Mises Daily Articles
Money, Subjective Value, and Gold
John Tamny, of Forbes magazine has written a recent article in which he takes Austrian economist David Gordon to task for not being Misesian enough in a book review of Money by Steve Forbes and Elizabeth Ames. Such critiques can be a useful exercise when the author has a solid grasp of the axioms of Austrian economics and Ludwig von Mises’s contributions to economics. When that foundation is shaky, the result is simply to add to the confusion.
My reading of Tamny’s critique of Gordon finds the absence of two key elements of Austrian economics from which Mises was certainly no dissenter – namely, 1) the subjective nature of value and 2) the claim that “there is only one coherent body of economics,” and it, “does not allow of any breaking up into special branches.”
The subjective nature of value is an Austrian tenet that virtually every mainstream principles of economics text pays lip service to in its first chapter, but almost immediately proceeds to jettison on specific topics. This is especially true in the areas of macroeconomics, where aggregates based on national income accounting are devoid of any grounding in the logic of choice based on people’s subjective evaluations of the utility of economic goods hold sway.
Failure of the mainstream to abide by the second key element of Austrian economics has long plagued monetary theory. Indeed, one of the main contributions of Ludwig von Mises to economics — unfortunately little appreciated outside the Austrian school — was to integrate the theory of money with general value theory.
It is precisely these two areas on which Gordon critiques the Forbes and Ames book. While Gordon seems to find much of value in that book — after all, the policies the authors favor would be preferable to those we currently endure — the critiques he does make accurately reflect differences between Austrian and more mainstream views. As far as I can tell, Steve Forbes is a supply-sider rather than an Austrian, so it is hardly shocking that Austrians would find some non-trivial points of disagreement with him.
The biggest violation of the tenet of the subjective nature of value in Tamny’s piece is to try to set up money as a constant measuring rod of objective value. The only way in which an Austrian economist would find the “measuring rod” metaphor valid, and a limited one at that, would be if the dollar were actually defined as gold. In that case, each dollar would be either a certain weight of gold (say, 25.8 grains of gold, nine-tenths fine) or a claim to that weight of gold. When the world was on the classic gold standard, each country’s currency was described in that way, so that each currency unit was a specific weight of gold. In that case, and that case alone, would gold be like a “measuring rod.” Not fiat money, mind you, but gold. However, once the link of redeemability between paper money — and the gold it had been a claim to — is broken, then indeed using gold in the way Forbes and Ames describe is a price control, although enforced by market interventions rather than diktat.
Their system has much in common with the Bretton Woods system, whereas the one Gordon favors is closer to the classical 1815–1914 gold standard. This is far from a meaningless difference. While Bretton Woods’ breakdown was seen as inevitable by many Austrians, most conspicuously Henry Hazlitt in his New York Times editorials (which cost him that job), because of the flaws in the system, the classical gold standard did not break down, but was abandoned because of its virtues. Had the classical gold standard been adhered to, it would have made it much more difficult, if not impossible, to finance the war that made the world safe for Lenin and Hitler.
Tamny quotes Mises in Human Action as saying that, “money is nothing but a medium of personal exchange,” then commits the non sequitur of inferring from this that Mises sees money as a, “measure [my emphasis] that fosters the exchange of actual economic goods.” To the contrary, Mises’s Theory of Money and Credit states in no uncertain terms that money is not and cannot be a constant measuring rod. To wit, when Mises refers to, “the naïve popular belief in the stability of the value of money,” he is debunking that view, not endorsing it.
The most serious point of dispute between the Forbes-Ames view espoused by Tamny and disparaged by Gordon is their proposed policy that the, “Federal Reserve would use its tools, primarily open market operations, to keep the value of the dollar tied to that rate of gold.” It facilitates matters that both Tamny and Gordon appear receptive to using Mises to decide the issue. Mises’s judgment on this matter can be found in Chapter 13 of The Theory of Money and Credit:
The ideal of a money with an exchange value that is not subject to variations due to changes in the ratio between the supply of money and the need for it … demands the intervention of a regulatory authority in the determination of the value of money; and its continued intervention.
While this quote seems to support the Forbes-Ames policy over that of Gordon, Mises makes it crystal clear in the same chapter that their policy will not reach their intended goal, which is one of Gordon’s key claims. As he says:
Once the principle is so much as admitted that the state may and should influence the value of money, even if it were only to guarantee the stability of its value, the danger of mistakes and excesses immediately arises again.
These possibilities … have subordinated the unrealizable ideal of a money with an invariable exchange value to the demand that the state should at least refrain from exerting any sort of influence on the value of money. A metallic money, the augmentation or diminution of the quantity of the metal available for which is independent of deliberate human intervention, is becoming the modern monetary ideal.
This amply demonstrates that it is not David Gordon who disagrees with Mises or believes he knows what the right quantity of money should be. Rather, it is John Tamny whose views are at odds with those of Mises, and Forbes and Ames who are the ones who may not know the right amount of money themselves, but believe that the Fed does, at least if they are guided by the price of gold.