Wednesday, April 22, 2009

What Has Government Done To Our Money?

(1990 Edition)
by Murray N. Rothbard

The question is asked: Why do we need money? Why do we exchange? I dealt with this last year in my first essay on the works of Murray Rothbard. Money is the medium of exchange, a marketable commodity that everyone wants for the purpose of exchange. I pointed out Dr. Rothbard's analysis of how exchange among diverse people in diverse locations is necessary to prosper and how money makes exchange much faster and easier. Gold and silver have the most time-honored uses as money, because through the centuries they have won out as the most marketable commodities.

It must be emphasized that money is a commodity. The only difference between the money commodity and other commodities is that the money commodity is demanded primarily as a medium of exchange (1).

Another emphasis is that the private manufacture (also called “minting”) of coins, or pieces of gold or silver resembling coins, is a legitimate function of the market (2). If someone owns a piece of metal, he or she has every right to shape it in any way, including a round, flat disk. However, if one does this today with gold or silver, one runs the risk of arrest for counterfeiting.

Dr. Rothbard continues his case for absolute freedom of money by discussing price stabilization and co-existing moneys before launching into “money warehouses” and banks.

Storing money (gold) in a warehouse and then using receipts for this money in trade was discussed in Man, Economy and State. The warehouse owner is in the business of safely storing money (gold) for his customers. He gives the customer receipts for the money that the customer placed in his care. These receipts may be traded for goods and services, and the money never needs to leave the warehouse unless the holder of the receipt wants to take it out (3). If the warehouse owner is honest he will not make up receipts that claim to represent physical money but in fact do not.

These warehouses are today analogous to banks. The receipts for the money are analogous to our dollar bills (and, of course, $5, $10, $20, etc. bills), but many people nowadays prefer to write an order to the warehouse (bank) to transfer some of their money to someone else without having to deal with “warehouse receipts.” This order is a check.

In an unhampered market with a commodity (such as gold) standard, checks and paper “money” are only stand-ins for the real deal.

The warehouses (banks) are businesses and have to make money just like any other business. They charge fees to their customers for keeping their money safe. If banks print up receipts for money they are not holding, they are being dishonest. Customers who find out will withdraw their money. And they will be quick about it too, as they know that phony-baloney receipts are redeemed, the bank will run out of money before all the real receipts are redeemed.

This issuance of un-backed-up receipts is called “fractional reserve banking.”

If enough banks do this, we have more receipts in circulation than there is gold in the bank. People believe they are richer than they really are. Now, we have “inflation” (4). Inflation is a fraud on bank customers. It would not be tolerated in a free market.

The important lesson we have learned from the book so far is that money, on the free market, must be a useful commodity that is used as a medium of exchange. If it is not, inflation is bound to occur.

Dr. Rothbard continues (5) to explain another very important concept: Inflation does not happen evenly across the board. The new money created reaches some people before it reaches others. These “first receivers” are usually people who are well connected. The recent bailout (recent when this was written in late October, 2008, and referring to the bailout of late summer, 2008) of $700 billion went primarily to banks and other fat-cat institutions. I never saw a dime. Did you? The only people on the lower rungs who get any will be borrowers. All recipients will go forth and spend a goodly portion of this new money. It will not be very long (a few months) before prices across the economy will drift up. In fact, I have begun to notice it already, except in the area of gasoline prices, which dropped in the fall of 2008. This came at an opportune time for me, since my summer place and my winter place are a few days' drive apart. This break in gasoline prices proves yet again the law of supply and demand. Had demand not fallen, I believe we would have been paying at least $4.00 a gallon, whereas it is actually well under $3.00 at this time.

Dr. Rothbard drove home that point many times, but right now he is talking about inflation. By the time the new money has “trickled down” (and up and over) to you, the well-connected have gone forth and spent, driving prices up. They did much of their spending before businesses had time to realize demand was up and adjust their prices accordingly. Later, if you are lucky enough to be still working and get a raise, the new money finally comes your way. But a lot of good it does if prices have already gone up. It is even worse for those on fixed incomes. The extra money you have to spend to pay the higher prices is like a transfer payment from you to the well-connected who get the new money first.

I have said many times that the establishment's system is set up in such a way as to assure that wealth gravitates to establishment interests.

Of course, prices do not all go up at the same time and rate any more than all people get the new money at the same time. This makes business calculation difficult (6). How can a business people determine what the cost of a capital good will be when they know it will have to be replaced in five years? Or even five months? They cannot. How can they even tell if they are making a profit if they cannot calculate their expenditures in five months? And, although it is very difficult for even a talented entrepreneur to anticipate consumer wants, it becomes nearly impossible when nobody knows how much purchasing power anybody will have in even a few weeks.

The exact situation we are in right now is what causes the business cycle (7).

After a brief history of coinage and bimetallism, Dr. Rothbard demonstrates that legal tender laws give rise to inflation. Legal tender laws give the government a money monopoly. Under them, only the sovereign government's money is legal to use as such and, therefore, the government has control of the nation's money.

As soon as governments took control of their countries' money in this manner, gold and silver was used in exchanges between countries only, not individuals (8).

As usual, it was government propaganda that sold the people on centralized control of the money by way of central banking. Then, as now, government blamed economic problems on the free market rather than government misbehavior.

We had free banking in the U.S. in the early part of the 19th century (9), and some of the bankers were unscrupulous and stole from their clients. The government did not stop this theft as it should have, and then blamed the free market for the problems. Today we do not even have a free market at all and haven't for several decades. In the early 19th century we did have a lot of freedom, but the government seemed to look the other way when real crimes were committed by its cronies such as bankers.

Central banking eliminates all checks on inflation because central banks have a monopoly on note issue. The only brake on inflation is the competition between national currencies. This is why the establishment's dream of a world-wide currency with a world central bank would be a disaster.

Dr. Rothbard briefly outlines the effects of fiat (government-issued or central bank-issued paper backed by nothing) money.

This was followed by Part IV of the book, beginning on P. 90 of the 1990 edition, where Dr. Rothbard traces the decline of money through inflation in the 20th century.

Until 1914 the situation approached the ideal, where most countries' currencies were defined as weights of gold. Exchange rates were therefore fixed, but not by government edict. An American dollar, for example, was worth 1/20 ounce of gold, and a British pound was about 1/4 ounce of gold. This meant that a pound was worth about $5 yesterday, today, and tomorrow, by definition (10). This made things a lot easier on people who traded with others in different countries. It was almost as good as having an international free-market currency. Dr. Rothbard emphasized that gold was not arbitrarily picked out of a hat by government bureaucrats as the commodity money, but that (despite what establishment textbooks teach) gold gradually came to be used on the free market because it fills the bill for consumers. Equally important, it wards off inflation and other government tampering and keeps the balance of payments in equilibrium (11).

The system broke down because governments broke it down (12). To the U.S. government, and other governments, the waging of the unnecessary World War I was more important than the well-being of the people. Big surprise! War is good for the establishment elite; the gold standard is not.

Later, the “gold exchange” standard was established. This was to allow foreign governments to exchange their dollars for gold, but individuals could not. Dr. Rothbard does not suggest it (although I have a strong hunch he would agree) but, judging from the havoc caused by this, I have to believe that the intentions were less than honorable.

Economic law will eventually catch up with government shenanigans, and in 1968 the system started to crack. The dollar was fixed at $35 per gold ounce. Americans were not allowed to own gold coins or bullion, but citizens in other countries were allowed to and did. They sold their American dollars for gold at $35 per ounce which was a real bargain because the real value of the inflated dollar was much less. Gold, therefore, was leaving the country, and dollars were returning. Why Americans obeyed the gold prohibition edict I will never understand.

The establishment was telling us that people's faith in paper would grow and that gold would drop in value in the marketplace. If you have been tracking the price of gold (and silver) you know how wrong they were!

On August 15, 1971, Mr. Establishment himself, arch-enemy of freedom President Richard Nixon went on television and announced the economy was about to be hit with two of the biggest blows he could deal, and be all but destroyed. He did not say it quite that way, of course, but he might as well have (13).

The first blow was “to combat inflation.” He froze all wages and prices effective immediately. Even a college freshman who has taken a microeconomics course knows what a disaster that was. I have written a lot in past essays so I will say no more here.

The second blow was a total severance of the dollar and gold. This meant that the dollar was now totally fiat. We have seen the results of that, too.

Older people can remember the price inflation that took place in the 1970s and in this book Dr. Rothbard briefly explains why.

What is needed is to go back to the classical gold standard, as he makes obvious. But, alas, since the book was written, we have gone in the opposite direction, drifting toward a world fiat currency, controlled by a world central bank and well-connected elite who would be the deciders about who would be the first receivers of newly printed money. I don't think you or I are in the running.

We already have a regional currency in Europe, the Euro. Internet savvy people are aware that there is a move toward another regional currency on the American continent called the Amero. A regional currency could be coming to the Far East, too. Eventually the establishment hopes to merge them all into one. This would pave the way for inflation to the establishment's stony heart's content.

Dr. Rothbard's work is a warning.

(1) P. 20, Rothbard, Murray N., What Has Government Done to our Money (1990 Edition), Praxeology Press of the Ludwig von Mises Institute, Auburn, 1990.


(3) What has Government Done to our Money, P. 43 - 45.

(4) Ibid. P. 48.

(5) Ibid. P. 55 on.

(6) Ibid. P. 58.

(7) Ibid. P. 61.

(8) Ibid. P. 68 - 69.

(9) Ibid. P. 70 - 71.

(10) Ibid. P. 91. Actually the pound was worth $4.86. P. 95.

(11) Ibid. P. 92.

(12) Ibid. P. 94.

(13) Ibid. P. 105.

No comments: