All Commentary
Saturday, May 1, 1965

How Much Money

Mr. Greaves is a free-lance economist and lecturer.

Most people want more money. So do I. But I wouldn’t keep it long. I would soon spend it for the things I need or want. So would most people. In other words, for most of us, more money is merely a means for buying what we really want. Only misers want more money for the sake of holding on­to it permanently.

However, if more money is to be given out, most of us would like to get some of it. If we can’t get any for ourselves, the next best thing, from our viewpoint, would be for it to be given to those who might buy our goods or services.

For then it is likely their in­creased spending would make us richer.

From such reasoning, many have come to believe that spread­ing more money around is a good thing—not only for their personal needs, but also for solving most all of the nation’s problems. For them, more money becomes the source of prosperity. So they ap­prove all sorts of government pro­grams for pumping more money into the economy.

If such programs are helpful, why not have more money for everyone? Why not have the gov­ernment create and give every­one $100 or $200 or, better yet, $1,000? Why not have the govern­ment do it every year or every month or, better yet, every week?

Of course, such a system would not work. But why not? When we understand why not, we will know why every attempt to create pros­perity by creating more money will not work. When we have learned the answer, we shall have taken a long step toward eliminat­ing the greatest cause of both hu­man misery and the decay of great clvilizations.

One way to find the answer is to analyze the logic which seem­ingly supports the idea that more money in a nation’s economy means more prosperity for all. If we can spot an error in the chain of reasoning, we should be able to make it clear to others. Once such an error is generally recognized, the popularity of government money-creation programs will soon disappear. Neither moral leaders nor voting majorities will long endorse ideas they know to be false.

Stable Price Argument

Perhaps the basic thought that supports an ever-increasing money supply is the popular idea that more business requires more money: if we produce more goods and services, customers must have more money with which to buy the additional goods and services.

From this, it is assumed that the need for prosperity and “economic growth” makes it the govern­ment’s duty to pump out more purchasing power to the politically worthy in the form of more money or subsidies paid for by the crea­tion of more money.

Support for such reasoning is found in an idea that goes back at least to medieval days. In the thirteenth and fourteenth centur­ies some of the world’s best minds believed there was a “just price” for everything. The “just price” was then thought to be determined by a fixed cost of production. Ac­tual prices might fluctuate slight­ly from day to day or season to season, but they were always ex­pected to return to the basic “just price,” reflecting the supposedly never-changing number of man-hours required for production.

From such thinking, it natural­ly follows that increased produc­tion can only be sold when con­sumers have more money. More goods might be needed for any of several reasons, let us say for an increased population. However, no matter how much they were needed, they would remain unsold and unused unless buyers were supplied additional funds with which to buy them at, or near, the “just price.”

What is the situation in real life? What do businessmen do when they have more goods to sell than customers will buy at their asking price?

They reduce prices. They adver­tise sales at mark-down prices. If that doesn’t work, they reduce their prices again and again until all their surplus goods are sold. Any economic good can always be sold, if the price is right.

The way to move increased pro­duction into consumption is to ad­just prices downward. Business­men, who have made mistakes in judging consumer wants, will suf­fer losses. Those who provide what consumers prefer will earn prof­its. Lower prices will benefit all consumers and mean lower costs for future business operations. Under such a flexible price system, there is no need for more money. Businessmen soon learn to convert available supplies of labor and raw materials into those goods for which consumers will willingly pay the highest prices.

What Are Prices?

Prices are quantities of money. They reflect a complex of inter­related market conditions and in­dividual value judgments at any one time and place. Each price re­flects not only the available sup­ply of that good in relation to the supply of all other available goods and services, but also the demand of individuals for that good in relation to their demand for all other available goods and services. But even this is only one side of price-determining factors. The money side must also be taken in­to consideration. Every price also reflects not only the supply of money held by each market par­ticipant, but also—since very few people ever spend their last cent—how much money each participant decides to keep for his future needs and unknown contingencies.

Prices thus depend on many things besides the cost of produc­tion. They depend primarily on the relative values that consumers place on the satisfactions they ex­pect to get from owning the par­ticular mixture of goods and serv­ices that they select. However, prices also depend on the amount of money available both to each individual and to all individuals. In a free market economy, un­hampered prices easily adjust to reflect consumer demand no mat­ter what the total supply of money or who owns how much of it.

What Is This Thing Called Money?

Money is a commodity that is used for facilitating indirect ex­change. Money first appeared when individuals recognized the advan­tages of the division of labor and saw that indirect exchange was easier and more efficient than the clumsy, time-consuming direct ex­change of barter.

In the earliest days of special­ized production, those who made shoes or caught fish soon found that if they wanted to buy a house, it was easier to buy it with a quantity of a universally desired commodity than with quantities of shoes or fresh fish.

So, they first exchanged their shoes or fish for a quantity of that commodity which they knew was most in demand. Such a commod­ity would keep and not spoil. It could be divided without loss. And most important, all people would value it no matter what the size of their feet or their desire for fish. The commodity which best meets these qualifications soon be­comes a community’s medium of exchange, or money.

Many things have been used as money. In this country we once used the wampum beads of Indians and the shells found on our shores. As time pased, reason and experi­ence indicated that the commodi­ties best suited for use as money were the precious metals, silver and gold. By the beginning of this century, the prime money of the world had become gold. And so it is today. Gold is the commodity most in demand in world markets.

Money is always that commod­ity which all sellers are most hap­py to accept for their goods or services, if the quantity or price offered is considered sufficient. Money is thus the most market­able commodity of a market so­ciety. It is also the most impor­tant single commodity of a mar­ket society. This is so because it forms a part of every market transaction and whatever affects its value affects every transaction and every contemplated transac­tion.

Kinds of Goods

There are three types of econ­omic goods:

1.      Consumers’ goods.

2.      Producers’ goods.

3.      Money.

Consumers’ goods are those goods which are valued because they supply satisfaction to those who use or consume them. Pro­ducers’ goods are goods which are valued because they can be used to make or produce consumers’ goods. They include raw materials, tools, machines, factories, rail­roads, and the like. Money is that good which is valued because it can be used as a medium of ex­change. It is the only type of econ­omic good that is not consumed by its normal usage.

In the case of consumers’ goods and producers’ goods, every ad­ditional unit that is produced and offered for sale increases the wealth not only of the owner but of everyone else. Every additional automobile that is produced not only makes the manufacturer rich­er but it also makes every member of the market society richer.


The more useful things there are in this world, the larger the numbers of human needs or wants that can be satisfied. The market system is a process for distribut­ing a part of every increase in production to every participant in that market economy. When there is no increase in the money sup­ply, the more goods that are of­fered for sale, the lower prices will be—and, consequently, the more each person can buy with the limited amount of money he has to spend. So every increase in pro­duction for a market economy normally means more for every member of that economy.

On the other hand, when any consumers’ goods or producers’ goods are lost or destroyed, not only the owner but all members of the market community suffer losses. With fewer goods available in the market place, and assuming no increase in the money supply, prices must tend to rise. Every­body’s limited supply of money will thus buy less.

Recently, a Montreal apartment house was destroyed by an ex­plosion. The loss to the occupants and the owners or insurance com­panies is obvious. The loss to all of us may be less obvious, but nevertheless it is a fact.

The market society has lost for­ever the services and contribu­tions of all those who were killed. It has also lost for a time the contributions of all those whose injuries temporarily incapacitated them. There is also a loss for all of us in the fact that human serv­ices and producers’ goods must be used to clear away the wreckage and rebuild what was destroyed. This diversion of labor and pro­ducers’ goods means the market will never be able to offer the things that such labor and pro­ducers’ goods could otherwise have been used to produce. With fewer things available in the market, prices will tend to be higher. Such higher prices will force each one of us to get along with a little less than would have been the case if there had been no explosion.

Thus, we are all sufferers from every catastrophe. Be it an air­plane crash, a tornado, or a fire in some distant community, we all lose a little bit. And all these lit­tle bits often add up to a signifi­cant sum.

This is particularly true of war losses. Every American killed in Vietnam hurts every one of us not only in the heart but also in the pocketbook. Our government must supply some monetary compensation to his family and an in­come, however little, to his depen­dents. In such cases, the loss may continue for years. The killed man’s services are lost for his normal life span and his depen­dents become a long-term burden on the nation’s taxpayers and con­sumers. Such losses can never be measured or calculated, but they are real nonetheless.

So, in a market society every increase in consumers’ goods or producers’ goods permits us to buy more with whatever money we have, and every decrease in con­sumers’ goods or producers’ goods means ultimately higher prices and less for our money. Increased supplies of such economic goods help both the producers and every­one else who owns one or more units of money.

Limited Goods Available

With money, the situation is quite different. Any increase in the supply of money helps those who receive some of the new sup­ply, but it hurts all those who do not. Those who receive some of the new supply can rush out and buy a larger share of the goods and services in the market place. Those who receive none of the new money supply will then find less available for them to buy. Prices will rise and they will get less for their money.

Pumping more money into a nation’s economy merely helps some people at the expense of others. It must, by its very nature, send prices up higher than they would have been, if the money sup­ply had not been increased. Those with no part of the new money supply must be satisfied with less. It does not and cannot increase the quantity of goods and services available.

There are some who claim that increasing the money supply puts more men to work. This can only be so when there is unemployment resulting from pushing wage rates above those of a free market by such political measures as mini­mum wage laws and legally sanc­tioned labor union pressures. Un­der such conditions, increasing the money supply reduces the val­ue of each monetary unit and thus reduces the real value of all wages. By doing this, it brings the high­er-than-free-market wage rates nearer to what they would be in a free market. This in turn brings employment nearer to what it would be in a free market, where there is a job for all who want to work.¹

Those who create and slip new supplies of money into the econ­omy are silently transferring wealth which rightfully belongs to savers and producers to those who, without contributing to so­ciety, are the first to spend the new money in the market place. When this is done by private per­sons, they are called counterfeit­ers. Their attempts to help them­selves at the expense of others are easily recognized. When caught, they are soon placed where they can add no more to the money supply.

Governments Inflate

In recent generations our ma­jor problem has not been private counterfeiters. It has been gov­ernments. Over the years, govern­ments have found ways to increase the money supply that not more than one or two persons in a mil­lion can detect. This is particu­larly true when production is in­creasing and when more and more of the monetary units are held off the market. Nonetheless, whether prices go up or not, every time a government increases the money supply, it is taking wealth from some and giving it to others.

This semi-hidden increase in the money supply occurs in two ways:

One, by the creation and issu­ance of money against government securities. This is a favorite way to finance government deficits. Government securities that private investors will not buy, because they pay lower-than-free-market interest rates, are sold to com­mercial banks. The banks pay for such securities by merely adding the price of the securities to gov­ernment bank accounts. The gov­ernment can then draw checks to pay suppliers, employees, and sub­sidy recipients. (This process is encouraged and increased by tech­nical actions and direct purchases of the nation’s central bank. In the United States, these powers reside in the Federal Reserve Board, which has not been hesi­tant about using them.)

The government thus receives purchasing power without contrib­uting anything to the goods and services offered in the market place. It thus gets something for nothing. As a result, there is less available for those spending and investing dollars they have re­ceived for their contributions to society. The consequence of such government spending is that prices are higher than they would other­wise have been.

Two, the other major semi-hid­den means of increasing the money supply is for banks to lend money to private individuals or organiza­tions by merely creating or adding a credit to the borrowers’ check­ing accounts. In such cases, they are not lending the savings of de­positors. They are merely creating dollars, in the form of bank accounts, by simple bookkeeping en­tries. The borrowers are thereby enabled to draw checks or ask for newly created money with which to buy a part of the goods and services available in the market place. This means that those responsible for the production of these goods and services must be satisfied with less than the share they would have received if the money supply had not been so in­creased.

By such systems of money crea­tion, our government and our gov­ernment-controlled banking sys­tem have, from the end of 1945, increased the nation’s money sup­ply from $132.5 billion to an es­timated $289.9 billion by the end of 1964. This is an increase of $157.4 billion. During the same period, the gold stock, held as a reserve against this money and valued at $35 an ounce, fell from $20.1 billion to $15.4 billion. The increase in the money supply for 1964 amounted to $21.0 billion.

All these new dollars provided the first recipients with wealth which, had there been no artificial additions to the money supply, would have gone to those spenders

Figures for the money supply include those for currency outside of banks, demand deposits, and time deposits of commercial banks which in practice may be withdrawn on demand, and investors who received their dollars in return for contributions to society. Last year alone, politi­cal favorites were helped to the tune of $21 billion, at the expense of all the nation’s producers and savers of real wealth.

These money-increasing policies remain hidden from most people, particularly when prices do not rise rapidly. It is now popular to say there is no inflation unless official price indexes rise appreci­ably. This popular corruption of the term inflation, originally de­fined as an increase in the money supply, makes it seem safe for the government to increase the money supply so long as the government’s own price indexes do not rise no­ticeably. So, if these price indexes can somehow be kept down, the government can continue buying or allocating wealth which has been created by private individu­als who must be satisfied with less than the free market value of their contributions.

Price Rise Kept Down

Since World War II, there have been two continuing situations which have helped to keep official price indexes from reflecting the full effect of this huge increase in the money supply. The first such situation is that throughout this period American production of wealth has continued to increase.

The second is that during these years foreigners and their banks and governments have taken and held off the market increasing sup­plies of dollars.

If there had been no upward manipulation of the money supply, the increased production of wealth would have resulted in lower prices. This would have provided more for everyone who earned or saved a dollar. It would also have reduced costs and increased the amount of goods and services that would have been sold at home and abroad.

As it was, with prices rising slowly over the 1945-64 period, the Federal government and our government-controlled banking system have been able to allocate the benefits of increased produc­tion, and a little bit more, to fa­vored bank borrowers who pay lower than free market interest rates and those who received Fed­eral funds over and above the sums collected in taxes or borrowed from private individuals or cor­porations.

Untold billions of dollars have also gone into the hands or bank accounts of international organiza­tions, foreigners, their banks, and governments. Many of these dol­lar holders consider $35 to be worth more than an ounce of gold. Such dollar holders have felt they could always get the gold and, meanwhile, they can get interest by leaving their dollars on deposit with American banks. Foreign governments could even count such deposits as part of their reserves against their own currencies. For example, the more dollars held by the Bank of France, the more it can expand the supply of French francs. So the inflations of many European governments are built on top of the great increase in their holdings of dollars.

Short term liabilities of Ameri­can banks to foreigners at the end of 1945 were only $6.9 billion.3 By the end of last year, they had risen to an estimated $28.8 billion, an increase of $20.9 billion.’ How many more dollars rest in foreign billfolds or under foreign mattress­es cannot even be guessed. Should such foreign dollar holders lose confidence in the ability of their central banks to get an ounce of gold for every $35 presented to our government, more and more of these dollars will return to our shores where their presence will bid up American prices.

This whole process of increasing the money supply by semi-hidden manipulations is not only highly questionable from the viewpoint of morality and economic incentives, but it also has a highly dis­organizing effect on the production pattern of our economy. Over the years, as these newly created dol­lars have found their way into the market, they have forced profit-seeking enterprises to allocate a growing part of production to the spenders of the newly created dol­lars, leaving less production avail­able for the spenders of dollars which represent contributions to society. Once this artificial crea­tion of dollars comes to an end, as it must eventually, those business­es whose sales have become de­pendent upon the spending of the newly created dollars will lose their customers.

This will call for a reorganiza­tion of the nation’s production facilities. Such reorganizations of business have become known as depressions. The depression can be short, with a minimum of human misery, if prices, wage rates, and interest rates are left free to re­flect a true picture of the ever-changing demands of consumers and supplies of labor, raw materi­als, and savings. Private business will then move promptly and ef­ficiently to employ what is avail­able to produce the highest valued mixture of goods and services. Any interference with the free market indicators will not only slow down recovery but also mis­direct some efforts and reduce the ability of business to satisfy as much human need as a completely free economy would.

The day of reckoning can only be put off so long. Once the na­tion’s workers and savers realize that such semi-hidden increases in the money supply are appropri­ating a part of their purchasing power, they may take their dollars out of government bonds, savings banks, life insurance policies, and the like in order to buy goods or invest in real estate or common stocks, and even borrow at the banks to do so. If this trend should develop, the government would soon be forced to adopt sound fis­cal and monetary policies.

The same effect might be pro­duced by a rush of foreign dollar holders to spend the dollars they now consider as good as one thir­ty-fifth of an ounce of gold. In any case, an ever-increasing supply of dollars and ever-increasing prices will eventually bring on a “run­away inflation,” unless the gov­ernment stops its present practices before the situation gets complete­ly out of hand.

The important thing to remem­ber is that increases in the na­tion’s money supply can never benefit the nation’s economy. Such increases in the money supply do not and cannot increase the sup­ply of goods and services that a free economy would produce. Such inflations of the money supply can only help some at the expense of others. Even such help for the politically favored is at best only temporary. As prices rise, it takes ever bigger doses of new money to have the same effect, and this in turn means still higher prices.

The fact is that no matter what the volume of business may be, any given supply of money is suf­ficient to perform all the services money can perform for an econ­omy. All that is needed for con­tinued prosperity is for the gov­ernment to let prices, wage rates, and interest rates fluctuate so that they reveal rather than hide the true state of market conditions.

Under the paper money stand­ard, politicians are easily tempt­ed to keep voting for just a little more spending than last year, and just a little less taxing than last year. The gap can be covered by a semi-hidden increase in the money supply—just a little more than last year. Then, too, the il­lusions of prosperity are often helped along by an easy money policy—holding interest rates be­low those of a free market. This tends to increase the demand for loans above the amount of real savings available for lending. The banks then meet the demand for more credit by the bookkeeping device of increasing the bank ac­counts of borrowers.

Clever financial officials must then find ways to put off the day of reckoning. If gold continues to flow out, private travel, imports, and investments can be blamed and controls instituted. When the first controls do not succeed, more and more controls can be added. When these fail, public attention can always be diverted by a war. War is now generally considered a sufficient excuse for more in­flation and a completely controlled economy of the type Hitler estab­lished in Germany.

No man or government should ever be trusted with the legal power to increase a nation’s money supply at will.

The great advantage of the gold standard is that gold cannot be created by printing presses or by bookkeeping entries. When a coun­try is on the gold standard, politi­cians who want to vote for spend­ing measures must also vote for increased taxes or sanction the is­suance of government securities paying free market interest rates that will attract the funds of pri­vate savers and investors. Under a true gold standard, men remain free, the quantity of money is determined by market forces, and both the manipulated inflations and the resulting depressions are eliminated, along with all the pov­erty and human misery that they cause.

Foot Notes

1 See “Jobs for An” by Percy L. Greaves, Jr. in the February 1959 issue

2Figures from the Federal Reserve Bulletin, February 1965.

3Figures from the Federal Reserve Bulletin, February 1965.

Federal Reserve Board “Supple­ment” to Banking and Monetary Sta­tistics, Sec. 15. International Finance.

4 Federal Reserve Bulletin February, 1965.


Under A Gum Tree

Stanley Yankus

Stanley Yankus moved to Australia some years ago in protest at not being allowed to grow as much wheat as he pleased on his own farm in Michigan for his own chickens without paying a penalty tax. We are pleased to share here a recent letter from him, concerning the practice of freedom.

A South American correspond­ent asks: “What progress are you making in promoting the ideas of liberty in Australia?”

Australia is a vast country. The nature of my job prevents my wandering off to Toowoomba, Queensland, or some other town a thousand miles away. So how can I promote liberty all over Australia?

Did you ever get the feeling that you can’t do much alone? On the surface it seems most of us lack the funds and are ill-equipped to promote freedom without be­longing to a large organization. But I’m in favor of two-man con­versations held under the shade of an Australian gum tree, or any other convenient place, as one of the best means of promoting lib­erty. If one’s ideas are good, I have faith the ideas will spread like dandelion seeds. If the ideas are worthless like some seeds, they won’t even germinate.

To illustrate, let me relate a re­cent conversation with a libertar­ian friend concerning the follow­ing story:

Back in the days of horse trans­portation, a group of tourists were being hauled around the country­side by team and wagon. The driver was an expert with his whip. Whenever a fly landed on a horse, the driver flicked it off with a quick snap of the whip. Then a bee landed on one of the horses, but the driver never moved. One of the curious tourists asked, “Why don’t you use your whip on the bee?”

The driver winked his eye know­ingly and replied, “The bees are too well organized!”

This story was intended to show that organizations have great pow­ers while individuals have none. But my libertarian friend doesn’t eat everything that’s put on his plate. He had sharper insights. “Suppose,” he said, “you were given the task of eliminating all the bees or all the flies. Which task would seem easier to accomplish? How easy it would be to sneak up on a hive at night and capture the entire organization of bees by throwing a plastic bag over the whole lot. How difficult it would be to catch all the flies. They seem to be everywhere and nowhere, un­organized as they are.”

Likewise, the unorganized lib­ertarian can go about his busi­ness of promoting liberty unno­ticed in the middle of the action taking place. Have you ever no­ticed how unobtrusive one is while strolling through a crowded shop­ping center—seen and unseen at once? Edgar Allen Poe in his short story, “The Purloined Let­ter,” illustrated how well a letter could be hidden in plain view on top of the desk.

But what can an unorganized individual do to promote liberty without such tools of communica­tion as newspapers, radio, and TV publicity? After all, what good are the ideas of liberty if no one else knows about them but you?

Hidden Tape Recorders

After purchasing a tape re­corder, I eagerly demonstrated my new possession to a family visiting our home. The lady, who heard herself for the first time on the play-back of the tape record­ing, commented, “I would not like to be recorded secretly by a hidden tape recorder.”

Her husband shrewdly ob­served, “You are tape recorded by every man, woman, and child you talk to. Not only that, you are televised by family, friends, neigh­bors, and strangers who see you. All of us have mental recollections of facial expressions and conversa­tions we saw and heard many years ago.”

Since most of us come in con­tact with thousands and thousands of individuals during a lifetime, the number of mental tape record­ings we leave in other minds be­comes difficult to calculate—even for a mathematics professor. All this communication takes place without spending a penny on the publicity of newspapers, radio, and TV. The lesson to derive from an awareness of the multitude of impressions made on others by our words and behavior is to work toward self-improvement—to make ever better tape recordings of self.

These ideas were not generated by a large organization aiming to reform others, but, rather, by two ordinary individuals who were mutually trading ideas on liberty for their own self-improvement—one hand washing the other. How better can one promote liberty in Australia or elsewhere?



How to Advance Liberty

Once an individual who would advance liberty has settled on self-perfection as correct method, the first fact to bear in mind is that ours is not a numbers problem. Were it necessary to bring a majority into a comprehension of the libertarian philosophy, the cause of liberty would be utterly hopeless. Every significant move­ment in history has been led by one or just a few individuals with a small minority of energetic supporters. The leaders have come from strange and odd places; they could not have been predicted ahead of time. One, 1 recall, was born in a manger. Another, the leader of a bad movement, was an Austrian paper hanger. Who, more than any other, will advance liberty in America? 1 do not know; you do not know; that very individual does not know, for each person is possessed of aptitudes and potentialities about which he or she is unaware.

Leonard E. Read

  • Percy L. Greaves, Jr. (1906–1984) was a free-market economist for US News (the forerunner of US News and World Report) and authored several books on economics, including Understanding the Dollar Crisis and Mises Made Easier. He was also a seminar speaker and discussion leader with the Foundation for Economic Education. Percy and his wife Bettina Bien Greaves were long-time associates and friends of Ludwig von Mises, and regular attendants at Mises's New York University seminar.