Great Antidote Extra: Lawrence White on Currencies and Better Money

money currency monetary policy banking inflation

November 8, 2023


"Money is complicated because it’s been so many things. It’s been peppercorns, seashells, barley, and precious metals. It’s also been both emergent and planned... it’s a socially conceived tool for exchange. Some people innovate to make that tool better and more convenient, and other people try to control and direct those innovations."
Why is money so important? And why is it so darned complicated? To explore these two seemingly straightforward questions, The Great Antidote’s Juliette Sellgren interviewed Lawrence White, a professor of economics at George Mason University and the author of books including The Clash of Economic Ideas: The Great Policy Debates and Experiments of the Last Hundred Years and Better Money: Gold, Fiat, or Bitcoin.

Adam Smith cautioned us about confusing money with wealth. White and Sellgren discuss money: The actual medium of exchange that makes commercial transactions easier—whether bills, coins, peppercorns, or cowry shells.  

To understand better, White takes us back. 

People started using money because it’s more convenient and predictable than bartering. (Sure, you can still barter. But it’s mostly for fun.) Silver (gold came later) outcompeted most other types of commodity money—that is, money that can also be used as a good or commodity—once coinage came along. Coins make it easier to tell how much silver someone offers without weighing the metal or determining its purity. Bank notes (bills) exchangeable for silver were more convenient still. 

Banking systems, which issue and manage the money supply, have ranged from free banking (as in Scotland in Adam Smith’s time when many competing banks issued bank notes) to a monopoly by a central bank on issuing currency, as under the U.S. Federal Reserve. Currencies vary, too, and range from pure commodity money to commodity-backed currency to fiat money. 

The value of commodity and commodity-backed money is kept steady by the market for the commodity—if gold (and the money it backs) becomes more valuable, it becomes worthwhile to mine more gold. When more gold is mined, the increased supply brings the price down again. This is the type of money, and the dynamics of its value, discussed by Adam Smith. 

Banks can weaken the discipline of commodity-backed money by promising less of the commodity in return for their notes. A bank can also decouple the currency from the commodity completely and issue fiat currency, which is valuable as a social convention. This is what most central banks have done, though cryptocurrencies like Bitcoin are not backed by commodity goods, either. 

White points out that there have been attempts to create new private currencies, such as Bitcoin, to compete with government-issued money. However, so far no privately issued cryptocurrency is commonly accepted.

So we might say that money is complicated because it’s been so many things. It’s been peppercorns, seashells, barley, and precious metals. It’s also been both emergent and planned. Competitively provided and issued through a monopoly. Money is also complicated because it’s a socially conceived tool for exchange. Some people innovate to make that tool better and more convenient, and other people try to control and direct those innovations.

Sellgren and White get to money’s importance when they talk about stability and predictability. Stability and predictability are measures of success for a monetary system. In countries like the United States and Canada, people don’t worry so much about the most disruptive ways that a currency failure can affect them. For all the troubles floating around, almost no one is predicting hyperinflation.

But there is still monetary uncertainty! Higher interest rates and less certainty discourage long-term investment and lending. This type of certainty hasn’t always been the status quo. White points out that under the gold standard, the United States had 35 years with no long-term inflation, whereas since the 1970s the annual rate has been closer to four percent, with more year-to-year variation.

White would like for central banks to be held to a higher standard for performance. One barrier to that is that the costs of bad monetary policy are so poorly understood. The benefits may be just as poorly understood.

Want to explore more?
John Burrow’s Cryptocurrency, Money, and Adam Smith
Lawrence White’s Competing Money Supplies, in the Concise Encyclopedia of Econnomics.
Watch Arnold Kling, Nicolás Cachanosky, and Leonidas Zelmanovitz discuss White's book in this episode of From the Shelf at Econlib.
James Broughel’s The Continuing Relevance of David Hume’s Musings on Money
The Wealth of Nations Reading Guide, Book II, Chapter 2, “Of Money Considered as a particular Branch of the General Stock of the Society, or of the Expence of Maintaining the National Capital”
EconTalk: John Taylor on Inflation, the Fed, and the Taylor Rule

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