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Mistreating money


Money is a social construct that enables price comparisons, calculations of profits and loss, budgeting and financial planning from individual to enterprise to national and international  levels. Its primary function is as a unit of account, and a given monetary unit has greatest benefit when used by the largest possible number of people and in the largest economies or monetary areas.

It only works as a good unit of account if actors, including governments, are willing to adjust to it, rather than trying to make it adjust to their changing preferences and needs. This is the full meaning of the term “monetary standard”; it should not refer to just any monetary doctrine or policy rule but something expected to last for the long term, and thus a measure of value that can be relied on.

Along with property rights and the rule of law, a good monetary standard is the key to a dynamic market economy. This is because it yields monetary signals that allow entrepreneurs to compare the rate of interest on loans with the prospective profitability of an investment. All the great classical economists took such a standard for granted.

After all the monetary experiments and 20+ years of inflation targeting (IT) with CBI, neither entrepreneurs nor bankers and other creditors can perform that essential activity for capitalism to work properly. There is too much uncertainty about levels of interest rates and prices in the longer term.


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