BOOK DATA
English Title: Money Mischief: Episodes in Monetary History
Author: MILTON FRIEDMAN (1912–2006)
ISBN: 978-0156619301
Language: English
Publisher: Mariner Books; First Edition
(March 31, 1994)
Keywords: 1840-1873 Seated Liberty Dollar Value, the Coinage Act of 1873, the Silver Purchase Program of 1933, Hyperinflation in China in the 1940s, the End of the Bretton Woods System between 1971 and 1973, the Fiat Money, Monetary Growth and Inflation, the Hong Kong Dollar, Consequential Uncertainty
Book Review: Money Mischief
Milton Friedman is one of my favorite economists (alongside Karl Marx and John Maynard Keynes), who easily explained what monetarism is in this book. I define this book as a history of silver, gold, and fiat money because he indicated several surprising facts below:
1. Silver was the main monetary consumption metal before the introduction of gold in the late nineteenth century, especially in 1873 for the U.S.
2. China, in the 1930s, was the last country to use silver as a monetary standard before the introduction of Roosevelt's silver purchase program that first led China to depression, then to hyperinflation to end the Nationalist regime.
3. The so-called ‘irredeemable paper money’ is the fiat money of today. The invisible effect of printing fiat money is systematic inflation and high unemployment rates, especially the former reducing what the same amount of money can buy. This alchemic magic of printing fiat money from nothing affects all of us invisibly. It was perfectly summed up as taxation on our money balances. This is in the view of the social totality as well.
The most astonishing thing is that the monetarist view is the exclusion of any class consciousness; thus, the monetarist view of money is now how we see money ordinarily. Class-mindedness in the ‘classless’ or ‘all-people’ depiction is the prime feature of capitalist economics under capitalism. This law is common in any field of science and theories as long as they are presented without the class consciousness of the proletariat.
Milton Friedman’s depictions of several important topics concerning Hong Kong are still effective and superior to any ‘scholars’ in Hong Kong.
(1) We are systematically misled by grotesque bureaucratic media propaganda in Hong Kong that the so-called ‘strong fiscal reserves’ mean or are exemplified by foreign exchange reserves or the Exchange Fund of US$400 billion. Foreign exchange reserves, or the exchange fund, are entirely different from fiscal reserves. Of HK$4,133.9 billion in assets of the EF as of the end of September 2024, the Government's fiscal reserves—a reserve fund is savings, or a liquid asset set aside to cover unexpected costs or future financial obligations—amounted to only HK$508.6 billion. As Milton Friedman taught, foreign exchange reserves are simply not fiscal reserves. In Hong Kong, as part of anti-people propaganda, the different terms are mixed to hide the truth.
(2) The HKSARG has been counting the revenue from bond issuance as recurrent fiscal revenue to calculate the fiscal deficit, resulting in the disclosed fiscal deficit being much lower than the actual fiscal deficit. Thus, according to the grotesque logic and culture of their closed ruling society, HKSARG’s statistical data is manipulated at the level of the basic definition of different concepts that are alienated from our ordinary common sense. As we saw in the ‘special’ definition of ‘the working population’ in the ‘unemployment rate.’ The purpose is the same as hiding the truth.
History of the Monetary Metals:
India had only recently terminated the free coinage of silver, and China would remain on a silver standard until Franklin D. Roosevelt drove it off silver with his silver purchase program in the 1930s (interestingly enough, a political sop to some of the same forces that had been behind the U.S. silver movement in the nineteenth century, as detailed in chapter 7). We have become accustomed to regarding gold as the natural monetary metal that we have forgotten that silver was a far more important metal than gold for centuries, losing first place only after the 1870s. (p.122)
From 1670 B.C. to 1873, the year in which the United States and France demonetized silver, the yearly average price of gold never rose above 16 times the corresponding price of silver. The lowest recorded price ratio is a trifle below 9 and 16 for more than three millennia. From 1687, when continuous annual estimates begin, to 1873—years when silver was unquestionably the dominant monetary metal—the range is much narrower, between 14 and 16. The situation changed drastically after 1873. From then 1929, the ratio varied between 15 and 40 and was mostly in the high 30s, except for a few years during and just after World War I. The drastic fall in the price of silver during the Depression raised the ratio to 76 in 1933. The silver purchase program lowered the ratio temporarily to 54 in 1935, but it rose to an all-time high of over 100 in 1940 and 1941. It fell to a low of 18 in 1970 because the United States pegged the price of gold at 35 dollars an ounce, while inflation was pushing up the price of silver along with the prices of other commodities. After the price of gold was set free in 1971, the ratio rose again, fluctuating considerably. Currently, it is around 75 to 1. (pp. 167-168)
Hyperinflation in China in the 1940s:
Had silver been simply a commodity in China, the rise in the price of silver would have been a welcome windfall, enabling China to dispose of its large stock of silver on highly favorable terms. But because silver was China’s money, the rise in the price of silver had produced a major deflation, which in turn had led to severely troubled economic conditions. ‘Imports declined while exports became increasingly uncompetitive. Industrial production drew to a halt with the low level of activity in the economy, unemployment rose, and prices slumped. The effect of the deflation on agricultural produce was from 100 in 1926 to 57 in 1933. This represented an appalling decline in income, and hence purchasing power, for those living by cultivation of the land. (Greenwood and Wood 1977a, p.32). According to Arthur N. Young, who served as a financial adviser to China from 1929 to 1947, ‘China passed from moderate prosperity to deep depression.’ (1971, p.209). (p.175)
The differences among the interpretations are important for a full understanding of events in China between 1931 and 1936. But it is worth emphasizing that all three interpretations agree that (1) the rise in the U.S. price of silver produced a sharp deflation in China; (2) large amounts of silver were exported, both legally and via smuggling after the government embargoed exports; (3) contemporary observers saw the deflation as accompanied by severely depressed economic conditions – whether because of money illusion or because their first-hand information was more reliable than the later highly aggregated, partial, and inexact statistics data; (4) the deflation, whether solely nominal or accompanied by declines in real magnitudes, produced widespread uncertainty and discontent; (5) this phenomenon led, by one route or another, to the departure of China from a silver standard and its replacement by a fiat standard; (6) the monetary ‘reform’ established institutional arrangements that contributed to the hyperinflation. (p.188)
The Magic of Monetarism:
Paper money came into wide use in the West only in the eighteenth century. It began, so I believe, with John Law’s ‘Mississippi Bubble’ of 1719-20, when, as the Encyclopedia Britannica (1970) puts it, ‘the excessive issue of banknotes stimulated galloping inflation with commodity prices more than doubled’ (see also Hamilton 1936)—a pale precursor of the million-, billion-, and trillionfold multiplication of prices in subsequent true hyperinflations. (p.191)
Whatever may have been true for money linked to silver or gold, with today’s paper money, it is governments and governments alone that can produce excessive monetary growth, and hence inflation. In the United States, the accelerated monetary growth from the mid-1960s to the end of the 1970s—the most recent period of accelerating inflation—occurred for three related reasons: first, the rapid growth in government spending; second, the government’s full-employment policy; third, a mistaken policy pursued by the Federal Reserve System. (p.205)
Financing governmental spending by increasing the quantity of money looks like magic, like getting something for nothing.
To make a simple example, the government builds a road, paying for it in newly printed Federal Reserve notes. It looks as if everybody is better off. The workers who built the road get their pay and can buy food, clothing, and housing; nobody has paid higher taxes, and yet there is now a road where there was none before.
Who has paid for it?
The answer is that all holders of money have ‘paid’ for the road. The extra money that is printed raises prices when it is used to induce the workers to build the road instead of to engage in some other productive activity. Those higher prices are maintained as the extra money circulates in the spending stream from the workers to the sellers of what they buy, from those sellers to others, and so on. The higher prices mean that the money people have in their pockets or safe deposit boxes or on deposit at banks will now buy less than it would have before. To have on hand an amount of money with which they can buy as much as before, they will have to refrain from spending all their income and use part of it to add to their money balances. As we saw in Chapter 2, the extra money printed is equivalent to a tax on money balances. The newly printed Federal Reserve notes are in effect receipts for taxes paid. The physical counterpart to these taxes is the goods and services that could have been produced with the resources that built the road. The people who spent less than their income to maintain the purchasing power of their money balances have given up these goods and services so that the government could get the resources to build the road. (p.210)
The Hong Kong Dollar:
Before 1972 it was united with the pound sterling using a currency board that stood ready to convert Hong Kong dollars into pounds at a fixed rate, keeping in reserve an amount of sterling equal to the sterling value of the outstanding Hong Kong currency.
Since the currency reform of 1983, the Hong Kong dollar has been unified with the U.S. dollar through a similar currency board mechanism. Likewise, the pound, the dollar, the franc, and the mark were simply different names for specified fixed amounts of gold, and so they constituted a unified currency area. The key feature of a unified currency area is that it has at most one central bank with the power to create money— “most” because no central bank is needed with a pure commodity currency. The U.S. Federal Reserve System has twelve regional banks, but there is only one central authority (the Open Market Investment Committee) that can create money. Scotland and Wales do not have central banks. When Hong Kong unified its currency with the dollar, it left open the possibility of giving the currency board central bank powers, and before the Tiananmen Square episode in China, the Hong Kong authorities were contemplating the introduction of changes that would in effect have converted the currency board into a central bank. One of the good effects of what happened in China has been the derailment of that project. With a unified currency, the maintenance of fixed rates of exchange between the different parts of the currency area is strictly automatic. No monetary or other authority needs to intervene. One dollar in New York is one dollar in San Francisco; one pound in Scotland is one pound in Wales, plus or minus perhaps the cost of shipping currency or arranging book transfers—just as under the late nineteenth-century gold standard, the rate of exchange between the dollar and the pound varied from 4.8865 dollars only by the cost of shipping gold (yielding the so-called gold points). Similarly, 7.8 Hong Kong dollars is essentially just another name for 1 U.S. dollar, plus or minus a minor amount for transaction costs. It requires no financial operations by the Hong Kong currency board to keep it there, other than to live up to its obligations to give 7.8 Hong Kong dollars for 1 U.S. dollar, and conversely. And it can always do so because it holds a volume of U.S. dollar assets equal to the dollar value of the Hong Kong currency outstanding.
An alternative arrangement is the one adopted by Chile and Israel: exchange rates between national currencies pegged at agreed values, the values to be maintained by the separate national central banks by altering (the favorite term is ‘coordinating’) domestic monetary policy appropriately. (pp.242-3)
…a world monetary system has emerged that has no historical precedent: a system in which every major currency in the world is, directly or indirectly, on an irredeemable paper money standard—directly, if the exchange rate of the currency is flexible though possibly manipulated; indirectly, if the currency is unified with another fiat-based currency (for example, since 1983, the Hong Kong dollar). The ultimate consequences of this development are shrouded in uncertainty. (p.249)
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