioned in your examples, one prudential and one moral. The prudential one is theft, which of currency is very easy to accomplish. I've lost count of how many times a few dollars in coins have been stolen from my car, for instance. City-livin' man. It's useful to have a small amount of currency in the car, and burdensome to remove it every night. So you resign yourself to losing some to theft.

And then there is the moral problem. Speaking for myself, when I have a lot of cash on hand (rare event), I tend to overspend. Instead of a 12-er of Coors Original, I go for the more intriguing micro-brew, which costs twice as much; or maybe even go for a couple high-end drinks at some fancy bar. "Money burning a hole in your pocket" is a moral danger in a way in which "nice gains in your 401k" is not, if that makes sense. Even bank accounts: for like three days after a house sale, my wife and I had five figures in a checking account. Kind of exhilarating, because usually we're watching for overdraft, timing bills out against paychecks clearing, etc. Even though I knew that an upcoming transaction would very soon return things to normal, I still had the old itch to buy unneeded stuff. The presence of an abundance of medium of exchange inclines men to go out and unwisely exchange it.

(By contrast, a couple times my wife and I have just given away unexpected equity gains to the charity. Some special dividend or whatever arrives: "Babe, why don't we just give this to the church?")

Dow Jones and S&P 500 have both almost doubled in value, while NASDAQ has more than doubled.

Yes, my stocks have gained during this time as well, and fortunately I can afford to keep money in stock and not think about it through the ups and downs.

The presence of an abundance of medium of exchange inclines men to go out and unwisely exchange it.

It doesn't have that effect on me and if anything even less so for physical cash. I keep physical cash mostly for particular things--paying the guy who mows the lawn or giving the kids change when they are buying someone a Christmas gift. With physical cash I'd be thinking, "No, no, don't spend that $10 bill. You'll just have to go to the bank sooner during business hours and get more tens, because the darned ATM will only give twenties."

In any event, it would be better in some ways for someone inclined to spend to have to save up cash in the bank for his splurges rather than putting his saved money away in a fairly non-liquid form and then being tempted to carry a balance on a credit card as well. Credit card debt is a worse temptation than spending money in the bank that you actually have. Worse, that is, from the perspective of what it does to one's fiscal situation.

By the way, Paul, I wanted to thank you for this wonderful little paragraph:

It’s almost as if solidarity and fellow-feeling among neighbors and countrymen — call it, I don’t know, “patriotism” — works better at preventing pernicious accumulations of wealth and power, than massive continental structures of regulation and bureaucracy. And it’s almost as if an unending obsession with diversity, difference, peculiarity, accompanied by a relentless denigration of the culture men once held in common, undermines that fellow-feeling, thereby clearing the path for the most cynical capitalists to accumulate wealth and power.

Well said, indeed.

One can attack the culture, but one cannot absolutely do without culture. What happens when an insane revolution attacks culture as such is that it gets replaced, not by the conscious decisions of men who intend something better, but by Satan tugging strings and manipulating men. And we know what kind of culture Satan loves: the Reign of Terror of Robespierre, the murder of 20 million Kulaks, the mountains of skulls of the Aztecs.

Paul J Cella,

New dollars should be added to reflect growth in productivity and creative achievement.

How does that supposed to be implemented? By which knowledge new dollars are to be conjured up? Isn't this conceit of central planners that they can do so?
The central control of credit and interest rate was a demand of the Communist Manifesto. Is it now to be adopted by the Right?

There is also a political and moral problem that the earlier recipients of the newly created money, say the banks or defense contractors or civil servants, are enriched relative to the rest of the population that only receives the created money later.
Should a Govt engage in this behavior that unfairly privileges particular segments of the population?

Mactoul, as I suggested above, new dollars at the rate at which the economy itself is growing is reasonable - any less than that and you have actual deflation. The growth of the GNP is a decent representation of that, though no measure is going to be perfect - and it's not necessary for it to be perfect.

In our system it's not the defense contractors that get the new dollars first, it's through the Fed. And yes, that does concern me: ALL of the creation of new money is through the Fed and through the other banks, and I am not at all confident that this is as it should be. In point of fact, the banks create money-of-account every day when they loan $100,000 on the back of a $10,000 deposit. One might say that it's not really the BANK that is getting the money, it is the borrower...but somehow the banks do constantly get richer in the process.

Given the government control of the money, is it any surprise that the government constantly grows and is ever more intrusive?

Do the government has to ask people to buy bonds as they did in the world wars?

This sentence from OP is curious

i

n line with their defense of nations, they think sovereign states should have access to currency devaluation as a respectable policy tool;

The basic principle of equity is that the lender must be made whole. But is it possible when the government deliberately devalues currency? Isn't currency devaluation a fraud perpetuated on lenders?
And what possible connection it has to do with "defense of nations". I suppose it is meant in the European context.

All this is pretty much antithetical to limited government.

Thanks, Tony. A perfect example, on the horizon, is the Leftist eagerness to hound and harass, like hares on the hillside, all authentically orthodox Christian businesses. As I asked a liberal friend once, "Do you think rapacious monopolists and rootless financiers will be more or less empowered when their path to worldly gain is cleared of the obstacles of all those little shops and firms whose charter as a business includes something higher than mere capital accumulation?"

The basic principle of equity is that the lender must be made whole.

Not all lending is created equal. For more on that, see here. Unless the loan is made out of charity, and thus bears no interest, then lenders should consider the capital they have lent as a partnership in an economic enterprise. Closer to equity investments, in other words, where there can be no promise to be "made whole." This for the simple reason that there is no "basic principle" that an enterprise will succeed; when it fails, an established capital structure, presumably worked out by contract beforehand, will determine what of the surviving capital will go to whom.

Isn't currency devaluation a fraud perpetuated on lenders?

Possibly, depending on circumstances. But by the same token, deliberate currency deflation may well be a fraud perpetrated on borrowers. But in any case, as Tony and I have said a couple times now, steady, moderate, predictable expansion of the money supply is ideal for a growing economy.

Paul J Cella,

All deliberate manipulations with currency are suspect ethically and politically. You don't seem interested in the argument that giving government authority to manipulate currency is directly linked with ever-growing ever-intruding government-something a small-government conservative should be against.

Your proposal that governments should be ethically free to devalue their currency is essentially a recommendation to default on the loan whenever expeditious. There is no bearing on "lenders should consider the capital they have lent as a partnership in an economic enterprise." Even if government an economic enterprise in which the bond-purchaser buys a partnership, it is unethical for the borrower to revalue the terms of the partnership in his favor.

Your proposal that governments should be ethically free to devalue their currency is essentially a recommendation to default on the loan whenever expeditious.

Paul has said, and I concur, that steady and predictable modest inflation is a good idea. If you have steady and predictable modest inflation, all loans with interest will have that inflation rate built into the loan interest rate, and the lender will indeed be "made whole" in terms of being paid an amount equivalent in value to his principal lent out. This definitively avoids the evil of devaluation effectively resulting default on loans.

There is no way to avoid the government having some kind of say over the money supply: even if the government is not printing it, it is regulating those who do produce it. It must at least do the latter. Unless you want to outlaw fractional reserve banking, the banks DO increase the money supply. Governments are not ethically free to just let banks do whatever they feel like, because they can easily bring down a whole economy. In regulating the banks, then, the government MUST have a policy regarding the rate(s) at which the money supply increases, not "whether" the money supply increases. For the money supply to remain fixed while the economy grows is to institute DEflation, and this too is an injustice - to borrowers.

It is indeed true that we should always keep an eagle eye on the government as it regulates the actors who control the money supply. The government can easily use the obligatory oversight to skew things badly, so we have to pay attention, and keep the government honest as it goes about its business of maintaining a steady hand on the wheel. But that does not get the government OUT of the business of oversight of the actors who control the money supply.

Your proposal that governments should be ethically free to devalue their currency is essentially a recommendation to default on the loan whenever expeditious.

Well, this may shock you, but I do, by and large, agree with the latter proposition. For corporations, strategic defaults are not an uncommon practice. There is an entire wing of finance concerned precisely with distressed assets, which largely means loans and other debt instruments that are in technical default. The form of loan where the borrower is morally obligated to make the lender whole is a loan out of charity, not one for profit and thus bearing interest. Once introduce the profit motive, with interest, and we're in the realm of business association: the lender is part of an economic enterprise and his capital is staked in its success or failure. He can't stake that capital and have it too. What happens in the event of failure or default will, again, depend on the capital structure agreed upon in the original contract.

Now, mind you, strategic defaults are not something anyone should lightly get involved in. The consequences can be severe: immediate damage to the value of all your other assets, loss of previously available credit, finding yourself at the mercy of the wolves of the above-mentioned distressed-asset finance, etc. A very good rule of thumb: if you can avoid default, do so. But there are exceptions.

On the scale of nation-states, let's likewise recall that lenders do not purchase a country's debt out of the pure goodness of their hearts. The Chinese do not buy Treasury bills in order to extend to Americans a charity. Neither do all the hundreds of funds which buy pristine new Treasury debt with every issuance.

The context of the OP is Europe, where for decades folks ambled along under the illusion that Greeks and Italians should be able to borrow at German rates, via the euro. It was folly on both sides: lender and borrower. Greeks and Italians would be better off restoring their own sovereign currencies, I think. (But the lure of those German rates is part of what prevents them from doing so.) Last year, the British surprised everyone by making an admirable effort to, in John O'Sullivan's words, "retrieve sovereignty from a remote bureaucracy that was governing badly."

Well, this may shock you, but I do, by and large, agree with the latter proposition. For corporations, strategic defaults are not an uncommon practice. There is an entire wing of finance concerned precisely with distressed assets, which largely means loans and other debt instruments that are in technical default. The form of loan where the borrower is morally obligated to make the lender whole is a loan out of charity, not one for profit and thus bearing interest. Once introduce the profit motive, with interest, and we're in the realm of business association:

I see the rationale of this, but I still don't exactly agree.

Let us agree that in a loan out of simple charity (I lend my neighbor $10 to get gas for his car to go to work, because he is out of cash at the moment), the borrower is morally obliged to pay back the principal...if he can. Part of my charity is accepting the "if he can" part of that: if he cannot, I let go my claim to $10. That's the charity part.

It is inevitable, though, that in the midst of my deciding (or, through bankruptcy court, society deciding) that "he cannot repay the debt", that it is made abundantly clear that he is not a good risk for future loans, at least for some foreseeable future period. His bad "credit rating" that results is a per se result of deciding "he cannot repay", it is not a punishment for, say, bad behavior. (There may be, in addition, a social punishment for whatever bad behavior of his that MADE IT so that he was unable to pay, such as becoming a drunk, but there need not be such a vice involved since sometimes people just fall on hard times.)

In a business loan, things are a little different, but perhaps not as much as you seem to suggest, Paul. Suppose that I loan $50,000 as a lender to a new business venture my cousin has, who has invented a new machine that (he thinks) will make X activity better / easier / cheaper / more worthwhile. The loan deal is that I will get $100,000 in 5 years. If, of course, he makes a go of it and generates some revenue. I am not a manager, nor am I an "investor" in the sense of getting a "piece of the pie"; he is responsible for running the enterprise, he is working his 8 hours a day on it just like any job, and he gets all of the profits (after paying expenses and loans). Suppose, as sometimes happens, that 2 years into it, things kind of look pretty sour: there were regulatory hurdles that he could not easily anticipate, the market in X kind of dipped, he got ripped off by a supplier. There is a point in such a process where one can say: "if we stop now and cut our losses, everybody will lose 2/5 of what they put in, but by liquidating they can recover 3/5. However, it is not certain that we cannot 'get past' the hurdles, and indeed, with sufficient energy (i.e. 12 and sometimes even 14 hour days), determination, courage, patience, and a little humble pie, we have a decent shot at turn this whole thing around and make the enterprise work after all."

The pure mentality of "strategic defaults" is a mentality that habitually rejects that last sentence, where the cousin says "I have no moral obligation to increase my commitment to the enterprise to that extent, I have no moral obligation to TRY to make my backers' money back for them, they knew coming in the door that it was a risk, and if that risk doesn't pan out, well tough luck for them."

I disagree that the cousin "has no moral obligation to try" in that sense. Speaking generically, while the legal ramifications of a default are what are present in the contract's terms, that doesn't mean that that covers all of the MORAL aspects of such commitment. It is not sufficient to say "the contract didn't say how many hours a day I had to work, it did not say I had to eat humble pie and be extra nice to the early customers who felt unsatisfied with my early products." And so on. There is ALWAYS a larger moral context to a contract than just the contract.

A similar thing can be said of bailing out on a house where you are under water just because you are under water. If you are living in the house as your home, and due to the 2008 crash you went 50K underwater, selling now solely to get out of the underwater arrangement and then buying another house next door (without a loan, because you tap your 401K), is legal but not necessarily morally sound. Yes, if the bank was smart they factored in a certain number of defaults and losses, but manifestly the banks did NOT factor in a crash and losses on 30% of the houses they have a mortgage on. I simply do not agree with the mentality that "as long as the contract legally permits me to get out of the contract and stick them with all of the loss, I have a moral right to do so." One of the things that leads me to say so is that if that were within the moral norm, doing so should not reduce your credit score. Indeed, if sticking the bank with all of the loss purely because you can, if there were no moral reason not to, would be the PRUDENT and UPRIGHT thing to do, and you should be getting a pat on the back from other financial institutions for properly recognizing your own financial best interests and following them. Nobody should be saying "you failed and you will have a price to pay", they should instead be saying "the bank failed and you were smart to hand them that loss, good for you." But they don't.

The cascade of effects of loan defaults DO NOT simply treat a discretionary default as "good business action", they treat it as something more important than a pure decision about gain and loss on that one loan. They treat it as if you had a moral commitment to try to pay the loan off if you could.

Another way to describe this is to say that a non-recourse home mortgage loan on your home IS NOT simply a joint business venture on the value of the property. It is a LOAN, and a loan is not the same thing as a joint business investment, it is in the same genus (loan) as a mutuum loan without interest. Loans are loans. The primary meaning of "loan" is that the borrower will "pay back". Proper 'investments' (such as shares of stock, or membership interest in a partnership) are not really loans, they have no presumption of a "pay back" because there is no "back" in its essence. The title to the mortgaged home reflects this: the name on the title is YOUR name, not your name and the bank's name (not a joint venture). The taxes are legally YOUR obligation, not yours and the bank's. If you want to sell the house, you can do so, you don't have to ask the bank. You are the owner, the bank has a lien on your home, which prevents you from doing certain things, but everything else is up to you. Nor is the bank an pure "investor" in your home, simply speaking: they don't get any piece of the profits if the home goes up in value, they get paid the loan payments and not a dime more. They don't take any of the loss if the house loses value but you finish making the payments anyway. They are a LENDER, the contract is a LOAN, which primarily refers to paying back the borrowed money. The loss they take if the property BOTH goes under water AND you decide not to pay back the payments is the result of the secondary feature of the loan, the "in case" provisions in the contract that provides that their recourse is limited to stated set of assets. But the "in case" provisions refer to "when the primary terms are not met." The loan contract has a primary obligation (pay back) and a secondary set of terms, otherwise the contract would actually be a joint venture with the individual (you) getting 'right of first escape', or even an 'installment sale with option' because the 'default' would just be the exercise of the 'option'. But nobody calls it these things. Nobody treats the borrower as simply exercising his option.

Paul J Cella,

The form of loan where the borrower is morally obligated to make the lender whole is a loan out of charity, not one for profit and thus bearing interest.

Surely the principle ---that a borrower return what he borrowed--underlies all taking of interest. Why else one pay any interest?
The concept of opportunity cost that justifies interest-taking makes no sense unless one accepts that the lender must be made whole.

Mactoul, the principle Paul cites is the fact that it is immoral to take interest on a mutuum loan, what he refers to as a "loan out of charity", i.e. one where there is no persistent asset that underlies the reason for the borrower getting the loan and constitutes the security for the loan. In this case, the source of intent for the lender lending is the lender's good will, because he expects no benefit from it. Because charging interest on a loan of this sort is actually immoral, the borrower is not morally obliged to pay any interest. He is, however, obliged to pay the principal back.

In the other kind of loan, where a lender provides money to a borrower so he can buy an asset that is collateral for the loan, where the amount the lender can demand if the borrower cannot repay is limited to the value of the collateral, the lender is taking a risk on the value of the asset that stands as collateral, and may reasonably charge a premium for accepting that risk, and this is legitimate interest. In one sense, the borrower is "not (legally) obliged" to pay the whole principal back, because there are explicit terms for what happens if he does not pay it: the lender takes the collateral asset and sells it and takes the proceeds - up to the amount due, the principal plus interest - and turns over any excess to the borrower. If the asset is worth less than the principal plus interest, the lender is left with nothing more to demand and the contract is "satisfied" even though the borrower has not paid the full amount "due". That's why it may be said that the borrower "does not have to pay the principal back."

However, more precisely, the borrower "has to" pay an amount LARGER than the principal (if he doesn't want to go through the secondary "default" provisions), and technically one should not refer to his paying interest as "paying back" the interest, since this is the lender's GAIN, over and above the principal he lent, and he is not getting the interest "back" he is getting the interest anew, over and above what he lent.

It is, (as I indicated from my comment yesterday), not exactly correct to simply say that he has no obligation whatsoever to pay back the principal on the loan. What is more correct is to say that he has a LIMITED obligation to pay back the principal. That captures the nature of the contract properly. He is "in default" if he does not pay the FULL amount due - which includes the principal and interest, not just principal - and there are pre-set contract terms for what happens if he goes into default. Those secondary terms of the contract provide that IF the asset can be sold for the full amount due, the lender can force a sale and collect his full amount due; whereas if it cannot be sold for the full amount, the lender is limited to forcing a sale and collecting whatever it is worth (which might be 0). The secondary terms, in case of default, LIMIT the borrower's ultimate legal obligation to repay.

It is, however, the norm for lenders to look both at the value of the property AND at the borrower's ability to make payments when they lend in such a loan. And it is, arguably, a moral defect for a borrower to refuse to repay on his home loan where the home value has dropped below the amount due (even if it is more than the principal), but he has plenty of cash available from which to pay the full amount due. There is, arguably, a gap between the legal obligation and the moral obligation, which is reflected in the fact that (a) it is, still, called a "loan"; (b) the secondary provisions are for when the loan is "in default"; (c) the borrower is considered to have "failed" to pay the amount due, with ongoing financial consequences of such a "failure". Ultimately, the borrower should intend to pay back what he borrowed in a loan (or it's not a "loan"). But this is not because he agreed to pay interest, it is rather because he accepted a loan (which is a broader concept).

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