Potjeh wrote:I'd say that a country's granary is a much better measure of it's real wealth than it's treasury. The food supply determines how large a population the country can support. Rate of production of real wealth is proportionate to the size of workforce, which is proportionate to the size of population. Effectiveness of food production also determines how many craftsmen, artists, philosophers, doctors and most importantly soldiers the country can support. With good enough motivation, you can have an army that fights without pay, but you can't have an army that fights without food. Sure, you could use gold to hire mercenaries, but if you don't have an army of your own they may find it easier to just take all your gold rather than earn some of it (I'm sure there's plenty of examples of condottieri doing this in Renaissance Italy). You can buy food for gold in peacetime, but making yourself reliant on food imports makes you susceptible to blockades and sieges, and someone will soon capitalize on that susceptibility. Even if it doesn't happen, you're at the mercy of your trade partners, who can blackmail you into anything with threats of embargo.
Of course, this all refers to a pre-industrial world. In a modern world, the things are quite similar, but food has been mostly replaced with energy, primarily oil. Most countries today try to be energy independent as much as they can. For an example of what happens when they're not, see the gas crisis in Europe. All the gold bars in Germany couldn't heat the apartments when the valves got shut.
A man with no bread in his cupboards but 100k in the bank is thus poorer than a bum with a hotdog. After all, the supply of food determines how many philosophers, craftsmen and artists the bum can support. I trust that you see that this is simply not the case. The point of having a currency is that it is exchangeable for the widest variety of general goods, and thus a liquidity that can be used to cover many potential situations that arise. Grain is useless if you need ammunition, and countries -- like people -- bank on the fact that currency is easier to exchange for most anything than is grain. Naturally many countries (and people, and companies) have strategic reserves of critical goods as well, but they have those to cover the eventuality of a break down in their ability to trade, which can certainly happen in the event of war, a natural disaster or whatever. You can naturally seek to store wealth in many forms (stocks, bonds, or, yes, even grain). The divide between a barter economy and a monetarized economy is not a hermetically sealed one . Sometimes barter between goods can be equally effective, and currency is really just a means of making barter simpler by allowing for higher resolution and generality in terms of exchange in a relatively neutral medium.
As for inflation, it's a *good* thing if it's moderate. People need incentive to spend or invest their money, because taking capital out of circulation is a cardinal sin against the national economy, and hurts everyone who participates in it. Having stockpiled money gain value over time is a horrible idea, because it would encourage people to put it in their socks, which would further raise money's value and start a vicious circle that kills liquidity in the national economy. Money kept in banks is different, because banks invest that money via loans, which help growth of total wealth by enabling people to start new businesses.
This is a common expression of the theories expounded by JM Keynes, who in my personal estimate is one of the greatest economical charlatans of the 20th century. Money saved is not a threat to the national economy, but quite the contrary. The crucial point that you miss here is the point from time preference. Money I save in the mattress is simply deferred spending that I will -- at some point or another -- spend. From your own personal perspective you should be able to see how it makes economical senses for a person to save money (To be able to afford a house, to cover an unexpected eventuality, to X, Y or Z). Money in my mattress is just as invested as is money in the bank, I have it on hold until I need to use it, quite simply. I have thus deferred some of my own present spending in favor spending at a latter date. The stored wealth of others is not a threat to you, and believing that it is is a breeding ground for bad policy.
The beauty of money saved "in the mattress" is precisely that it is not invested in the formal sense that you are thinking about. That means that my personal wealth is not at the mercy of some snooty banker fresh out of business school and the investments he decides should be the target of my savings. A sin against the national economy that I would like to decide for myself where -- if anywhere -- my money should be invested? I am sorry, Comrade, I wasn't aware.
And yeah, it's stealth taxes, so what? Infrastructure, defence, public services, they all take money. If the government didn't get money through this stealth tax, it'd just raise regular taxes. Higher regular taxes are worse for business than moderate inflation.
Is there anything else you think the government should be doing bei Nacht und Nebel, rather than openly and admittedly? Taxation is an attack on the personal sphere of an individual, and if the government is to not become repressive or totalitarian, it should not conduct its business without openly informing the individual of that. The hidden nature of this tax deprives the individual the means of making an informed decision concerning his country's political future at the ballot box, and I actually fail to see how you can at all defend or prefer that to open taxation. If you take money to use for public purposes you should be clear about where that money is going, how it is being spent and how much is being taken. Anything else is just despotism, arbitrariness and the end of the rule of law. Hidden taxation denies the individual the ability to have the taxes tried before a court of law.
The bottomline is that modern economy is a lot more efficient than the medieval economy, precisely because of fiat money. The cases where overprinting of money caused spread of poverty are notable exceptions, and they mostly have other reasons behind them. Weimar Republic, for example, did have a crazy rate of inflation and it's people were driven into poverty. But the real cause of this poverty wasn't printing of money, it was the oppressive Versailles treaty. When you have to give a significant portion of your production to other countries, your people will be poorer. There's simply less goods to go around, no matter if you use gold standard or fiat money.
Modern economy is certainly more efficient in many senses than many historical economies -- money is easier to transfer, if nothing else -- but that is in spite of fiat money, not because of it. The greatest period of economic development in Europe is most likely the 19th century, throughout which most all European countries employed a gold standard. The fundamental problem caused by inflation is of course the economical boom-bust cycle, which is not an inherent phenomenon of a free market, but a problem created by the arbitrary inflation of the money supply.
I certainly agree with you on your estimate of the Versailles treaty.
by jorb » Thu Jul 22, 2010 6:34 am 
