Tamny: The Dollar Is ‘Mighty’ In the Way That Kim Jong Un Is ‘Tall’

Authored by John Tamny via RealClearMarkets.com,

Were he around, Adam Smith would marvel. All this talk of a “strong,” “weak,” or as is often said lately, a “mighty” dollar. Wait, what? Money just is, yet pundits of the moment quite literally act as though money grows on trees such that it grows “stronger” today, but perhaps not tomorrow. No, the money discussion isn’t serious. Again, Smith would be aghast.

He would be given his common sense understanding that money’s sole purpose is as a measure to facilitate the exchange of goods and services. Producers of actual goods and services quickly happened on the blinding glimpse of the obvious that barter was inefficient, thus necessitating money. A common agreement among producers about a measuring stick of value would enable producers of varied goods and even more varied wants to trade with each other.

At which point stability of the unit of value (money) was of utmost importance. Since money flows logically signaled the exchange of products and services for products and services, stability of the unit mattered. A vintner providing his wine for “dollars” logically wanted the money taken in for the wine to command equal value in the marketplace.

All of which explains the eventual migration to gold. The appeal of the yellow metal wasn’t its shininess, or religious factors, or something else unrelated to exchange. Gold came to define money because the producers who comprise the market realized that it was the commodity least affected by everything else. Put another way, gold was remarkably stable. Which meant it was and is the ultimate money. Producers want equal value for their production, period.

That gold still is the ultimate definer of money will logically trigger some in our midst, and without regard to political persuasion. Supposedly gold is “yesterday,” supposedly it’s the stuff of monetary cranks, or conspiracy theorists. In a sense it is. There are a lot of oddballs out there who are for what they imagine is a “gold standard,” and they’re for it without a clue of what gold’s historical purpose as a definer of money was. Oh well, no big deal. Fringe attaches itself to all ideas in some shape or form. That it does in no way vitiates the simple and modern truth that gold remains the ultimate money precisely because it remains the commodity least affected by everything else.

Evidence supporting the above claim is $7 trillion in daily currency trading. Before President Nixon severed the dollar’s link to gold in 1971 (and by extension, the world’s currency link to gold), currency markets were largely non-existent. With good reason. With the dollar defined as 1/35th of a gold ounce, and the world’s currencies either explicitly or implicitly defined in terms of the dollar, currencies were very stable. Nothing to trade. That there’s so much trading today is powerful evidence that producers the world over still require stable money to exchange, which explains the frenzied “currency markets.” Something must mitigate the tautology that is currency instability wrought by money lacking a standard, hence the trillions in daily trading. When money had a commodity definition, it just was. Like a foot, inch, or minute, money was the quiet aspect of commerce that facilitated actual commerce. Again, pre-1971 “currency trader” wasn’t a profession. Money was as Smith defined it in The Wealth of Nations.

Which is why he would once again marvel at the discussion of money today? The dollar is “strong”? How? Why would money be anything but a constant measure of value? Exactly.

Still, the dollar is said to be strong today. It’s well up against the yen, the euro, the pound, etc. Okay, but what does that mean? There has to be context. Think about it. North Korean leader for life is Kim Jong Un is said to be 5’7”, or 5’4” without lifts in his shoes. In that case, Kim would be tall around 5-year old kids, but rather short around 35-year olds.

The Wall Street Journal’s Joseph Sternberg claims the dollar is “mighty,” but he bases the claim on it rising versus other paper currencies that lack definition. In that case, is the dollar “mighty,” or is it just “less weak” than other currencies Sternberg is measuring it against. Market signals indicate that the dollar is just “less weak.”

Indeed, while currencies no longer have a gold definition, gold still speaks through the markets. At present the “mighty” dollar is worth 1/1900th of a gold ounce. When the 21st century began a dollar purchased roughly 1/300th of a gold ounce, when Joe Biden entered office the price of gold was around 1/1853rd of a gold ounce. What the gold signal tells us is that the dollar has long been weak, but not notably weaker in recent years. In other words, it hasn’t been “mighty” as much as the pound, euro and yen have been in decline.

The shame, as always, is that this is even being discussed. No one talks about a “strong” inch, foot, or minute. All three are quiet. As constant measures of length and time, they just facilitate the understanding of reality. Money is no different, or should be no different. Not wealth on its own, money that’s credible as a measure facilitates enormous wealth creation precisely because it fosters simple exchange among producers that makes possible immense specialization among the individuals who comprise what we call an economy. The more labor is divided among producers, the more productivity. It’s really quite simple.

Sadly, money’s lack of quietude such that it’s “mighty,” “weak,” or somewhere in between means that a growing number of wildly talented people are sidelined from production in order to trade the chaos brought on by the pretense that what solely exists to enable trade should itself be traded. Economists will plan money and its “supply,” don’t you know?

Yes, we all do. Prosperity is being sacrificed on the obnoxious conceit of economists and pundits who haven’t a clue about what money is. Yes, Smith would most certainly marvel.