13: Monetary Policy
States attempted to facilitate economic activity by creating a singular form of currency for use in commercial transactions - in effect, to mint currency that was standardized and to apply force of law to ensure that it remained reliable, such that commerce could be relieved of the necessity of validating currency.
However, it shortly followed that government attempted to leverage its control over money as a means to certain political aims, often to its own advantage, by legislating the prices of goods and then debasing its own currency to its own advantage, generally at times when the government itself experienced a fiscal shortfall and needed more purchasing power without the inconvenience of extracting it directly from its citizens.
There is also the matter of government coin in International trade, and a similar attempt by the state to gain an advantage for itself, at the expense of the nations with which it conducts trade, by attempting to manipulate the value of its money.
(EN: This seems an ill-conceived notion, as the value of money in exchange derives from an agreement between buyer and seller - and especially in International trade, in which a state has no authority over the foreign policy, their ability to recognize this practice and make an independent valuation, not to mention the potential to refuse to accept a given currency altogether, makes supply-side manipulation short-lived.)
The attempt by the state to arbitrarily fix commodity exchanges, particularly in the attempt to fix the value of exchange before gold and silver when both were in use as currency, has been in vain, and has had little influence on the use of currency in the market - though admittedly, considerably more influence on producers of gold and silver, who can be easily influenced to mine and refine more or less of their metal based on their relative values. Essentially, this is a problem of exchange value of the commodity goods, and not a problem of the intrinsic value of money.
Unfortunately, politics often relies upon public opinion, which itself is often dominated by erroneous views on the nature of money and its value. Money itself is viewed with a great deal of superstition, cloaked in myth and conspiracy theories, but a population that regards the wealthy classes as a cabal that is constantly plotting against the underclass. So it's not uncommon for the most irrational of sentiments to precipitate state actions that ultimately fail to serve their ostensible intent. Ultimately, the stated interests of the people are served, even though nothing is accomplished, so the true intent is in that respect well served.
It's also noted that attempts to influence money by the state are motivated by a desire to alter the purchasing power of citizens. Money has been seen as a means to which this end might be accomplished, and continues to be so in the current age, in spite of the repeated historical failures of such attempts.
Instruments of Monetary Policy
The principal instrument of monetary policy at the disposal of the state is in its ability to influence the choice of the kind of money used in commercial exchange. In effect, the state may provide, and attempt to compel its citizens to use, a particular kind of money. This is not merely the physical artifact of coin and note, but the basis on which that money is to be valued (whether it represents old, silver, or even credit).
For a country that is on a metallic standard, the only measure of currency policy is that it can change to another kind of money, either by changing to a different standard of valuation, or invalidating the physical artifacts.
If a country is on a credit or fiat standard, the state has the power to increase or decrease the quantity of money with greater facility - it need only issue a declaration, not seek to manage a supply of commodity metal that is represented by currency.
Inflationism
"Inflationism" is a monetary policy that seeks to increase the quantity of money by decreasing its value against consumer goods. (EN: Or, from the buyer's perspective, by increasing the price of consumer goods in terms of money.)
This is often based on the fallacy that money is the equivalent of wealth, driven by the specious notion by creating more money, the people are somehow made richer (the merchants charge higher prices, the laborers get more wages, and everyone has "more" money).
The folly of this notion is evident when you consider that the creation of money does not create real wealth - in terms of the goods and services obtained in exchange for money. The baker gets an extra coin for his loaves, the baker's apprentice an extra coin for his labor, but this does not create a single additional loaf of bread.
The sole beneficiary of inflationism is the debtor, who can repay his debts with money that is worth less than that which he borrowed - but this is offset by the fact that the creditor, anticipating future rates of inflation, charges higher interest on his loans to account for the decreased value of monies repaid in future. As such, the only beneficiaries are the holders of long-term debt whose interest rate is fixed.
The notion of depreciation of currency would mean the converse: that monies to be received in future have higher purchasing power than they do at the time at which they are loaned, which is a favorable situation for the creditor. A loan extended with an expectation should therefore have a negative interest rate - such that the debtor would repay a lesser sum of money due to its increased future value. The occurrence of depreciation in any monetary system has been extremely rare; and the occurrence of a money-lender agreeing to accept less money in payment than was given in loan is utterly unheard of.
In terms of state debt, inflation serves the interests of the state itself, by printing an abundance of money, the state repays its creditors with less value than it obtained. It is likewise in the interest of the state to devalue currency for taxation, such that the citizens will have a greater quantity of money (in lesser value) with which to pay taxes, rather than having to undertake debt to pay their tax bill. While the state thereby sacrifices the monetary value it gains in taxes, it appeases the discontent of the citizens who must make such payments.
Aside of appeasing the complaint of the population, a state also has an interest in money insofar as its own needs are concerned. Commonly, we see inflationism occurring in time of war, but it has also been common practice in socialistic states.
A government typically produces no value in the sense of consumer goods - so when it aims to provide food for the poor, it must somehow obtain the means to obtain this benefit that it might provide it. This can be done by taxation, if there is ample wealth in certain sectors of society to be taken for the benefit of others; but when the ambitions of a government exceed the wealth of the nation, it must turn to other means - chiefly, the manipulation of the money supply - to "create" money to buy goods.
The inherent problem in this practice is the reaction on the part of the suppliers of those goods. When they recognize that the currency has been devalued, they will raise the prices of their goods. Therefore, the advantage to the state is only temporary - as soon as the market prices adjust to inflation, it no longer has an artificially-create surplus.
Another difficulty arising from inflationism is largely mathematical. By decreasing the value of currencies, the value of goods is increased, such that the price of a good, either all at once or over a long period of time, makes the smallest denomination of currency useless: if all goods that initially cost a penny rise to a nickel because of inflation, there is no longer a need for pennies (nothing can be purchased that cheaply). Prices are set in nickels, then in dimes, than in dollars, and the lower currencies fall from use.
There is also the notion of rounding, which exaggerates the effect of inflation. If inflation occurs at a rate of 5%, what once cost a penny should now be priced at 1.05 pennies - and as there is no .05 penny coin, the merchant must decide whether to sell his good for a single penny (at his own detriment) or increase the price to two pennies (to the customer's detriment). (EN: I expect this was of greater concern at the author's time, when a penny could actually buy something useful - but in the modern day, the base unit of currency is the dollar, so prices can rise more fluidly in increments of 1%. And as currency goes increasingly digital, fractional units can be managed with greater efficiency, should the need arise.)
Returning to the value of inflation as a means of increasing the purchasing power of the state: it is not a tactic that can be used without limits. Inflationism is fundamentally a scam that can only be successful if it is both short-term and infrequent. If it becomes constant and predictable, consumer prices in a market will increase in anticipation of inflation - which not only mitigates the effectiveness of the inflationary tactic, but goes further, to compel the state to support inflation to prevent a decrease in the ability of citizens to provide for their own needs.
Ultimately, consistent and constant inflation will lead to the collapse of a monetary system. The purchasing power will diminish until it disappears, at which point the buyers and sellers in a market will cease to use it. This has been evident in instances of rampant inflation, where people attempted for a time to maintain the use of a currency, even to the point where it required sacks of banknotes to purchase a paltry amount of consumer goods, an then people ultimately abandoned currency and resumed bartering.
Historically, the collapse of monetary systems has occurred when the decrease in the value of money was such that the government was unable to maintain sufficient supply - to return to the preceding example, when it would take a sack of banknotes to buy a loaf of bread, but the buyer is not able to find enough banknotes in circulation to fill a sack, he must then seek to find something other than banknotes with which to bargain. So long as the mint can keep pace, even a currency whose value is rapidly decreasing may still be usable as money.
Recall that the amount of money in circulation has no necessary correlation to the goods available in a market: seen in this way, the collapse of a monetary system does not equate to the collapse of an economy. Those who have goods, or can produce them, can still exchange in trade. The only harm done is to individuals who maintained their wealth in the form of currency - any "stored" value is wiped out, but the value of current assets and future production remain unaffected. It's also noted that those who have considerable wealth also seek to diversity - they will hold foreign currencies, precious metals, gemstones, and even works of art, which will maintain their value even should a monetary system collapse.
As such, the collapse of a monetary system is merely a temporary interruption to an economy, which does incidental damage, and it has been witnessed in a number of situations in which a monetary system's collapse resulted in a temporary panic, but the nation in question (the United States, France, and Germany) was able to continue and to regarding footing with a different monetary system in a relatively short amount of time.
Deflationism
The author now considers the opposite: the desire of the state to increase the value of its currency, resulting in a decreased price for goods, is termed "deflationism."
Deflationism is in the interests of individuals who maintain a horde of money, which they do not need for their immediate needs. The benefit of deflating the currency is that the hoarded money increases in value, and is therefore better able to serve future needs.
While it would also seem to be in the interest of government (which looks forward to future tax revenues) and even creditors (who would gain payments whose value exceeds the original sum borrowed by virtue of deflation), neither faction has embraced deflationism in practice due to one inherent problem: should the burden of payment become to great, the debtor or taxpayer simply will not pay.
As such, it gives more control to the tax authority or creditor to be able to manage the rate directly, rather than relying upon the market value of currency to do it "automatically," leaving his future income entirely to factors beyond his control.
Another inherent problem of deflation is that it discourages commercial exchange: if money will be worth more tomorrow, why engage in trade today? In an extreme sense, it results in a situation where money itself is valued more highly than goods. It is difficult to find a historical instance where deflationism was put into practice to achieve a given end (as the "ends" generally deal with obtaining some practical value, rather than seeking to gain exchange value); and even in theory, it is difficult to conceive of an instance in which the exchange value of money would be of greater value than the use-value of the goods it might obtain.
The most probably motive, both theoretical and practical, in deflating a currency is to increase its purchasing power in foreign markets - in effect, to motivate foreign producers of use-value to accept less exchange-value to provide these goods for the benefit of a domestic market.
(EN: The author goes on for quite a few more pages on the theoretical problems of deflationism, but I don't find it very compelling as it's a theory that has extremely little chance of finding any applicability whatsoever.)
Invariability of Exchange Value
Having considered the tactics of decreasing or increasing the value of money, the author then turns to the often-overlooked tactic of seeking to maintain the current exchange value of money.
In practice, this would entail the other two strategies: to increase the value of money when the exchange value is too low (deflationism) or to decrease its value when the exchange value is too high (inflationism), according to the exchange of money for goods in a given market.
In effect, if one wished to ensure that a loaf of bread remained at a fixed price, the quantity of money would need to be increased when more bread became available in the market or decreased when there quantity of bread in the market decreased, so that the value of bread in terms of money did not fluctuate freely according to supply.
Maintaining an invariable exchange rate is a complex proposition, as it requires instantaneous knowledge of the quantity of goods in a market, and the ability to increase or decrease the supply of money in an equally instantaneous manner. As such, it is not practicable to perfectly maintain the exchange value of money, but even an imperfect attempt to do so, by increasing or decreasing as the need arises, would enable these efforts to offset one another, such that the long-term effects of increases and decreases might balance out.
(EN: My sense is this is the practice of the Federal Reserve: it monitors the monetary supply and issues treasury notes to take money out of circulation, and may redeem the notes or print more money to introduce additional money into the economy. And given the low rate of inflation in recent years, it would seem that it has become highly effective at doing so, probably as a result of computerization in commerce making consumer prices and the money supply easier to monitor with near-instantaneous information.)
Limits of Monetary Policy
While a state may exercise a strict control over monetary supply, it is clear that the state has little influence over the economy proper - the presence or absence of consumer goods in the market, and the supply and demand of the goods in question by producers and consumers.
This explains why all historical attempts to effect an improvement in the welfare of the people by manipulation of the money supply have met with no success, and more often great failure, by virtue of a lack of foresight, information, communication, and ultimately common sense about the nature of money itself.
While in the present age, there ahs not been a complete renunciation of intervention by government into the economy, it is increasingly clear that the lessons of history have not gone entirely unheeded, and the effort of government in terms of monetary policy has been retracted to nearly the point of its original attempt: merely to supply to the market a stable and reliable currency for use in economic transactions.
(EN: Given that this book was written in the wake of the Great Depression, this may be an optimistic statement written at a time where the lessons of history were not too difficult to remember. This notion has been repeatedly forgotten and re-learned in the years since, and my sense is that it will ever be so.)