Stanley Fischer is the head of the Bank of Israel. As such, he is the government appointed goon in charge of money printing. In his infinite wisdom, he is supposed to know exactly what the supply of money should be, because he’s purportedly a chacham she-ein kamohu – a crazy genius who has a pulsating brain and somehow knows these things. Or maybe God comes to him in his sleep and tells him how many shekels should exist and how much he should print and when.
Or maybe he’s just some guy who has no idea what he’s doing, given a power the equivalent of an economic nuclear weapon, something that no one man should ever, ever have.
Stan the Super Shekel Man recently came out with an announcement that he would be quitting his post early. Aside from the speculation as to why (I think it’s because he knows there will be an unstoppable economic tsunami in the next 3-5 years and he wants to duck out early and quit while he’s ahead), I have seen nothing but wall to wall praise for this central planning money printing soviet-style currency czar. Sure he’s kindly, has a sweet voice, an endearing Zambian accent, cutely mixes up male and female in his Hebrew grammar all the time, and the Israeli economy didn’t totally collapse in 2008 so everyone assumes the money master is responsible for saving us all from destitution. But this is all a big, sad, sorry myth.
Let’s break it down.
Let’s step aside for a moment from the persona of Stan the Man himself. He as a person is not the main problem. As I said, he’s a nice guy. The main problem is the very system of central banking that give men like him inordinate power over all of our economic lives, a power which, once you realize the scope and consequences of it, can make you dizzy.
Imagine for a moment two national economies. One where the supply of shoes and their price is controlled by one man and anybody else who manufactures or uses shoes besides him goes to jail, and another where the supply of shoes and their price is controlled by the free market, meaning a myriad of entrepreneurs freely importing and exporting shoes based on the demand for them by customers. In a free market where anyone can manufacture and buy as many or as few shoes as he wants, the supply, demand, and price of shoes will tend to reach an equilibrium point where profits will remain constant and steady. Shoe firms like wholesalers, manufactures, and retailers, will all compete with each other to sell the most shoes to the public. In order to do this, they will have to make shoes of the highest possible quality at the lowest possible prices in order to attract buyers.
If the supply of shoes gets too high, shoe prices will tend to fall, lowering profit margins, thereby restricting the amount of shoes manufactured, choking off supply, and bringing shoe prices back up to equilibrium. If demand gets too high, shoe prices will tend to rise, increasing profit margins, encouraging shoemakers to produce more in order to earn those increased profits. This brings supply back up to match demand, bringing prices back down to equilibrium again.
Now, in an economy where the supply of shoes and their price is controlled by one man, let’s call him the chairman of the Shoe Bank of Israel, we are entrusting a single person to:
- Manufacture every single shoe in the country, because anyone else who does that is considered a shoe counterfeiter and goes to prison
- Know automatically what the supply of shoes in the country should be at any given moment
- Set the price of shoes at whatever he thinks it should be
- Not abuse this power
The shoe market in such a country would be a complete mess and everyone who needs shoes would be miserable. Since only one firm would be allowed to make and sell shoes, there would be no competition and the quality of the shoes would deteriorate. If the Chairman of the Shoe Bank of Israel set the price of shoes too low, meaning he underestimates demand, people would start hoarding the shoes and buying more than they need, and there would be shoe shortages. If he sets the price of shoes too high, meaning overestimates demand, people who needed new shoes would not buy them, instead waiting for a lower price. Perhaps they would attempt to repair their old shoes, or cut open the ends if they didn’t fit. Huge surpluses of shoes would result.
Meanwhile, regardless of whether Stanley Shoemaker creates a shoe shortage or a shoe surplus in the country with his inaccurate divining of the appropriate shoe price and supply, people will have no choice but to buy shoes from him alone, and he will get richer selling them regardless of how crappy the shoes are. Nobody wants to be arrested for being a shoe counterfeiter after all.
Having one man in charge of the shoe supply in a country is bad enough. But it is infinitely worse to have one man in charge of the money supply in an entire country, because the supply and demand for money controls the entire economy, shoes included.
I know that the concept “demand for money” and “price of money” is hard to wrap your head around. Doesn’t everyone demand money all the time? How can it change? How can money itself have a price? Isn’t money money? Bear with me here.
It is difficult for people to understand these concepts these days because fiat government currencies have ruled the world since 1971, and governments the world over have taken upon themselves the exclusive right to produce money, forbidding anything else from entering the market as money. But in reality, money, just like shoes, is a good like any other. The only difference is that money is more easily trade-able than shoes for other goods. In fact, money is the most easily trade-able good that exists. That’s why it’s used as money.
Now, the “price of money” and the “demand for money” are reflected in many different ways. They are reflected in how much money money lenders (AKA banks) charge to borrow money, otherwise known as interest rates. If interest rates are high, then money is “expensive”. If money is expensive and money lenders can charge high interest rates, the “demand for money” must be high too. Otherwise, people would not be willing to pay such high rates in order to borrow money. If interest rates are low, then money is “cheap.” If money is cheap and money lenders are forced to lower interest rates in order to attract borrowers, then the “demand for money” must be low.
The price and demand for money is also reflected in the general economy in terms of the money prices of all other goods and services. At times when the demand for money is high, forcing interest rates up, that means people want to hold more of their money (AKA save) rather than spend it. If people want to save more money, the consequence is that the money-prices of goods and services will go down. Things will get cheaper to buy, because in order to attract sales, merchants will have to lower prices in order to entice more money out of savings.
The high interest rates, or high price of money, will in turn serve to bring the money market back into equilibrium at times when the demand for money is high and prices low, as money-savers (lenders) will earn higher rates of return. This will earn savers more money on their savings, and in that way they will be enticed to spend the money they earned from their saving, bringing prices back up, money out of savings, and interest rates back down as lenders are forced to settle for lower interest rates in order to attract more borrowers again. The demand for money is thus lowered, enabling merchants to raise the money-prices of other goods and services, prices go up, demand for money down, and interest rates down.
A short recap:
Demand for money up = interest rates up = prices down
Demand for money down = interest rates down = prices up
Eventually, this entire process reaches an equilibrium point where relative prices of goods and services in terms of money will stay more or less stable along with interest rates.
Now what about the supply of money? This is the cool part. In a free market, the supply of money will be controlled NOT by Stan the Shekel Man, but by gold and silver mining companies teaming up with private money coiners who in turn team up with private banks. Here’s how it works:
- Mining Company A has mined 100 kilos of silver, but needs them coined by a recognized and respected money coiner so he can buy stuff. Merchants don’t accept uncoined blobs of silver because there is no way to tell how pure the silver is. So he goes to Money Coiner B and gives him 100 kilos of silver.
- Money Coiner B puts the silver through his coining machine, checks its purity, and stamps it with his stamp of approval by coining it into little circles with his certification on it. He keeps 2 kilos of newly minted silver coins as a commission for his services.
- Mining Company A and Money Coiner B then go to Money Bank C and say, “Do me a favor Money Bank C. We have these coins here. They’re too heavy. Could you please put them in your vault and give us paper receipts that the silver is sitting here? Please give the silver to whoever presents you with the receipt.” Money Bank C takes the silver coins, provides them with receipts, and charges Mining Company A and Money Coiner B a small fee for storing the coins and providing the receipts.
- All parties go out and spend the paper receipts, AKA “money” in the economy and buy stuff.
How is the supply of money regulated in a free market? In the following way: When the demand for money goes up and the prices of other goods go down, mining companies will make higher profits on the gold and silver that they mine for two reasons:
- Since the prices of everything are going down, it will become cheaper for them to do the mining itself, increasing profit margins.
- Since the prices of everything are going down, the mining companies will be able to buy more stuff with the gold and silver they produce.
These two factors will entice them to increase production of gold and silver, increasing the supply, bringing interest rates down and prices of other goods and services back up. When prices of other goods and services go back up, it will cost the mining companies more money to mine gold and silver, and they will be able to buy less with the gold and silver they mine. Eventually, profit margins for the gold and silver they mine will go down to a point where they will be forced to lower production. The supply of money will go down and the prices of goods and services back down again with it.
In a free market for money, the best, most efficient, and most honest money coiners will get the most business and have the most coins circulating on the market. Those coining companies that cheat and lie about the purity of their coins will lose business and go bankrupt. Their coins will not circulate, or they will circulate at a discount.
In a free market for money, the best, most efficient, and most honest money receipt issuers (currency printers, private banks) will store the most money and issue the most currency. Those private banks that cheat and lie about how much silver or gold they have in their vaults to match the receipts and “inflate” their currency will lose business, inspire their receipt holders to call in their receipts for silver and if they can’t provide it, they will go bankrupt. Their currency will not circulate, or it will circulate at a discount..
In a free market for money, you will have several different competing currencies and coinages, with people accepting the ones with the best reputations and rejecting the ones that are unreliable.
Interest rates and prices will remain stable as money supply and money demand equilibriate, and as in any developed economy, goods and services will increase faster than the supply of money, allowing for a gently falling price level and everyone to get richer in real terms.
Or you can have someone like Stan the Shekel Man Fischer in charge, printing sheets of paper backed by absolutely nothing, causing prices to continually rise and government controlled money to continually lose value, making everyone poorer and more miserable.
Stanley Fischer did not save the Israeli economy from collapse. He simply did not abuse the insane power given to him as badly as other central bankers did: the monopoly power to print money. This power, incidentally, was given to him in much the same way as our fictional Stan Shoemaker’s was given to him: By a bully state ready and willing to arrest anyone besides Stan who manufactures shoes. Or in this case, money. And why would the Israeli government forbid anyone but Stan their goon from manufacturing money? Because when you have control over the entire money supply, you can spend it on anything…you…want. Like welfare. And leather seats for Knesset members. And armored cars for party heads. And first class trips to France for Defense Ministers. And subsidies to ignoramuses who you want to vote for you. And huge campaign posters and TV ads and God only knows what else.
When one man controls the shoe market, the quality of shoes goes down and everyone who wears shoes, suffers. When one man controls the money market, the quality of money goes down. It loses value. It makes you poorer. Everyone who uses money, suffers.
Every single time a national/federal/central bank prints money with the flip of a switch, it steals from people like you and me who have to work to earn our money.
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About the Author: Rafi Farber blogs at SettlersofSamaria.org.
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