BALTIMORE – The Dow rose on Wednesday morning… after Janet Yellen made soothing remarks about a “gradual” return to normal interest rates. Then investors must have realized that returning to normal is not on the Fed’s agenda. The Dow finished the day down 99 points.
We haven’t seen normal central bank policy since the Nixon years. Normal is a currency backed by gold, not by PhD economists. Only briefly and episodically, over the last 2000 years, has the world flirted with pure paper or “fiat” money. Every time, the affair was over in a short time… and regretted for a long time.
The result of the usurpation of money by government
Under a gold standard, credit comes from savings. Thus limited, interest rates typically stand somewhere in the 3% to 6% range. They do not roll around on the barroom floor with the spilt beer, drunks, and sawdust.
Real credit comes from money that is saved… taken out of the consumer economy so that it can be used for emergencies and capital investments. When it is paid back – usually out of increased output – the world is a richer place.
But try to trick the economy with phony credit – money that was never earned and never saved – and you are just asking for trouble. Said Jörg Guido Hülsmann, a senior fellow at the Mises Institute:
“In no period of human history has paper money spontaneously emerged on the free market. In all known historical cases, paper money has come into existence through government-sponsored breach of contract and other violations of private property rights.”
Jörg-Guido Hülsmann – a staunch proponent of a free market in money (you can read his book “The Ethics of Money Production” for free here, pdf) Photo via mises.de
Giving out more money always gives the economy a temporary lift. People think they are richer.
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