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Saturday, January 1, 1972

Legal Tender: Sellers Beware

A pleasant premise underlying socialism is that everyone should be able and willing to pay prices high enough to cover costs. Then, no one ever would be obliged to work for less than “a living wage.” Such is the foolish dream of persons who do not understand the process and the advantages of free trade.

True, one trades in order to gain something of greater value to him than what he gives up in exchange, and so does every other trader. Each strives to satisfy his wants with the least effort or expenditure; but the trader differs from socialists for he does not expect anyone else to give up something for nothing.

A second significant difference between a trader and a socialist concerns their respective views about money. To a trader, money is that particular item of commerce so much more universally acceptable in trade than other scarce and valuable items that it serves as a useful medium of exchange. It opens up a far wider range of market opportunities than could possibly be reached through direct barter. It is useful as money because the overwhelming majority of traders are willing and anxious to accept it in payment for their wares.

An entirely different concept of money is implied in the language and philosophy of socialism. Those who speak of “a living wage” and of “prices high enough to cover costs” are not thinking about willing customers, or of a money that arises naturally out of willing exchanges in the open market. What they seem to have in mind, instead, is a purchasing power to be created out of thin air — that ancient dream of alchemists and counterfeiters.

Counterfeiters Need “Legal Tender”

Now, it’s easy enough to take a base metal and color it “gold,” or to print a slip of paper and call it “money.” The trick is to make others believe it. Counterfeiters and confidence men are indeed a nuisance to producers, traders, savers, especially to those who are willing to venture into shady deals. But with a bit of experience and wariness, an honest trader can readily spot such risks and direct his business toward men and money he trusts.

So, what is the poor counterfeiter to do? He will do his best to have his “money” declared legal tender, which means that the government would force creditors to accept it when offered in payment of any debt.

Any debt? Including taxes? The government that levies and collects taxes is expected to grant to someone a note printing monopoly? It takes no political genius to rise to the conclusion that if anyone is to print notes to be enforced as legal tender, surely that monopoly had best be exercised by the government itself! And that is socialist monetary policy in a nutshell: the government in full control of the “money machine.”

If government expenditures rise, just print additional bogus money. Soon enough, this bog us money declared legal tender will have driven into hoarding or hiding any more substantial or trustworthy medium of exchange. As Sir Thomas Gresham observed: “Bad money drives out good.” This is the monetary manifestation of the more general law that people always will use the cheapest and easiest means available to obtain their various ends. In other words, if the government decrees that a piece of paper or an alloyed coin is equal in purchasing power to the precious metal that the market had chosen as money, then customers will do their best to make sellers take the bad money. And even the most honest and scrupulous of men will gladly use the bad money to meet his tax payments.

However, a small problem looms for a national government: its taxing power and legal tender monopoly end at the border. It may be able to fool or to browbeat foreign suppliers for a time into accepting printed paper to cover trade deficits; but eventually, international trade balances are payable in goods of value, such as gold. Even an international monetary cartel such as the Bretton Woods agreement breaks down as soon as the gold runs out — a breakdown which President Nixon declared official on August 15, 1971.

It Stops at the Border

At this point, let us pick up the thread of the labor theory of value with which we began this discussion of inflation: the socialistic presumption that everyone is entitled to “a living wage,” whether or not he earns it. The late Lord Keynes translated this fallacy into the language of politics, saying in effect: the way to stay in office is to woo organized labor; if the unions demand higher wages, meet their demands through use of the money machine.

Some witnesses, seeing that the “money” button is now being pushed by organized labor, have come to the remarkable conclusion that this is a new kind of “cost push” inflation, unlike the old “demand pull” type; the union wage demands are pushing prices up, so the money machine isn’t the culprit after all. Therefore, let’s freeze wages and let the machine run until the economy has regained its health! That, too, was implicit in the official declaration of August 15, 1971.

Despite all the International Brotherhoods of this and that, the new “cost push” inflation has no greater power over foreigners than has any other name for the game. In the markets of the world, it’s still the same: put up, or shut up; if you want our goods and services, give us your goods or your gold; worthless paper not accepted here; the exorbitant wage demands of American labor unions are not legal tender in Japan, so sorry!

So, in the final analysis, what a nation can do is to inflate itself out of the world market and practice its splendid isolationism to the very brink of its own disaster — if not further. And a citizenry that will thus demand and tolerate socialism fully deserves it. Nor is it an effective cure for inflation to demand that the government more stringently regulate the monopoly powers granted to organized labor; of course those powers are used and abused to everyone’s detriment and ought to be withdrawn. So should numerous other special privileges and government sanctioned interventions that disrupt peaceful production and trade. However, as long as the government has power to declare that paper is legal tender, there is little prospect that the economy may be free of inflation and socialism.  

  • Paul L. Poirot was a long-time member of the staff of the Foundation for Economic Education and editor of its journal, The Freeman, from 1956 to 1987.