Milton Friedman Isn’t Required To Confirm That Monetarism Is Monetary Phrenology

Anna Fifield is a long-time reporter on North Korean matters for the Washington Post. In a book Fifield wrote about the dysfunctional country, she noted that the U.S. dollar is the currency of exchange there.

Where it perhaps gets interesting is just how common this monetary state of affairs is. As I point out in my new book The Money Confusion, a majority of monetary transactions that take place in Venezuela are refereed in dollars. In Argentina, if you want to buy a house you better have dollars. The Argentine peso’s history of endless devaluations render it unfit for exchange, much as 3,000+ devaluations of the Iranian rial since the 1970s have had the impact of sidelining it as money. Where local currencies aren’t trusted, the dollar is routinely king.

That it is shouldn’t surprise us. Underlying all monetary transactions is the exchange of goods and services. Since it’s always and everywhere products for products, the money must be reasonably stable. That is so because producers would prefer to not be ripped off.

At which point some readers are perhaps wondering why dollars are globally circulated, and can be found in countries generally seen as enemies of the U.S. Does the Federal Reserve “supply” dollars to these countries? No. Not at all. It couldn’t even if it wanted to, or if it were legal for it to. For a central bank to “supply” money is the equivalent of it presuming to know how much production will take place in a city, state, country, or continent, and when.

In reality, the “supply” of money is a natural consequence of production. The Fed doesn’t place dollars around the world as much as the production that takes place is a magnet for financial intermediators who facilitate exchange. Just as government bureaucrats can’t plan production, they similarly can’t plan the monetary flows that move the production. That they can’t is of no real economic consequence given the happy truth that reasonably trusted money is as natural a market phenomenon as the market goods that it aids the movement of.

To paraphrase Ludwig von Mises, no individual, business, city, state, country, continent or planet need ever worry about the so-called “supply” of money. Where there’s production there will always be money to navigate it to its highest use. See above.

Despite this market truth, there are economists in major numbers who still believe that economies are reliant on central planners of “money supply” in order to function. Count Johns Hopkins professors Steve Hanke and John Greenwood as believers in this impossible state of monetary affairs. So-called “money supply” is “something that they control.” The “they” in this instance is central banks. It’s the view of Hanke and Greenwood that money in circulation is something central banks can control even if they don’t.

What they contend quite simply isn’t true. See above. The dollars in circulation around the world aren’t controlled by the Fed, and they’re similarly not controlled by local central banks. If anything, they’re “controlled” by production. Money in circulation is production determined. Hanke and Greenwood are presently based in Baltimore and London. Their locations are instructive. Dollars circulate in much smaller amounts in Baltimore than they do in New York City, while pounds are circulated in much larger amounts in London than they are in Leeds. Central banks didn’t plan this, but production did.

All of this is relevant given the endless opinion pieces published over the past couple of years by Hanke and Greenwood that presume “money supply” is either planned by central bankers, or should be. No, money is a consequence as opposed to an instigator.

Hanke and Greenwood’s opinion pieces have generated a fair amount of pushback, including some who question the economists’ monetarist magic. A recent letter-to-the-editor in response to the Hopkins economists pointed out how Monetarist School hero Milton Friedman disavowed what vandalized reason (the quantity theory of money espoused by monetarists) in a 2003 Financial Times interview, only for Hanke and Greenwood to respond that Friedman’s admission wasn’t really an acknowledgment that central planning didn’t work. Which really misses the point.

The simple truth is that those Hanke and Greenwood refer to as “anti-monetarists” didn’t nor do they need Milton Friedman to confirm what’s already obvious. All it takes to see that monetarism never worked and never could work is to think rationally about money. It has no purpose absent production, and since it doesn’t the amount of money in circulation cannot be planned simply because production can’t be planned. Central planning didn’t just fail in the 20th century, it did so murderously.

It’s just a reminder of what is plainly evident. What one academic says or said on the matter of money isn’t very meaningful now, nor was it ever. Money is abundant where production is, and it’s scarce where production is slight. That’s not an academic statement as much as it’s a statement of the obvious.