Comments on Martin Armstrong’s Creating the Floating Exchange Rate:
While this is a good article, Mr. Armstrong has erred in his thinking when he says:
“Money supply MUST grow with the population or else there will be deflation.”
This is an incorrect statement. What he is trying to say is that “money supply must grow proportionately with the production of goods and services or else there will be deflation”. Deflation is a GOOD thing and not a bad thing as he indicates. It is a GOOD thing because it means the value (purchasing power) of the currency is rising. This is another way of saying that your money is appreciating.
Who wouldn’t want their money to be able to purchase more goods and services year after year? Are we not tired of seeing prices go up as our savings lose value? An appreciating currency promotes savings and investment in production. Production begets wealth because goods are created that can then be traded for other goods. (See What is Money? for a further explanation on what constitutes money.)
Mr. Armstrong is correct in stating that a free market in money is what is needed. The free markets – consisting of billions of individual participants acting in their own self interest – will make the necessary adjustments in the exchange value of the various media of exchange. Even now, when the US Dollar is somewhat protected by legal tender laws, people are choosing gold as a “go to” commodity money. The historic Gold Standard in the US was not a free market solution but rather an attempt to fix exchange rates. Thus it was a form of “economic dictatorship” to use a phrase from Faustino Ballve’s Essentials of Economics.
Mr. Armstrong calls for free markets but then contradicts himself when he says that “the ONLY solution will be to create a new One World Currency”. Who would create the One World Currency? Who does he propose to be the “All Knowing Supreme Being” that would create and administer this One World Currency? Friedrich Hayek called this the fatal conceit and the “pretense of knowledge“. Yes, the solution is free markets but one needs to be consistent and let the free market decide what is real money.
My favorite quote in his article is in the opening paragraph:
“capital is like water, it will find the crack and just leak through the pot. It cannot be stopped. Laws are only a form of tyranny, for you cannot legislate against common sense or human nature.”
Economic Law is a form of Natural Law. It is the law of cause and effect. Legislation can only hamper the intentions of men.