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FrÃ©dÃ©ric Bastiat's Views on the Nature of Money / Artikel mises.org

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FrÃ©dÃ©ric Bastiat's Views on the Nature of Money
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By Mark Thornton

[Posted June 23, 2003]

[img][/img]

What is money? This is a question for the ages. Humanity has
risen into complex society and experienced tremendous economic development and
high cultural achievement through the use of money. It has foundered or even
been destroyed when money has been undermined. Ignorance of the nature of
money should therefore be the central economic issue for society.

FrÃ©dÃ©ric
Bastiat was a French businessman who lived during
the first half of the nineteenth century (1801-1850). In the last few years
of his life he was elected to the national assembly and began a prolific
career as a writer on topics of economics, public policy, and political issues
of the day. His highly effective writing style includes the use of humor,
ridicule, dialogue, irony, exaggeration and, most important, logical deduction
and the process of elimination. He is like a mystery sleuth in search of
economic truth and this style has made him the undisputed champion in economic
polemics. He continues to earn high praise from journalists, economists, and
most important, from educated readers more than 150 years after his death.<a title href="http://www.mises.org/fullstory.asp?control=1251#_ftn1" name="_ftnref1">[1]</a>

In contrast to the universal respect and admiration for his
literary skills, Bastiat has not been admired as an economic theorist. His
efforts at economic theory have been roundly criticized and characterized as
the efforts of an amateur or even a crank. We can list the eminent economist
Joseph Schumpeter and Nobel Laureate F.A. Hayek, two outstanding economists,
among the critics of Bastiat as an economic theorist.

I have re-examined Bastiat's contributions to economic
theory and have found the charges against him to be unsubstantiated. In terms
of economic theory, Bastiat is widely knowledgeable, keenly discerning, highly
competent, and very creative. Furthermore, I have concluded that the central
criticisms of his detractors are unjustified because they are based on an
interpretation of Bastiat's theories that is at odds with the large body of
Bastiat's views on economics.

These critics place Bastiat in a camp that believes that
people do not benefit from trade (zero sum theory of exchange) and that the
value of a good actually resides within the good itself (intrinsic value). It
is simply preposterous to believe that Bastiat held such beliefs and to
interpret his theory in this manner. Bastiat was arguably the most consistent
economist of all time, an achievement that was nurtured by many years of
serious study before embarking on his political and publishing career a few
years before his death. There may be something wrong in Bastiat's theoretical
framework, but these critics have not identified it (Thornton 2001, pp.
387-98).

Had Bastiat lived to see the publication of his theoretical
treatise, he would no doubt have defended and clarified his views, possibly
modifying those views or their presentation. Bastiat certainly loved
intellectual debate, and few people of his day or ours would relish going to
battle with him.

Bastiat has received criticism in the area of monetary
theory. Hayek wrote in the introduction to an edition of Bastiat's Selected
Essays on Political Economy that Bastiat should not be blamed for his failure
to address the important problems of monetary economics because Bastiat lived
during the heyday of the international gold standard. With so many other
problems in his day, why should Bastiat search for a solution where no problem
existed?

<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">

The attentive reader will notice that, while Bastiat
grapples with so many economic panaceas which are familiar to us, one of the
main dangers of our time does not appear in his pages. Though he has to deal
with various queer proposals for using credit which were current in his
time, straight inflation through a government deficit seemed in his age not
a major danger. An increase of expenditure means for him necessarily and
immediately an increase in taxation. The reason is that, as among all people
who have gone through a major inflation within living memory, a continuous
depreciation of money was not a thing with which people would have put up
with in his day. So if the reader should be inclined to feel superior to the
rather simple fallacies that Bastiat often finds it necessary to refute, he
should remember that in some other respects his compatriots of more than a
hundred years ago were considerably wiser than our generation. (Hayek 1964,
pp. xi-xii)

[/i]

Many writers have appealed to Bastiat's writings on other
subjects to analyze monetary problems and to offer monetary solutions. For
example, appeal has been made to his views of the nature of government or
trade to illuminate monetary issues. Others have tried to reconstruct what
Bastiat would believe about money and some of these attempts can be judged
quite successful.

I have searched through Bastiat's writings for something—anything—on
monetary economics and have finally found an essay,"Maudit Argent"
(1849)2. A translation of the essay appeared in English, in a long lost volume<a title href="http://www.mises.org/fullstory.asp?control=1251#_ftn2" name="_ftnref2">[2]</a>
of Bastiat's essays, by the great American economist David Wells in 1877. We
are now able to see clearly if Bastiat has any economic lessons for us in the
area of monetary economics.

Modern economists would probably scoff at the notion of
using the dialogue method to present economic theory, but Galileo used it to
describe the nature of the universe, and Plato certainly used it to good
effect. Bastiat used dialogue to address the question,"What is money?"
It is a dialogue between an economist who represents Bastiat's views and who
begins the dialogue by shouting"Hateful money! hateful money!" (p.
174) after leaving a Committee of Finance meeting where a project of paper
money has been discussed. His discussant is an acquaintance and an educated
layman willing to learn how a failure to understand monetary theory"is
to be found at the root of all economical errors" (p. 177).

Bastiat begins his detailed analysis of the nature of money
with a stunning statement when he calls"drafts on the Bank of
Exchange" a"deceitful substitute" for money. This clearly
implies that banknotes and deposit accounts are fraudulent when they do not
represent commodity money in the same way warehouse receipts represent the
titles to nonmonetary commodities. Bastiat therefore begins his dialogue by
labeling fractional reserve banking practices as a fraud on the general public.

Bastiat goes on to explain that the confusion of money and
riches or wealth is the"cause of errors and calamities without number"
(p. 176). Money is genuinely beneficial—indeed, it plays a critical role as
the medium of exchange—but people confuse money with wealth. This is not a
problem for the deluded individual who readily ignores this mistaken belief
every time he gets hungry or thirsty and converts money into goods. However,
when this mistaken belief becomes acceptable public policy all manner of
destruction can be unleashed:

<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">

Because, when a man, instead of acting for himself,
decides for others, personal interest, that ever watchful and sensible
sentinel, is no longer present to cry out,"Stop! the responsibility is
misplaced." It is Peter who is deceived, and John suffers; the false
system of the legislator necessarily becomes the rule of action of whole
populations. (p. 179)

[/i]

When government concludes that money is wealth and enacts
policies to draw money away from other nations, it accepts the doctrine that
an individual and a nation can only prosper at the expense of others. In order
to increase wealth, people must be prevented from spending their money on
imports even if they are hungry, and must also be compelled to export their
goods in order to increase the amount of money in society. An expensive system
of customhouses will be necessary to prohibit imports and an expensive system
of export subsidies will be necessary to encourage exports and all of this
will require a large tax to be laid on the people. If other governments adopt
the same view, then you must raise armies and navies to establish colonies and
conquests that will then serve as customers for your goods and sources of
money. If they in turn raise armies to contest your colonies and conquests,
the process—"universal war" (p. 187)—becomes self-defeating and
very expensive.

<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">

And, tell me, are not these custom-house officers,
soldiers, and vessels, these oppressive taxes, this perpetual struggle
towards an impossible result, this permanent state of open or secret war
with the whole world, are they not the logical and inevitable consequence of
the legislators having adopted an idea, which you admit is acted upon by no
man who is his own master, that"wealth is money; and to increase the
amount of money is to increase wealth?" (p. 186)

[/i]

Of course, universal war is not the only result of the idea
that increasing the supply of money can make us richer. Along with
protectionism, colonialism (imperialism), heavy taxes, and the hatred of
capital comes"the last and worst, paper money" (p. 188).

<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">

When legislators, after having ruined men by war and taxes,
persevere in their idea, they say to themselves,"If the people suffer,
it is because there is not money enough. We must make some." And as it
is not easy to multiply the precious metals, especially when the pretended
resources of prohibition have been exhausted, they add,"We will make
fictitious money, nothing is more easy, and then every citizen will have his
pocket-book full of it, and they will all be rich." (p. 188)

[/i]

Bastiat then goes on to show that the notion of money as the
source of wealth is incorrect, that trading goods and services is mutually
beneficial, and that trade is merely facilitated by the use of commodity money
as the medium of exchange. He then reinforces this point by noting that any
rare metal can serve as money and that any quantity will be sufficient to
serve as money. The policymaker need not increase the money supply at all:

<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">

Money serves only to facilitate the transmission of these
useful things from one to another, which may be done equally well with an
ounce of rare metal like gold, with a pound of more abundant material as
silver, or with a hundredweight of still more abundant metal, as copper.
According to that, if a country like the United States had at its disposal
as much again of all these useful things, its people would be twice as rich,
although the quantity of money remained the same; but it would not be the
same if there were double the money, for in that case the amount of useful
things would not increase. (p. 191)

[/i]

Bastiat is adamant that any increase in the supply of money
does not benefit society and does not increase satisfaction. You simply do not
make the citizenry better off by forcing them to give up useful things in
return for newly created money. What is good for the individual (more money)
is not good for the nation as a whole, and Bastiat invents an ingenious game
to explain inflation and debasement. He then explains that money represents
value that the holder has provided to someone else in society either by goods
or labor, and the holder can take money and exchange it with others for goods
or labor of a similar value.

Bastiat laments:"It is impossible for society to
render more services than it receives, and yet a belief to the contrary is the
chimera which is being pursued by means of the multiplication of coins, of
paper money, etc." (pp. 200-01). You cannot solve the problems of
society, nor raise the standard of living simply by increasing the supply of
money.

Bastiat's companion asks, why not give an increase in the
supply of money a try, even if it will not work. At least it will not cause
any harm and will give people some hope that social problems can be addressed.
Beginning with a fictitious construction similar to what is now referred to as
the helicopter model, Bastiat replies"after the issue of paper money and
its depreciation, the equilibrium of values should instantly and
simultaneously take place in all things and in every part of the country"
then"the best thing we could do would be to look at one another and
laugh" (p. 205).

But this is not how it works in the real world. When you
force people to take false money in return for real goods and services, the
alteration of money creates real changes in the world, and, rather than
providing a mechanism for solving real-world problems or even of just
providing hope to the poor and the downtrodden, inflation actually creates
real problems and injustices for the least advantaged members of society.

<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">

I must inform you, that this depreciation, which, with
paper, might go on till it came to nothing, is effected by continually
making dupes; and of these, poor people, simple persons, workmen and
countrymen are the chief. (p. 206)

[/i]

During inflation the ability to calculate is blurred and
this is especially so among the average working class people who are unable to
identify the reason for their impoverishment. Bastiat notes that a"day's
pay of a country laborer will remain for a long time at a dollar while the
salable price of all the articles of consumption around him will be rising"
(p. 211). He goes on to note that, because the rise in prices cannot be"instantaneous
and equal for all things" (p. 212), inflation also contributes to the
chief problem of those who wish to use money to solve social problems, the
inequality of wealth in society.<a title href="http://www.mises.org/fullstory.asp?control=1251#_ftn3" name="_ftnref3">[3]</a>

<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">

Sharp men, brokers, and men of business, will not suffer
by it; for it is their trade to watch the fluctuations of prices, to observe
the cause, and even to speculate upon it. But little tradesmen, countrymen,
and workmen will bear the whole weight of it. (p. 212)<a title href="http://www.mises.org/fullstory.asp?control=1251#_ftn4" name="_ftnref4">[4]</a>

[/i]

There are many more problems with inflation, but the
discussants grow weary. Bastiat tries to summarize his conclusions by noting
that"these questions are of the highest importance; for peace or war,
order or anarchy, the union or antagonism of citizens, are at the root of the
answer to them" (p. 217), and goes on to question, how can all civilized
nations avoid the study of such critical information. Bastiat's companion
replies that the state fills men's minds with prejudices and sentiments"favorable
to the spirit of anarchy, war, and hatred" (p. 218), because the state
takes us at an early age and:

<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">

It puts a bandage over our eyes, takes us gently from the
midst of the social circle which surrounds us, to plunge us, with our
susceptible faculties, our impressionable hearts, into the midst of Roman
society.... How can you expect them to take the slightest interest in the
mechanism of our social order? (pp. 218-19)

[/i]

Bastiat ends the dialogue with his recommendation for reform:

<blockquote dir="ltr" style="MARGIN-RIGHT: 0px">

The most urgent necessity is, not that the State should
teach, but that it should allow education. All monopolies are detestable,
but the worst of all is the monopoly of education. (p. 220)

[/i]

Clearly, rumors of Bastiat's lack of interest in monetary
theory have not only been exaggerated, they are patently untrue. Indeed,
Bastiat places the role of money at the center of the economy and portrays
ignorance of its nature as one of its greatest dangers. Not only does he
explain the nature of money, but he also very cogently explains the inevitable
results of a failure to understand that nature.

Bastiat's analysis is so advanced that it is prophetic. Not
only does he explain the inevitable consequences of mercantilist monetary
policy, but he also goes on to explain the critical weaknesses of modern
equilibrium approaches to monetary theory and monetarism. As one views the
world and sees global economic chaos, growing class conflict, widely divergent
economic opportunity, and perpetual war, Bastiat provides a clear and concise
guide to its cause. Bastiat's solution no doubt rests in the true
understanding of the nature of money by the citizens, the abolition of fiat
money and central banks, and a return to commodity money such as gold and
silver coins.


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<hr align="left" width="33%" SIZE="1">
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Mark Thornton is senior fellow of the Mises Institute. This
essay is reprinted from the Quarterly Journal of
Austrian Economics, Volume 5, Number 3 (Fall 2002), pp. 81-86. The full
Bastiat essay is also available. mthornton@mises.org

 
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<a title href="http://www.mises.org/fullstory.asp?control=1251#_ftnref1" name="_ftn1">[1]</a>
Even the president of the Federal Reserve Bank of Dallas, Dr. Robert
McTeer, has heaped high praise on Bastiat's writings.

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<a title href="http://www.mises.org/fullstory.asp?control=1251#_ftnref2" name="_ftn2">[2]</a>
Translation is"What is Money?" It was translated and published
into English by David Wells in 1877. All page references here are to this
translation unless otherwise noted.

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<a title href="http://www.mises.org/fullstory.asp?control=1251#_ftnref3" name="_ftn3">[3]</a>
Bastiat addresses the problems of credit in other articles and therefore
does not consider the problems of inflation induced credit expansion and
the business cycle.

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<a title href="http://www.mises.org/fullstory.asp?control=1251#_ftnref4" name="_ftn4">[4]</a>
Wells then provides an extensive footnote that documents a real-world case
in which inflation contributes to the inequality of wealth.

REFERENCES

Bastiat, FrÃ©dÃ©ric. 1849."PubliÃ© dans le numÃ©ro
d'avril." Journal des Ã©conomistes. (Note de l'Ã©diteur de
l'Ã©dition originale.)

_____________. 1877. Essays on Political Economy.
David A. Wells, trans. New York: G.P. Putnam's Sons.

______________. 1964. Selected Essays on Political
Economy. Seymour Cain, trans. George B. de

Huszar, ed. Princeton, N.J.: D. Van Nostrand.

Hayek, F.A. 1964."Introduction." See Bastiat
1964.

Thornton, Mark. 2001."FrÃ©dÃ©ric Bastiat was an
Austrian Economist." Journal of Economics and Humane
Studies11, no. 2/3 (June/September): 387-98.


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