Money Is Wealth

On my June 24 post, regular commenter and paid subscriber (hint, hint) Daniel Melgar and I went back and forth. I didn’t have time to fully answer him but now I do and I think the issue is of more general interest. This this post.

Here was our discussion.

Daniel: Since our money is fiat currency, no amount of it is correctly called wealth. Even a billion dollars isn’t wealth—it is a claim check on real wealth (goods, services, and capital assets) produced by the broader economy.

David: I think money is wealth.

Daniel: Explain please.

David: Sure. A claim check on those things you mention is wealth. Imagine that I have $100 million and no goods or assets. I have $100 million in wealth.

Daniel: But what if I magically double all the money?

Your claim to real wealth (things that producers make or their services) will be cut in half. If money were true wealth, doubling the money would make society twice as prosperous. Instead, it just changes the numbers on the price tags.

David: It’s true that doubling the amount of money would reduce my wealth by approximately half. I would still be wealthy.

Take another example. When the United States was on the gold standard in the 1890s and the cyanide process was introduced to extract gold at lower cost, the amount of gold increased and prices increased. (That, incidentally, is why William Jennings Bryan’s campaign for president failed.) So the value of a given unit of gold fell. Would you then say that gold was not wealth?

Daniel: No. The gold is wealth but not the money. It has zero intrinsic value. It is a legally binding token that transfers ownership of the asset without you having to carry heavy metal around.

If you hold a gold-backed $100 bill, but the central bank locks its doors and refuses to redeem it for physical gold, your paper bill instantly loses its value.

The money becomes worthless paper, while the wealth (the gold) remains valuable to whoever holds the keys to the vault.

This exact breakdown occurred globally in 1971, when the United States permanently ended the Bretton Woods system, halting the ability of foreign governments to exchange US dollars for physical gold.

Now, here’s my reply to Daniel.

Everything has zero intrinsic value. One of the main contributions of the Marginal Revolution of about 1870, which involved Carl Menger, William Stanley Jevons, and Leon Walras, was to point out that value is subjective. It derives from our preferences. So even a Rolls Royce would have zero value if no one valued it.

In 1933, FDR did refuse to redeem paper money for gold. The paper money lost some of its value, but it didn’t lose its value. It still retained value, just less value. It did not become “worthless paper.”

Then when Nixon closed the gold window on August 15, 1971, so that no longer could even foreign central banks turn in their dollars for gold at $35 per ounce, the dollar lost some value but did not become worthless paper.

I have a challenge and 2 questions for Daniel.

Challenge: Because you believe that your paper dollars are worthless, please send all of them to me.

Question 1 (2 questions, actually): Do you consider a portfolio of shares in corporations to be wealth? What if their nominal value falls in half and there has been no change in prices of everything else. Do your shares suddenly cease to be wealth?

Question 2: What is your definition of wealth?

Note: Thanks to Jeff Hummel for looking this over and suggesting the point about shares in companies.