Economics Questions

Re: Stephen Zarlenga refutation of Menger's Theory of the Origin of Money

DougM — Fri, 13 Mar 2009 18:40:53 GMT

I apologize for the necessarily long post.

I found an article by Zarlenga on this subject here:

http://www.monetary.org/mengerrefutation.html

I’ll address this article point by point.

The first part of the alleged refutation concerns the volatility of gold. Zarlenga contends that the price of gold in terms of other commodities decreased during certain periods in history. For example, he contends that following the discovery of the Americas prices in Holland and England rose by as much as 500% over the course of a century and a half.

The Austrian theory is completely consistent with an increase in the supply of gold causing an increase in the prices of other commodities in terms of gold. This has occurred historically, the most recent period cited being 420 years ago. It is unlikely to happen again unless gold is discovered on other planets.

Zarlenga also makes the point that, in more recent times, gold has gone through periods where it had high volatility in terms of money. All of these involve changes in the value of money, not changes in the value of gold. The price of gold fell in terms of money from 1789 to 1809 because, among other things, the U.S. was shifting from the Continental, backed only by promises for the U.S. government to redeem the currency for gold some day, by the gold-back dollar. Similar events were taking place in all of the other periods cited.

Note that the highest volatility cited that was caused by changes in the value of gold is 500% over a century and a half. This pales in comparison to the changes caused in the money supply in just the century prior to gold prices hitting $1,000 an ounce earlier this year, which amounts to 5,000%.

The article then tries to refute Menger by citing the difference between the gold-silver ratio in the ancient Roman Empire and China, Japan, Africa, and Spain. This ignores the tremendous transportation costs of the time. It took several months crossing the deserts of the middle-east to get commodities from the west to the east. Under these circumstances, the Austrian theory is not at all at odds with differences in the exchange ratios. The difference in exchange ratios is, assuming it is correct, not important to monetary theory. However, monetary theory can tell us that this condition indicates that the west almost certainly had more silver relative to gold at that time than the east. In this way, a-priori monetary theory can focus the efforts of historical investigations.

The article then makes an attempt to refute the following statement by Menger:

"The reason why the precious metals have become the generally current medium of exchange among all peoples of advanced economic civilization is because their liquidity is far and away superior to that of all other commodities, and at the same time because they are found to be specially qualified for the concomitant and subsidiary function as money." (p.17)

The article attempts to refute this statement by citing instances in ancient Rome, China, and Peru where metals other that gold and silver were used as money. The question would be whether Menger would have considered these advanced economic civilizations. The relevant criteria would be the mining and metal refining technology and capital structure in these societies compared to those in Europe in the 1870’s. There can be little doubt that fewer resources were required to produce iron, copper, and bronze in 1871 than were required in 200 BC. Consequently, it is obvious that by advanced economic civilizations Menger was not including these ancient civilizations.

The article then contends that a 130 grain standard size for coins emerged in several civilizations and that this represented the value of a cow, with cattle being the previous unit of exchange. It then states “If gold was in the process of supplanting the old money unit, without institutional conventions, there is no way to explain the international 130 grain consistency.” Actually, there are only two ways to explain this. Either all of the governments got together in an international summit and agreed on the 130 grain standard, or the market already existed and the governments simply adopted the standard that had already been adopted by the market. Which one is more likely?

Finally, the article uses a bunch of quotes to support its point but admits that “it is not possible to establish history through such through such contemporary studies.”

In summary, the Austrian monetary theory is completely consistent with all of the evidence cited. We would expect to find more government-minted coins in the archeological record than privately minted coins because private merchants would more likely weigh the metal (as they did during the gold rush) than mint coins. Zarlenga has provided no evidence to prove his point that the origin of money is government decree.

Re: Stephen Zarlenga refutation of Menger's Theory of the Origin of Money

krazy kaju — Fri, 13 Mar 2009 11:38:09 GMT

The Fed is a government created institution, so you can't really blame the "free" market for anything here.

Re: Stephen Zarlenga refutation of Menger's Theory of the Origin of Money

nazgulnarsil — Fri, 13 Mar 2009 07:36:04 GMT

EDIT: okay what he's actually advocating is that the power to print money be retruned to congress and then have congress print money and spend into the economy. This is just keynesian economics in another guise.

"They argue that this would mean money would be issued by government interest free and spent into circulation to promote the general welfare. They argue that this would mean that substantial expenditures on infrastructure, including human infrastructure (education and health care) would become the predominant method of putting new money into circulation."

same old same old. the theories talked about below appear as an aside in his book "the lost science of money", but I'm not sure where his beliefs lie, since his organization promotes the above line.

/end edit

just from looking around the net he is basically arguing for turning paper dollars into a hard commodity be severely restricting its printing. In theory you could make paper money harder than even gold simply by not ever printing anymore. Of course this would lead to deflation over time, which keynesians loathe.

mencius moldbug actually talks about the exact same thing here:

http://unqualified-reservations.blogspot.com/2008/09/clean-slate-accounting-of-dollar-part-1.html

basically turn all electronic "virtual dollars" into real dollars, then destroy the printing presses. bam, sound currency. Of course the problem is that it will never happen.

further reading in that vein: a Misean account of the bank crisis

http://unqualified-reservations.blogspot.com/2008/10/misesian-explanation-of-bank-crisis.html

and the underlying reason for bank illiquidity: term transformation

http://unqualified-reservations.blogspot.com/2008/09/maturity-transformation-considered.html

sorry to come off as a fanboy. I just find the quality of writing to be refreshing.

Stephen Zarlenga refutation of Menger's Theory of the Origin of Money

DD5 — Fri, 13 Mar 2009 06:58:16 GMT

Is anyone familiar with Stephen Zarlenga and his claims to refute Austrian theories about money?

There is this crazy idea, also popularized by this book "Web of Debt" which propagates some of his fallacious ideas. Among them is "social credit" or some form of socialism as a monetary solution to our problems. This Stephen seems to propagate a false dichotomy of public vs private money, as opposed to government vs free market. The "private" he is referring to is the current system (Fed being private and all)

When ever I have tried to persuade one of these followers that their theories are based on false economic grounds, they always point out to me that Austrian theory on money and credit has been refuted by Stephen Zarlenga, and that I should go read his book. I don't feel like wasting my time reading some more of the same old socialist economic nonsense, so I am wondering if anyone here knows what is this supposedly refutation of Austrian theory of money by this Zarlenga guy.