There is a dangerous school of thought out there in the wild, running loose and convincing those of weak intellect that there can be such a thing as “not enough money”. Somebody in that school must have realized that it’s all nonsense, and decided to give the idea some false dignity by making up some big words ro describe it. So instead of “not enough money”, they call it “monetary disequilibrium”.
Their description of the situation, stripped of mumbo jumbo, is this. One day everyone decides, spontaneously and for no reason, that they want money. They don’t want as much food, or clothing, or stocks, as they used to, they want cash itself. This desire infects both buyers and sellers at the same time. Since every transaction nowadays involves money, the buyers and sellers will be in a tug of war. The buyer will not want to buy what he used to, wanting the money instead. The seller will also want the money, but he can’t have it, can he? Thus, although the guys who were previously buyers will get to keep the cash they so crave, the sellers won’t even get the cash coming in they used to be able to rely on, much less have anything to stash under their mattress.
Thus, a “money shortage” is created, or to numb the mind a little with meaningless words, a “monetary disequilibrium”.
The solution these guys propose is to give the people what they want. Money shortage? No problem, create more money. And how do you create money nowadays? Simple enough, that’s why we have banks. Just have the banks hand out checks to people, saying the bearer of this check has the right to withdraw X dollars from the bank. People will use that check just like money. Instead of keeping their cash under the mattress, they will keep the check under the mattress. Now everyone is happy. There are enough checks flying around for everyone, and people treat them just like cash. Thus the buyers and the sellers both have the money they so crave, or least a check instead.
One may ask, where do the banks suddenly get the cash needed to cover those checks to make sure they don’t bounce? Short answer: they don’t. Banks, unlike you and me, are legally allowed to write checks that are sure to bounce if someone tries to cash them. In the USA, they are allowed to write a ten dollar check for every dollar of cash they have. The key to solving the so called money shortage is to make sure the check will bounce if anyone ever decides to cash it, and hope nobody ever does.
Smiling Dave will soon expose the gaping flaws in this foolish line of reasoning. But first he wants to have the record show that these people have the gall to call themselves Austrian Economists. The mind boggles.
Dave was warming up to his task, doing finger exercises to alleviate his carpal tunnel, when Devil’s Advocate moseyed in.
DA: Dave, you are once again in over your head. They will drown you in big words and charts and graphs and equations. You stand no chance against them.
SD: I regret I have but one carpal tunnel to give to my country. Smiling Dave will write the truth, in simple language, and rely on the reader who can use his noodle to do so. Like the child in the story of the Emperor’s New Clothes…
DA [interrupting]: Dave, why do you always refer to yourself in the third person?
SD: Let’s get to it, shall we? Their key mistake is one even a newbie should not make, confusing money with purchasing power.
DA: What does that even mean?
SD: Allow me to explain. What would you rather have, one US Dollar, or a hundred trillion Zimbabwe Dollars?
DA:. What a question! Of course I want the US Dollar. I can buy things with it, like a quart of milk. But with a hundred trillion Zimbabwe Dollars I can’t buy anything at all, even in Zimbabwe. Their currency is literally worthless.
SD: But isn’t a hundred trillion so much more than one?
DA: Dave, it’s not the money per se that I want, it’s the purchasing power the money has. The Zimbabwe dollar has no purchasing power.
SD: Oh, I see. So what if tomorrow the purchasing power of the dollar went down, would that make you happy?
DA: Of course not.
SD: Let’s look at what these people are proposing. Since people want more cash in their wallets, they intend to give everyone two dollars, which together will buy less than a dollar could yesterday. They will get more dollars, but less purchasing power.
DA: Sounds pretty stupid, if you ask me.
SD: I know, right?
DA: But Dave, you have only showed that their so called solution is idiotic. But you have to admit they are describing a legitimate problem, maybe.
SD: What they call a problem I call a blessing. Those guys forget all about the great benefits of the blessing they slander as “monetary disequilibrium”. Because if people save, that means they under-consume. Which means there will be capital accumulation. Under-consumption = capital accumulation. Capital accumulation results eventually in greater production, aka everyone is wealthier and better off. See Human Action, end of Chapter 18.
DA: But Dave, as Devil’s Advocate I have to point out that maybe there is some gain, true, but that gain might be out weighed by the losses when there is a so called money shortage.
SD: Every seller, the fellow who is going to be stuck with no money, is also a buyer. We’re not talking about robots, but about human beings who sell stuff in order to buy things. How did he plan to buy food for his family, gas for his car, and pay his bills this week? Obviously, he has money somewhere for these things. When the hoarding madness supposedly descends, he is a buyer just like everyone else, and will stash away his little pile, just like everyone else.
DA: OK, but if everyone stashes away something, that means everyone will be both buying less and selling less. The economy will grind to a standstill.
SD: Again, every buyer is also a seller. If he wants a stash of money, he will have to sell stuff to get that money. So his desire to buy less is accompanied by his desire to sell more. And you know what that means, having studied the Laws of Supply and Demand. Lower demand, increased supply?
DA: Prices will go down.
SD: Yep. And what does that do to the money?
DA: Increases its purchasing power.
SD: And what did people want? More dollars, or more purchasing power?
DA: I see what you did there. But I have one last ace up my sleeve.
At this point Devil’s A. takes out a bottle of Elmer’s glue and starts smearing the glue all over his money.
SD: What are you doing, Dev?
DA: Sticky prices, Dave. Sticky prices. People will not lower their prices for things, including for wages. You said market forces will press prices down, but some people are highly resistant to that, even if it’s for their own good.
SD: They will have to learn the hard way, then. In the meantime I have something special to give those people.
DA: What, Dave? A govt stipend? A guaranteed job? A fat stimulus package?
SD: A Darwin Award.