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How Libertarians Were Misled to Fear Money.

by on March 28, 2013

“If you repeat a lie often enough, it becomes the truth. ” Joseph Goebbels

Money and currency are vital for means of trading in an advanced economy, and is relied upon for nearly all forms of transactions. So it is vital to understand its purpose and its effects on our economy.

Understanding how our currency works should be taught before people graduate high school. That is how important it is. Every American who votes, does so purportedly to elect leaders to help guide our economy, so it should be an important concept to understand before people hit the voting booths. But, it is widely ignored in our educational institutions.

The nation is then stuck relying on non educational institutions to tell us what American people need to know in sound bites, via the media, politicians, and economic pundits who are paid by our media, to add an aura of authority to it. When it comes to discussion on currency and money, it largely is based on the fear of inflation and devaluation of the U.S. currency.

This fear of inflation and devaluation is mostly derived from a libertarian mindset that money creation equals inflation. Most of the academic level libertarians don’t actually hold this view, but their armies of arm chair economists, who influence the voting booths, have a much larger influence and they are the ones who typically scare Americans into this belief.

Milton Friedman, one of the most influential figures of modern libertarianism, said this:

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” Planning for Freedom, page 79

This divergence from a realistic approach on inflation, to what we have today from libertarians, most likely occurred from the era of stagflation (rising prices, and high unemployment) we experienced from the oil embargo in the 1970s. At the time, and still today, many liberal and conservative economists know that this era of stagflation was caused by a sharp rise in food and oil costs.

Milton Friedman seized this chaotic period to influence future policy makers by claiming this stagflation was “printing based” and not from an actual measurable cause such as the oil embargo. To this day there is no correlation that has been drawn up to show that loose monetary policy, printing money, caused the stagflation period. Friedman’s original quote actually suggests that inflation won’t occur until we reach full employment. The divergence from Keynesian economists is that Friedman believed that there was a natural rate of full employment (NAIRU), that would be inflationary.

Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes the politically inevitable.”

Milton Friedman “Capitalism and Freedom”

This specific time in history is where libertarianism lost its way with understanding inflation and what causes it. The claim here isn’t that Friedman changed things on his own, but that the idea of money printing causing inflation first entered the American psyche on a mass scale around this time, and thus a myth was born: NAIRU.

This myth wouldn’t be so bad to our country if it was just held by the minority of our population that makes up libertarianism. Unfortunately, as stated earlier, it has seeped its way into our media and our economic decision makers holding office, and one would be hard pressed to not find someone who automatically responds to printing money with the question: “Won’t that cause inflation?”

Let’s rewind and go back to what Friedman said about inflation, which referred to it being caused by printing past full employment. He was right in this statement but wrong in introducing NAIRU.

Inflation is not caused by money printing, but an increase in the price of commodities (like oil and food) from shrinkage of supply. When demand stays relatively the same or increases and supply of that commodity shrinks or doesn’t keep pace with the increasing demand, we see inflation. So we are seeing inflation today because there are certain “high demand” items that are difficult to produce more on a mass scale, e.g. energy and food.

If we are to take Friedman for his word about causes of inflation, then the factor of wage increases would be an indication that NAIRU might have some merit. But with unemployment being so high, the pressure on wages is downward, since the unemployed are at a bargaining disadvantage. And those that are employed are stuck with taking pay cuts to avoid the unemployment office lines.

So pay attention to what is happening today. We are nowhere near the levels of inflation in the 1970s, but we are definitely experiencing higher unemployment levels. As prices start to rise in health care, education and oil, be prepared for those inflationary commodities to possibly push us into a similar stagflationary period. What Americans sorely need is more money via more jobs to combat inflation, not more myths!

“The only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others”. John Stuart Mill, “On Liberty”

Libertarians largely believe that inflation from money creation causes undo harm on people. This belief that money creation leads to inflation is a false one. So if their premise of inflation as being harmful is no longer a detriment to money creation, then it necessarily follows that the benefits of money creation should be a platform for libertarian beliefs.

If people could have access to more money, via a job, wouldn’t that give them more freedom, without risk of harming others? Isn’t it also apparent that the lack of money does in fact cause harm?

The most likely argument against this would be that it would cause harm to the tax payer who would have to fund this increase in spending.

Why Taxation as Revenue is Obsolete:

There are two other myths that many Americans adhere to: 1- Future generations have to pay for current government spending, and 2- Government needs taxes to spend.

There has only been one instance in this nation’s long history that the entire government debt was paid off. And what happened after that was the worst depression in U.S. history that many people probably never even heard of. Since then the government has always been in debt and since then generations have passed without requiring their grandchildren to pay it off. The evidence is here in U.S. debt history that grandchildren will never have to pay off this government debt.

Probably the most damaging myth, held by most Americans (not just Libertarians), is that taxation is needed to fund the government. The previous paragraph points out how taxes have never funded the government debt; the government spends regardless of how much it takes away from us in taxes.

The United States government is monetarily sovereign, so it has no reason to collect taxes to fund anything it does. In fact it can’t collect taxes from us, unless it creates that currency in the first place! This fact has been known by a few in government for a while now but for some reason it never enters into mainstream economic thought. Beardsley Ruml, who served as a director of the New York Federal Reserve (1937-1947), wrote that taxes for revenue are obsolete at the time we went off the gold standard:

“What Taxes Are Really For

Federal taxes can be made to serve four principal purposes of a social and economic character. These purposes are:

As an instrument of fiscal policy to help stabilize the purchasing power of the dollar
To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes
To express public policy in subsidizing or in penalizing various industries and economic groups
To isolate and assess directly the costs of certain national benefits, such as highways and social security.”

These are the things that libertarians should be adhering to as a policy base in order to be true their credo of causing no harm. Specifically the first purpose, which indicates that one reason for taxation is to prevent inflation, otherwise they are not following the most basic premise of their belief structure.

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4 Comments
  1. Milton Friedman: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”
    Jct: More money chasing the same goods, Shift A inflation, has to be the problem since poor Milton just can’t imagine the same money chasing less goods after foreclosure, Shift B.
    So they start the discussion by limiting the scope of their investigation to what the inflation they expect to see much like a drunk looking for his car keys under the lightpole because that’s where he can best see.

    Inflation is not caused by money printing, but an increase in the price of commodities (like oil and food) from shrinkage of supply.
    Jct: The increase in the price of all commodities from the shrinkage of supply by foreclosure on products we couldn’t afford to buy when priced at Principal+Interest and we only have P.

    What Americans sorely need is more money via more jobs to combat inflation, not more myths!
    If people could have access to more money, via a job,
    Jct: That’s backward. Americans need more jobs via more money to combat inflation. You can’t have new jobs without without new paychecks and to say that new money comes from new jobs misses the point that new jobs come from new money first.

  2. I am so happy to read this. This is the type of manual that needs to be given and not the random misinformation that is at the other blogs. Appreciate your sharing this greatest doc.

  3. “Jct: That’s backward. Americans need more jobs via more money to combat inflation. You can’t have new jobs without without new paychecks and to say that new money comes from new jobs misses the point that new jobs come from new money first.”

    I was implying that new money would be needed for those new jobs.

  4. Kyle permalink

    “So we are seeing inflation today because there are certain “high demand” items that are difficult to produce more on a mass scale, e.g. energy and food.”

    The author deserves a Nobel prize in economics for that sentence alone. I wish everyone in the world would get this through their skulls!! Excellent article!

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