Since World War I, the Western world has been dominated by a soft money economic order. The powers took to inflationary finance because it was necessary to fund the wars against one another.
Since World War II, direct interstate competition paused, and the current consensus is that it has stopped indefinitely.
My secret crackpot theory is that the mutually assured destruction is not actually a permanent condition, and that technological counter-measures to MIRV warheads have either already been developed or will be eventually developed, leading to a return to direct interstate warfare.
I base my crackpot, tough-to-prove theory on some of the comments by Samuel Cohen, inventor of the neutron bomb, on how he’d develop an alternative to the ‘Star Wars’ theory of anti ballistic missile defense. Essentially, rather than trying to zap ICBMs shortly after launch with a space-based weapon, you just launch a small neutron warhead at it, and use the air burst to neutralize anything coming at you. Such a technology would render the MAD theory, upon which all post-modern international relations is based, mostly moot. If you can neutralize a lot of warheads before they hit you, they have to use more conventional means to deter you instead.
So, anyway, to return to the ostensible topic of the post, the ability to use inflationary monetary policy to bleed your tax base beyond what would otherwise be the limit has stopped being a competitive advantage. It used to be, especially during a time in which all the European powers had turned to centralized political control, but is less so now that less centralized alternatives are emerging.
For a state competing with the existing superpowers to succeed, it would just need to develop a working anti-ballistic missile defense technology, either along the lines already theorized (which is technically not challenging compared to the dominant, politically correct theory), or along some other lines that have not yet been conceived of, like a Star Trek deflector shield. Whatever that is is what it would take to return the state system to a healthier era of interstate competition.
The debate between hard money and soft money systems is one of trade-offs. As a long time hard-money advocate, it’s difficult for me to deign to provide some positive arguments for a soft-money system.
The reasoning chain goes as follows:
The benefit of the soft-money system is that it allows the central state to mobilize for total war using mass armies. Just about all of the alternative economic arguments for soft money systems are facetious. There is no multiplier effect, ‘deflation’ is not damaging, and Keynes was just a glib pedophile with no special insights into economics.
Technology, even considering a possible neutralization of intercontinental nuclear weapons, has rendered mass armies obsolete.
Because the mass army is obsolete, the monetary system that enables it is also obsolete.
The soft money system, in which money & credit can be manufactured in infinite amounts for reasons of state, disrupts private property on a continuous basis. It re-orders society on the basis of proximity to soft-money banking systems, rather than on more durable measures of service to global markets.
This makes those people close to the source of authority very happy and very rich, and they are loath to give up their privileges. Those farther from that source of privilege are likely to want to kill or otherwise compete with the people close to the enormous soft-money nozzles, forever spewing new emissions of money and credit towards the primary dealers and their special friends.
Emerging hard money systems, whether gold or Bitcoin, represent existential threats to the soft money system, which has also lost its military advantage. The military advantage will continue to pass to decentralized professional military companies, as existed before the emergence of the state system in the 17th century. The loss of the military advantage tends to come before the loss of the monetary advantage, but does not become realized until major military defeat ensues.
The soft money system co-exists with monopoly systems on the legal use of force. Hard money systems coincide with breakdowns of those monopolies. It’s no coincidence that depreciation and Empire are so often coincident: when there is a sole, central government, even the wisest leaders have trouble maintaining a hard money regime.
On an economic basis, hard money systems out-compete the alternative, just because it suffers from fewer calculation problems. Because soft money systems rest on a monetary unit that is flexible, it disadvantages all economic entities that use it, because it introduces systematic inaccuracies into their accounting systems.
Soft money systems can compete on the military level, but only temporarily, based on a strong society created on a hard money basis. When the soft money system destroys the underlying society over time, the military advantage dissipates, because there is no more strong society upon which it can draw from.
Trustless monetary regimes are likely to dominate the international scene following the retraction of the American empire at the physical, moral, and economic levels. This will happen faster than most responsible people who want to present as reasonable are likely to want to represent. It’s the difference between Yahoo circa 1998 and Google circa 2005.
When a power has a crippling vulnerability, other powers notice that vulnerability, and exploit it at the opportune moment. The vulnerability does not need to be public knowledge for it to be exploited in a devastating way.
The future will be more competitive than the past, as a correction to the overly cooperative present.
If your crackpot theory is correct, soft-money regimes should perhaps correlate with per capita body counts.
tg moderator says
You have hit upon one of the major challenges to reaction. Even a wise and accountable ruler may be tempted to use soft money (debt expansion) to buy more military power. This little issue is not one of our oft discussed flaws of democracy–it is a pitfall that all leaders face. Also… there is a multiplier effect, but it is a short term condition. Dump a few trillion dollars out of helicopters and watch the result. There are only two things to do with a dollar–spend it or save it. Some fraction of the dollars that get spent get spent again, and a fraction of those get spent a third time, etc. In the long term it is all smoke and mirrors, but in the short term a leader can expand his industrail base and military. War is an expensive game of scissors, rock, paper. Military conflict is not over and never will be.
It’s not necessarily up to the strength of a leader. If internal enemies are more dangerous than external ones, the sovereign will tend to debase the currency to centralize authority.
When it gets out of hand, though, it weakens the central state against internal competitors (French revolutionaries, Adolf Hitlers, uppity Roman generals etc. etc.)
When there are strong external enemies, debasement invites a stronger opponent to come in and wreck you, and that puts a brake on it. Also, when you have to use a hard currency to trade, it blocks out a lot of chicanery, because the strongest currency becomes the common one.
I used to be a hard money advocate too until I realized that “my wealth is not what my currency says it is”. Money just represents value. It is not value itself.
The dilemma doesn’t occur when the central bank devalues the currency, it occurs because people save in the same medium in which they transact. Money is simply credit and nothing more. It’s just a way to keep score, no different than poker chips or credits in a video game. Gold, however, is the store of value par excellence. Gold serves a very important role…. OUTSIDE the monetary system as a vehicle in which you can store your surplus wealth.
Here’s the three posts that changed my perception of the concept of money:
I’ve read this guy, and it’s somewhat interesting if crankish.
This is what we talk about when we talk about NRx theory generation. I’ve been looking at the world through these lenses all week, and I can find no fault with them. I’m not sure I take Nick’s point about soft moment regimes and body counts. Soft money would not correlate with violence where the sovereign issuer was simply the last man standing. Historically, soft money has carried so many advantages to consumers (liquidity, portability, etc.) that they seem willing to park value in it whenever a credible soft currency exists, even as an alternative to another bankrupt soft currency. Like bubble assets, soft money can be a rational investment under a wide range of temporary conditions. Taken as rule of thumb, Henry’s observation that hard money doesn’t triumph until soft money is defeated in battle is, at least, better investment advice that I’ve received in a while.
Hard assets in the US are also encumbered by taxes and onerous reporting requirements.
Less willing, more required.