The Angel Gabriel and Monetary Inflation – Robert Aro (01/08/2021)

Six hundred dollars, two thousand, or how about one million per person? How much money should a government give its people to get the wheels of commerce turning again?

If starting with the premise that many are struggling because they don’t have enough money, the obvious solution for government is to “give them more money.” Unfortunately, this idea has never worked and will never work. The idea of money creation for the purpose of wealth creation is nothing new. In 1912, when Mises published The Theory of Money and Credit, he cited David Hume, who in the eighteenth century discussed what would happen if overnight “every Englishman [were] miraculously endowed with five pieces of gold.”

Years later, Murray Rothbard used the ideas of Hume and Mises in works such as The Austrian Theory of Money and The Case against the Fed in what became known as the “Angel Gabriel model.” In The Mystery of Banking Rothbard uses the model to show that an increase to the money supply confers no social benefit to society:

The Angel Gabriel is a benevolent spirit who wishes only the best for mankind, but unfortunately knows nothing about economics. He hears mankind constantly complaining about a lack of money, so he decides to intervene and do something about it. And so overnight, while all of us are sleeping, the Angel Gabriel descends and magically doubles everyone’s stock of money.

If such an injection to the money supply were to happen today, many distinguished economists, politicians, and central planners might very well praise such “stimulus,” saying it’s exactly what the economy needs!

In the morning, Rothbard explains, everyone would be ecstatic to find they are now twice as rich as they were the previous night because they now have twice the amount of dollars in their “wallets, purses, safes and bank accounts.” They would go out to spend their money, but as the day went on they would find prices getting higher and higher. Eventually, he insists, they would find that:

Society is no better off than before, since real resources, labor, capital, goods, natural resources, productivity, have not changed at all.

The notion of “increasing the money supply” overnight, carries further implications such as unpredictable changes in prices and consumer preferences, plus a whole host of economic problems. But the overarching idea is that an increase in the money supply does not lead to better societal outcomes, specifically because there is no such thing as an “optimal money supply.” Therefore, whether the money supply is doubled or halved, it does not equate to a society that is twice or half as rich. These ideas were formulated centuries ago. Yet they appear to be lost on those who hold a monopoly on our currency.

Consider our real-life Angel Gabriel policy expected next year, only this time, rather than a $600 check per person, imagine $1 million is sent instead. Once the money is received, most people will find an increased demand to buy assets such as real estate, land, or stocks. Most people would not significantly increase their purchases of household items like hair dryers, bed sheets, or even eggs. We have no reasonable method to anticipate how much prices will change; but we can anticipate there will be countless changes to prices. The level of price distortion and economic chaos the $1 million per person would unleash remains unfathomable to those in developed economies. Whatever the outcome, it would be disastrous.

While $1 million per person sounds extreme, we can similarly say that even though $600 per person is understandably less extreme, the same economic chaos and negative outcomes exist, the only difference being the degree of damage. We can say $1 million destroys the economy at a quicker pace than $600. But this does not take away the fact that both outcomes are bad, nor does it mean $600 is good because it is “less bad,” than $1 million.

The real question becomes: Why do we use economic policies that have no known positive effects, only detrimental ones?

THIS ARTICLE ORIGINALLY POSTED HERE.



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