Does Money Really Need to Be Controlled by Enlightened Experts?
Many who understand how a planned economy — wage and price controls, government-mandated production goals, industry standards, subsidies, and the like — destroys market productivity still make an exception with regard to one indispensable economic good: money. Many of the adherents of the so-called Chicago School of economics, such as the late Milton Friedman, were for the most part eloquent defenders of laissez-faire capitalism. Yet Friedman and his epigones also believe that, while the rest of the marketplace should be allowed to operate with a minimum of government interference, the money supply should be controlled by enlightened government managers at central banks such as the American Federal Reserve. While market forces are adequate to maximize market productivity and efficiency for all other goods and services, they are allegedly insufficient for the “stuff that dreams are made of.” Left to market forces, the money supply will destabilize prices and hamstring productivity. This, at least, is the argument.
To believe this is to ascribe to money some mystical property that no other market good possesses, and to assume that money is somehow exempt from the ordinary interplay of supply and demand. But this is not true. Money is an economic good like any other, but with the specific purpose of providing a convenient means to store wealth and to carry out indirect exchange. No fully formed economy can exist without some form of money.
When government is able to manipulate the money supply, it is argued, it can provide greater economic stimulus, allowing for far more rapid economic growth and technological progress than what would be possible under the old system of gold- and silver-backed currency. But in fact the reverse is true. When government is given the power to create money out of thin air, it can no more calculate what the optimal money supply is than it can calculate optimal production goals for any other good. And this means that government-created money, like all other forms of government economic planning, will do far more harm than good.
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