12. Money is Not Prosperity

WHILE MONEY INCREASES THE efficiency of trading goods and services, money in itself does not create prosperity. Prosperity is created by producing goods and services that people value. If the U.S. government printed and distributed $1 million to every household in the country (approximately $100 trillion), would we all live better lives? If the answer is “yes,” why not do even better by having the government print and hand out $1 billion per household? You probably sense something is wrong with that suggestion, but what is it?

Let’s examine the assumption that money equals prosperity by viewing a society of five people. In this society, there is production, trading, and money. For simplicity’s sake, let’s say each member produces 20 units of a different good during a given period and each member’s unit of goods has a similar subjective value to each of the other members. As it stands, the society’s prosperity (wealth) is then 100 (5 x 20) units of goods. Let’s say we give each member $1,000. Irrespective of the additional money, the total quantity of the community’s wealth remains at 100 units of goods, with each member contributing 20 units to that overall level of wealth. Even if we were to give each member $1 million there would still only exist 100 units produced—in other words, no increase in prosperity. In the first example, each unit of goods might equate to, say, $50; however, in the second example, each unit of goods could equate to $50,000.

During Germany’s hyperinflation in the 1920s, a millionaire was actually a pauper. Government printing presses were working at full capacity, twenty-four hours a day. The famous caricature of a person hauling his money in a wheelbarrow exemplified the worthlessness of the German mark in 1923. In 1914, the mark was backed by gold and had a value equal to one quarter of a U.S. dollar. By 1923, the mark’s value was one trillionth that of a U.S. dollar. Since governments are tempted to create fiat money at their whim to acquire goods at no cost, some economists advocate that money should always be backed by gold or something else of real value to prevent such skullduggery. With a required backing to money, governments would then have to limit their takings to taxes and tariffs.

Even using gold as money won’t bring us a free lunch. Irrespective of the form or amount of money, one’s wealth is still limited to what one produces, and the prosperity of a community is limited to the sum of each member’s production. If Earth were to be hit (very softly!) by a huge meteorite of pure gold, and we each received an equal share, after putting the artistic and electronic benefits of gold aside, we would not be better off. With our newfound gold as money, it might now take a kilogram (32.15 troy ounces) of gold to buy a suit, whereas pre-meteorite that same suit could have been purchased for the equivalent of one ounce. Financial wealth is measured by what one can acquire with money, not by the quantity of money itself.