We’ll get back to The Libertarian@War sometime soon, but a recent Mises article by John Chamberlain, A Short History of US Credit Defaults started me back to thinking on one of my favorite issues – money. The article makes for interesting reading in its own right, in view of the current budget nail-biter going on in D.C., with Mr. Chamberlain identifying at least previous defaults by the US government: The Continental-Currency Default, The Default on Continental Domestic Loans, The Greenback Default of 1862, The Liberty Bond Default of 1934, and The Momentary Default of 1979. Go ahead and give it a quick read, I’ll wait.
Okay, everybody back? Good.
Back on track, let’s ask the question, “What is money?” I am not going to indulge in the logical fallacy of appealing to authority by quoting someone else’s definition … for purposes of this conversation, money is “any material used as a convenient store of a person’s wealth that enables him to work around the difficulties imposed by a barter economy, if that material is generally accepted.” In other words, it needs to be something that a stranger will accept, even if at discount, in payment for goods or services. Trading ammunition with your buddies at the range is still barter, even if ammunition has, in the past, been used as money. Historically gold and silver are common as money, but things such as tobacco, whiskey, pretty seashells, and paper have been used. Money is something that keeps you from having to try and get change for your goat when you’re looking for a new pair of shoes.
How does this play into the default discussion above? Simple – I would contend that the State, when it controls the money supply always defaults on its debt in some way, shape, or form, defining “default” as a failure, neglect, or refusal to pay a debt. The only question is how that default occurs. Mr. Chamberlain covers some pretty drastic and catastrophic defaults in his article, ones that are well known. Latin America has demonstrated default, and threats thereof – and we can soon the PIIGS to follow suit. Even America, potentially, could go into catastrophic default.
But what about less-than-catastrophic-default? For instance, what else is inflation – the increasing amount of fiat currency compared to the growth of goods and services – but another form of default as the State, with its monopoly on the money presses, devalues its currency and thus uses the debased currency to pay down its debts to various parties that are owed money by the State. Every contract, even a “social contract,” has an understanding of “good faith,” and producing more money than is necessary or reasonable is a breach of that faith – a default on that contract – between the State and the people.
As an aside, the classic “gold contract” was a hedge against such defaults. Repayment on a contract was not set in dollar terms, but in terms of a certain weight of gold, either over time or in a lump sum. For example’s sake let us say it costs a 20th of an ounce of gold to produce a book, and Claire sells her book for a tenth of an ounce. If Wendy, by gold contract, buys Claire’s book, it doesn’t matter whether Wendy gives Claire a tenth of an ounce of gold, 3.4 1970 paper dollars or 159 2011 paper dollars. Claire gets the the same value.
Let us now suppose, however, that in a fit of unaccustomed sanity, some minion from the US government decides to buy Claire’s book. In 1970, he would pay 3.4 paper dollars for the book. But, unless Claire has kept up with inflation by changing the price of her book, by 2011 the minion could now purchase 46 of Claire’s books (and about 170 pages of a 47th), using the amount of dollars that a tenth of an ounce of gold would bring. The problem is that even if Claire is keeping up with inflation in pricing her book, she’s not likely to know just how quickly the minion has obtained access to extra dollars, and she will be behind the curve on replacing the books with new ones. Even worse is if she has to replace her stock on a gold contract.
It’s fairly obvious, then, that whoever obtains access to the paper dollars first, before finding out about the de facto default, is going to be in a better position to acquire goods and services than someone downstream.