By Robert P. Murphy *

Joe Weisenthal is an editor and host at Bloomberg who recently used his big platform Twitter to throw stones at the inflation hawks. In a recent discussion thread, Weisenthal poked fun at those concerned about the declining purchasing power of the US dollar and in fact claimed that it would be immoral so that the currency retains its value over time.

As we’ll see, while Weisenthal’s thought experiment on a time traveler is a bit fancy, it gives us a good opportunity to explore the underlying economy. The entire episode highlights, once again, why the Austrian school provides audiences with a beacon of light amid our financial expert’s confusion.

The Weisenthal Time Traveler

Below is the original tweet, which is largely self-explanatory, although interested readers may see me grappling with Weisenthal by click here.

In the context, Weisenthal (and Adam Singer) poke fun at the Ron Paul types who are upset by the steady decline in the dollar’s purchasing power since the creation of the Fed in late 1913. Weisenthal thinks it is absurd to expect real currency to maintain its market value for a century. Why, what would such a “hoarder” have done to benefit society all this time?

Reduce the time scale

To get straight to the point, Weisenthal is completely wrong: there was nothing immoral about the classic gold standard and its maintenance of the dollar’s purchasing power over long periods of time. But it will be easier to pinpoint the flaw in Weisenthal’s thinking if we first consider a simple story.

Suppose Joey is a teenager who mows lawns for extra income and typically earns $ 25 per weekend. Joey wants to buy a $ 300 Xbox, so he saves his weekly mowing money under his mattress. After three months, Joey brings the $ 300 saved in cash to the mall and buys the coveted electronics.

Does Joe Weisenthal have a problem with this scenario? Did the free market function immorally by allowing Joey to shift his purchasing power from early summer to late summer? Was Joey supposed to have done something in addition to mowing lawns gain the ability to report its potential consumption over time?

I hope Weisenthal not oppose Joey saving his change over the summer. But then, what is the difference in principle between Joey’s three-month postponement and Weisenthal’s time traveler who performed a hundred-year postponement of consumption?

Trade in goods present at a higher price for future goods

Indeed, not only should a time traveler not be penalized for delaying consumption by a century, but he should be actively reward. This is because present goods have more value than future goods. (Note that we get into some very technical issues here. The interested reader can check out my three-part podcast series – one, two, and three – to hear the intricate details of interest theory in the Austrian tradition.)

So, going back to the original tweets, if a guy in 1921 has two quarters in his pocket, and that would be enough for him to buy a delicious burger, then for his willingness to effectively swap his 1921 burger for a burger to be delivered in 2021 , the guy should at least get to trade at par. And in fact, he would (normally) be able to get a pledge of Following than a hamburger in the future, since the former are more valued. (It’s no more mysterious than a present burger that trades for more than one here Hot dog.)

It is easy to understand why, subjectively, people would have to be promised more goods in the future in order to forgo potentially consuming their goods today. But how, mechanically, can borrowers keep these promises? How is it possible, technologically speaking, to transform 100 units of present goods into (say) 150 units of future goods?

The answer is, the longer we are willing to wait, generally speaking, the more physical output we can get for a given amount of input today. Eugen von Böhm-Bawerk referred to the superior physical productivity of wisely chosen individuals, more roundabout process. For example, if a man is in the woods and wants to draw water from a stream in his neighboring cabin, he has different techniques he can use.

A very quick and straightforward method is to cup your hands and go back and forth between the stream and your cabin. This offers some water to its cabin very quickly, but the output, measured in gallons of water per hour of work, is also very low.

An intermediate method would be to dig two coconuts into small buckets, and then armed back and forth with the newly created capital goods. It would take longer to get the initial water to its cabin, but once the process was underway, it would provide significantly more gallons per hour of labor invested, even including the time spent building the buckets.

Finally, the man could take several months to dig a small path from the stream to his hut, so that the water would flow directly to him. Once completed, his renovations would be extremely productive if measured in terms of the volume of water per hour of his working time.

And so we see that the company would be willing and able to reward Weisenthal’s hypothetical time traveler for making $ 100 in 1921, and then postpone consumption for a century. The real resources which would have served to satisfy it in 1921 would be freed up to be invested in longer processes, which had a higher physical yield. To put it simply, it makes perfect sense that a 1921 hamburger is trading on the futures market for multiple 2021 burgers.

Bonds for cash

We can really see the weakness of Weisenthal’s analysis if we assume that the time traveler took their original money. and deposited in a savings account at the bank. Would it be immoral for a bank account to have $ 100 in 1921 and exceed that amount by 2021?

Or for another example, what if the 1921 time traveler initially bought a very long bond that would mature in 2021? The time traveler puts the link in his pocket, activates the time machine, and shows up at Weisenthal’s gate. He asks Joe to help him cash out his overdue obligation (and working at Bloomberg, Weisenthal is just the guy). The time traveler rejoices to find that the nominal interest he has earned on the hundred-year bond is just enough to maintain his purchasing power, because the goods are much more expensive than the traveler has. used to see. Has the market economy behaved immorally in allowing such a transaction to occur?

In principle, the same type of intertemporal exchange occurs if people invest their savings not in bank account or bond balances, but rather in the accumulation of real cash. Even here, the initial decline in consumption frees up real resources that can be channeled into the production of more future goods. As Ludwig von Mises explains in Human action:

If an individual uses a sum of money not for consumption but for the purchase of factors of production, savings are directly transformed into accumulation of capital. If the individual saver uses his additional savings to increase his cash flow because it is in his eyes the most advantageous mode of use, it causes a downward trend in the prices of raw materials and an increase in purchasing power. of the monetary unit. If we assume that the money supply in the market system does not change, this conduct on the part of the saver will not directly influence the accumulation of capital and its use for an expansion of production. The effect of the savings of our saver, that is to say the surplus of goods produced over goods consumed, does not disappear because of its hoarding. The prices of capital goods do not rise to the level they would have reached in the absence of such hoarding. But the fact that more capital goods are available is not affected by the desire of a number of people to increase their liquidity. If no one uses the goods – the non-consumption of which has resulted in additional savings – for an expansion of consumer spending, they remain as an increment of the amount of capital goods available, regardless of their prices. These two processes – increasing the liquidity of some people and increasing the accumulation of capital – go side by side.

It is a fascinating subject to think about the ideal currency (if such a concept makes sense) and whether its purchasing power would fall, rise or remain stable over long periods of time. What we can say for sure is that fast and unpredictable changes are undesirable, because an extremely fluctuating currency defeats the efficiency of monetary calculation, which is one of the foundations of civilization itself. Namely, double-entry bookkeeping only works when the monetary units of income and costs are comparable.


Contrary to the thoughts of Joe Weisenthal, there is nothing immoral about a currency retaining its purchasing power over long periods of time. In general, when people funnel their savings into conventional vehicles (such as bank accounts or bonds), it frees up real resources that can be used to generate a greater amount of production on the road. In principle, currency holding could simply be a different financial asset to achieve the same goal.

* About the author: Robert P. Murphy is Senior Fellow at the Mises Institute. He is the author of numerous books: Contra Krugman: Shattering the Mistakes of America’s Most Famous Keynesian; Chaos theory; Lessons for the young economist; Choice: cooperation, business and human action; The politically incorrect guide to capitalism; Understanding Bitcoin (with Silas Barta), among others. It is also the host of The Bob Murphy Show.

Source: This article was published by the MISES Institute

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