Chapter 1: Money

Money is a medium of exchange and store of value. Historically, harder money (high stock-
to-flow) has produced more stable and prosperous societies.

 Problem of money: how to move value across time and space (1).

 direct exchange (barter) challenge due to scale, location, and time frame —> indirect
exchange (2).

 money (medium of exchange) differs from an investment: no return, lowest risk, no

transaction cost (3).

 key characteristic of money is salability (ease of sale) according to Carl Menger (father of

Austrian school of economics, *On the Origins of Money”) (3-4).

 Money is:

- Medium of exchange (3).

- Store of value (4), determined by hardness and acceptability (7) and unit of account
(denomination of prices) (8).

 Hardness (difficulty in producing new monetary units) needed to preserve value over time
(5).

- Stock: existing supply

- Flow: production

 Inflation is” expropriating the wealth of the savers” (5).

 Types of money are always competing, and higher stock-to-flow has won historically (6).

 Single medium of exchange allows for economic growth and sophisticated production (8-
9).
Chapter 5: Money and Time Preference

Time preference (discount rate) is how we value the present compared to the future. It is
positive for us all (the present is more certain), but lower time preference leads to
investment and increases productivity. Time preference determines our choices and is
greatly influenced by the expected future value of money. Deflationary fiat money leads
directly to debt and lack of savings, and eventually to moral and family breakdown as a high
time preference mentality pervades all aspects of our thinking. Modern art and architecture
also exhibit the cultural decadence that results from soft money and high time preference.

 Sound money: is chosen freely on the market for its salability, because it holds its
value across time, because it can transfer value effectively across space, and because
it can be divided and grouped into small and large scales. It is money whose supply
cannot be manipulated by a coercive authority that imposes its use on others.

Sound money:

- protects value across time and lowers time preference.

- enables free trade with a stable unit of measurement.
- is essential for individual freedom.

 Time preference: ratio at which individuals value the present compared to the
future; lower time preference allows for investment (delay immediate gratification to
produce capital goods)

 Low time preference builds civilization (not just capital accumulation, but what capital
accumulation allows humans to achieve)

 Unsound money leads to high time preference in both economic life (spend more and
save less) and moral life

 Monetary Inflation
- A theoretically ideal money would have a fixed supply.
- This is not the case for fiat currencies which have lost 97% of value compared to gold
since 1971.

 Innovations: "Zero to One" Versus "One to Many"

- Innovations per capita peaked in the nineteenth century under the gold standard.

 Artistic Flourishing
- Times of sound money have produced artistic flourishing.
Chapter 6: Capitalism's Information System

Prices are the fundamental information system in a capitalist system, organizing the

economy in a decentralized manner and allowing trade and specialization. Socialist systems
fail by centrally planning prices, but this is the unfortunate situation caused in modern
capital markets by central banks setting interest rates. Scarcity is fundamental, and
recessions are the inevitable outcome of interest rate manipulation. Unsound money creates
these business cycles, as well as the currency wars and massive drag on global output caused
by foreign exchange markets.

 Hayek: the economic problem is a problem of knowledge, which is by its nature

distributed.

 Prices are the knowledge and the signals that carry information.

 Capital Market Socialism

- Mises: the fatal flaw of socialism is the inability to allocate capital goods because of
the removal of prices
- Modern central banks effectively create socialist capital markets in modern
economies, their main tools being:

1) setting the Federal Funds rate.

2) setting the required reserve ratio.

3) engaging in open market operations (buying/selling treasuries and financial assets).

4) determining lending eligibility criteria.

 Business Cycles and Financial Crises

- Unsound money distorts prices, and recessions are the natural result of manipulating
interest rates.
- Unsound money prevents the emergence of accurate price signals; capitalism cannot
function without a free market in capita. l
- Long refutation of Friedman's Monetary History of the United States (121-126).

 Sound Basis for Trade

- Monetary Nationalism began with the abandonment of the gold standard.
- "Impossible Trinity" describes the plight of central banks: "no government can
successfully achieve all three goals of having a fixed foreign exchange rate, free
capital flows, and an independent monetary policy" (128).
 Now we typically have independent monetary policy and free capital flows, but
floating exchange rates, creating unnecessary challenges for business.
- This leads to a large foreign exchange market (25x global GDP!) and currency wars.