A Basic Inquiry Into the Nature and Effects of Monetary Economics Speech

The following is the speech I will give at this years Austrian Students Scholars Conference hosted by Dr. Herbener and Grove City College.

Economic science is the study of human relationships and how these interpersonal connections lead to the existence of a complex network of transactions. These crucial economic functions form societies, civilizations, and empires. Though civilizations have traditionally been ruled by political bodies, there has always been something much grander behind the scenes that has been able to outlive these institutions. This phenomenon is the market and it is built by the voluntary transactions of individuals and exists without regard to the corrupt workings of the body politic. The market functions through many different channels and its operations can be understood by the analysis of specific economic elements. In my paper, the backbone of the economic structure and catalyst of interpersonal exchanges is analyzed; this catalyst is, of course, money. The importance of this catalyst is evaluated and its origins discovered. From understanding primitive interpersonal relationships to the complexity of business cycles, money is the lens through which economic scholars may view market activity. To comprehend the nature of media of exchange is to understand the structure of the modern market, its failures, and its triumphs. The goal of this study is to deliver a proper explanation of the phenomenon of money, credit, and their affects on the economy as well as explore the origins of some the problems of the modern market and the government's connection to these problems. My paper strives to conclude that the old Monetarist saying that “money matters” is, in fact, unquestionably true.

My paper begins by analyzing the concepts of interpersonal relationships and how these interactions make up the foundation of market activity. Rothbard's Man, Economy, and State lends much to this discussion and gives brilliant insight into the differing interpersonal relationships that may arise in human interactions. Von Mises has an equally magnificent explanation in his Human Action and deduces the elements that make an interpersonal relationship hegemonic. It is only through voluntary trade and peaceful interpersonal relationships that a market can be formed. When voluntary trade takes place, the parties in question are always ex ante better off. Its in a hegemonic relationship that one individual is benefiting at the expense of another and is therefore exploited. As Rothbard notes, “the master uses the subject as a factor of production for his own profit at the latter's expense” and that “the ruler exploits the subject for the ruler's benefit.” It maybe said that a citizenry's relationship with the government is inarguably hegemonic and that its in the free market where voluntary or contractual interpersonal relationships are allowed to breed prosperity and wealth.

As voluntary transactions produce markets, there is a shift within these markets towards specific media of exchange. This occurs out of the sheer difficulty of finding, as Jevons labels, a double coincidence of wants. Money comes out of a need by markets to facilitate trade between individuals and it is those goods that are more generally accepted that become media of exchange. Media of exchange also exhibit certain qualities and the market for money soon clears itself of goods that do not exhibit these attributes. Adam Smith correctly points out in The Wealth of Nations that money usually exhibits the following attributes: durability, divisibility, portability, homogeneity, and scarcity. Its these elements that lend to the existence of gold, silver, and sometimes copper as the most highly valued moneys of all time. That said there have also existed other goods that have exhibited these attributes. For instance, iron nails in Scotland, pressed tea leaves in China, and beaver pelts in the early American colonies. In addition, tobacco was used so widely in Virginia as money that warehouses soon sprung up willing to store tobacco in exchange for receipts with 100% redeemability. That said, in time gold and silver did win out as a popular money for both domestic and international trade.

Indirect exchange can be labeled as those interactions that use money as a facilitator of exchange and its through the use of money that prices can be formed. Prices can be formed in a market where direct exchange prevails but such a list of exchange rates would be enormous and impossible to maintain as the demands for commodities shift in relation to one another. Indirect exchange allows for exchange rates between a wide array of factors of production to be valued against a highly marketable good (i.e. money). These exchange rates translate into prices which entrepreneurs and consumers use to decide the profitability of certain ventures. Prices signal to entrepreneurs when to cut back or increase production and allow consumers to know how much of each good, with respect to their marginal utility for differing goods, to purchase. In essence, its prices, through the constant bidding of producers and consumers, that allocate resources efficiently with respect to the social rate of time preference. In an unhampered market, without central banking, prices can distribute resources to where they are most urgently needed and allow the market to fulfill the demands of economic actors.

The reasons for the proper allocation of resources, with respect to a free market, has less to do with the intelligence of men and more to do with the ability of individuals to use indirect exchange and media of exchange to properly calculate the demand, costs, revenue, and the potential output of a given production process. By using prices and economic calculation, an entrepreneur can understand at what point cost has outweighed profit and then begin to take the proper measures to curve losses. In the market, resources are not always allocated efficiently but the profit and loss mechanism drive entrepreneurs away from wasting precious resources; this is an attribute lost when speaking of Socialism and government programs.

Socialism, because of its lack of private initiative and an adequate medium of exchange, does not have the basic tools to allow entrepreneurs to use economic calculation to properly allocated resources. Instead, Socialist societies rely on the benevolence of a central planning commission to dictate what is best for a population many times it's size. How is it that Socialist central planners can acquire the knowledge of how many shoes need to be made? How many tractors must be produced to yield X amount of grain, on Z acres of farmland, for Y number of citizens? The problem lies in the inability to calculate costs in terms of goods physically used up in the production process. Due to the sheer size and scope of goods used in industrial production processes, proper allocation of these resources when valued against each other is nearly impossible. Mathematical calculations based on assumptions of human order do not suffice. What is necessary is a marketplace and the entrepreneurial incentive for profit which guides resources to their proper uses.

It is only through proper banking and free markets that prosperity and the production of wealth can take place. Once government gets involved in the market there is always a distortion. This is evident in the use of central banking as a method of spurring economic growth and creating wealth. When there is an inflation of the money supply there is a transfer of wealth that occurs from one group to another. In addition, it is inflation, through an increase in the supply of loanable funds, that signal entrepreneurs of higher order goods to produce more capital than desired by the market. Credit creation signals economic actors to engage in production processes that will not turn out profitable due to the existence of the social rate of time preference. Whenever the government uses an inflation of the money supply to bring down the market rate of interest, below the natural rate of interest, it creates a misallocation of resources that winds up in a boom and bust cycle. Its money and credit that lend to an explanation of the business cycle and it is by following the "money trail," so to speak, that von Mises and von Hayek were able to structure the Austrian theory of the business cycle.

In summation, money governs much of economic activity and it is through media of exchange that markets can be built and destroyed. Money allows individuals to create wealth and act as a buffer between prosperous transactions. Though money, through voluntary transactions, can produce wealth, when the monopoly of legal tender is in the hands of the State and when metallic currency is replaced by fiat money, the market can easily be disrupted. The study of currency has allowed me to see its true importance and the power the State has in its enforcement of legal tender laws with respect to it's issuance of fiat money. It has also directed me towards my main passion in economics, namely business cycle theory, and the role it plays in the field. As von Hayek writes in Monetary Theory and the Trade Cycle, only through a proper understanding of money and its role in the economy, with respect to the rate of interest and capital creation, that one can fully grasp the nature of business cycles.