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Please take this as penance for my recent, and recently-deleted, post regarding the Fed. Out of that regrettable conversation came, I hope, one good thing: an opportunity to open a door for the genuinely curious who wonder what I’m so worked up about. Specifically, let me present a good launching point. It isn’t a massive scholarly tome, but it isn’t (or at least isn’t merely) opinionated handwaving.
What Has Government Done to Our Money? and The Case for the 100 Percent Gold Dollar is Murray Rothbard’s famous manifesto on sound money. First published in 1963 in the style of a pamphlet designed for mass distribution, it is one of his most influential works.
Murray Rothbard needs no introduction in libertarian economic circles. For the rest, Rothbard might best be characterized as an economist analogue of David Horowitz. Raised by parents of the Left, he was intellectually unable to reconcile cant with reality, but sincere in his belief in freedom, both in the abstract as a moral good in itself, and in practice the best vehicle for improving the lot of the less fortunate.
Rothbard, a student of Ludwig von Mises and hence the Austrian school of economics, begins with a brief apologia for taking freedom as a guiding principle in discussing money. It isn’t likely to convince the unconvinced, but is characteristic of any student of von Mises, who was a stickler for making assumptions as explicit as possible. “If we favor the free market in other directions,” Rothbard writes,” if we wish to eliminate government invasion of person and property, we have no more important task than to explore the ways and means of a free market in money.”
Part II, “Money in a Free Society,” is worthwhile by itself as an excellent capsule summary of Austrian monetary theory. He quickly argues the value of exchange generally:
If no one could exchange, if every man were forced to be completely self-sufficient, it is obvious that most of us would starve to death, and the rest would barely remain alive. Exchange is the lifeblood, not only of our economy, but of civilization itself.
He surveys primitive barter schemes and their limits: “Clearly,” he observes, “any sort of civilized economy is impossible under direct exchange.” Next he treats indirect exchange: “At first glance, this seems like a clumsy and round-about operation. But it is actually the marvelous instrument that permits civilization to develop.’ From this, he concludes:
A most important truth about money now emerges from our discussion: money is a commodity. Learning this simple lesson is one of the world’s most important tasks. So often have people talked about money as something much more or less than this. Money is not an abstract unit of account, divorceable from a concrete good; it is not a useless token only good for exchanging; it is not a “claim on society”; it is not a guarantee of a fixed price level. It is simply a commodity. It differs from other commodities in being demanded mainly as a medium of exchange. But aside from this, it is a commodity—and, like all commodities, it has an existing stock, it faces demands by people to buy and hold it, etc. Like all commodities, its “price”—in terms of other goods—is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. (People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.)
He notes the benefits of money. Because of it, “an elaborate ‘structure of production’ can be formed, with land, labor services, and capital goods cooperating to advance production at each stage and receiving payment in money.”
Next he treats monetary units, noting that “the free market will choose as the common unit whatever size of the money-commodity is most convenient. If platinum were the money, it would likely be traded in terms of fractions of an ounce; if iron were used, it would be reckoned in pounds or tons. Clearly, the size makes no difference to the economist.” If the size makes no difference, neither does its shape. He then considers private coinage:
Champions of the government’s coinage monopoly have claimed that money is different from all other commodities, because “Gresham’s Law” proves that “bad money drives out good” from circulation. Hence, the free market cannot be trusted to serve the public in supplying good money. But this formulation rests on a misinterpretation of Gresham`s famous law. The law really says that “money overvalued artificially by government will drive out of circulation artificially undervalued money.”
In the section treating the “proper” supply of money you’ll find a pillar of his critique of central banking; to wit, that the decision about the “proper” supply should be left to the market:
Aside from the general moral and economic advantages of freedom over coercion, no dictated quantity of money will do the work better, and the free market will set the production of gold in accordance with its relative ability to satisfy the needs of consumers, as compared with all other productive goods.
“The critic of monetary freedom is not so easily silenced, however,” he concedes:
There is, in particular, the ancient bugbear of “hoarding.” The image is conjured up of the selfish old miser who, perhaps irrationally, perhaps from evil motives, hoards up gold unused in his cellar or treasure trove—thereby stopping the flow of circulation and trade, causing depressions and other problems. Is hoarding really a menace?
He believes not:
Money is only useful for exchange value, true, but it is not only useful at the actual moment of exchange. This truth has been often overlooked. Money is just as useful when lying “idle” in somebody’s cash balance, even in a miser’s “hoard.” For that money is being held now in wait for possible future exchange—it supplies to its owner, right now, the usefulness of permitting exchanges at any time—present or future—the owner might desire. …
We have seen that society cannot satisfy its demand for more money by increasing its supply—for an increased supply will simply dilute the effectiveness of each ounce, and the money will be no more really plentiful than before. People’s standard of living (except in the non-monetary uses of gold) cannot increase by mining more gold. If people want more effective gold ounces in their cash balances, they can get them only through a fall in prices and a rise in the effectiveness of each ounce.
There goes Keynes.
In another pillar of his argument against central banking, he points out that those who seek to “stabilize the price level” must necessarily overrule freedom, “[s]ince the price of money would admittedly fluctuate on the free market.” Indeed, “[a]rtificial stabilization would, in fact, seriously distort and hamper the workings of the market.” Money he concludes, “is not a ‘fixed yardstick.’ It is a commodity serving as a medium for exchanges. Flexibility in its value in response to consumer demands is just as important and just as beneficial as any other free pricing on the market.”
Nor does he see the need for a single currency. To the contrary: “The free market is eminently orderly not only when money is free but even when there is more than one money circulating.
What kind of “standard” will a free money provide? The important thing is that the standard not be imposed by government decree. If left to itself, the market may establish gold as a single money (“gold standard”), silver as a single money (“silver standard”), or, perhaps most likely, both as moneys with freely-fluctuating exchange rates (“parallel standards”)
But where will these currencies be stored? Worry not. “There is every reason to believe that gold warehouses, or money warehouses, will flourish on the free market in the same way that other warehouses will prosper.”
In sum, he argues:
[F]reedom can run a monetary system as superbly as it runs the rest of the economy. Contrary to many writers, there is nothing special about money that requires extensive governmental dictation. Here, too, free men will best and most smoothly supply all their economic wants. For money as for all other activities, of man, “liberty is the mother, not the daughter, of order.”
You could stop there and have a better understanding of money than 98 percent of the populace, whether you agree with Rothbard’s conclusions or not. Such is the quality of Rothbard’s exposition.
In Part III, “Government Meddling With Money,” Rothbard the teacher gives way to Rothbard the polemicist. “The Economic Effects of Inflation,” “Permitting Banks to Refuse Payment” (AKA “Bank Holidays”), “Central Banking: Removing the Checks on Inflation,” “Going Off the Gold Standard,” etc., all explain, in detail, the central lie of central banking: It doesn’t control inflation; it creates it, and usually on purpose:
We have seen that, over the centuries, government has, step by step, invaded the free market and seized complete control over the monetary system. We have seen that each new control, sometimes seemingly innocuous, has begotten new and further controls. We have seen that governments are inherently inflationary, since inflation is a tempting means of acquiring revenue for the State and its favored groups. The slow but certain seizure of the monetary reins has thus been used to (a) inflate the economy at a pace decided by government; and (b) bring about socialistic direction of the entire economy.
Furthermore, government meddling with money has not only brought untold tyranny into the world; it has also brought chaos and not order. It has fragmented the peaceful, productive world market and shattered it into a thousand pieces, with trade and investment hobbled and hampered by myriad restrictions, controls, artificial rates, currency breakdowns, etc. It has helped bring about wars by transforming a world of peaceful intercourse into a jungle of warring currency blocs. In short, we find that coercion, in money as in other matters, brings, not order, but conflict and chaos.
Part IV, “The Monetary Breakdown of the West,” is Rothbard the teacher again, in my opinion at his best. Economic theory, to qualify as scientific, must show explanatory and predictive power. Here Rothbard uses his command of Austrian monetary theory to look at the Classical Gold Standard of 1815-1914, World War I, the Gold Exchange Standard of 1926-1931, the Fluctuating Fiat Currency regime of 1931-1945, the Bretton Woods agreement of 1945-1968, Bretton Woods Unraveling 1968-1971 (a period I personally remember), Bretton Woods’ End in 1971, The Smithsonian Agreement 1971-1973, and Fluctuating Fiat Currencies 1973-?Folks my age can fill in the blanks: the Carter years and Carter bonds; Reagan, Friedman, and Volker’s Fed, etc.
In Rothbard’s view,
As we face the future, the prognosis for the dollar and for the international monetary system is grim indeed. Until and unless we return to the classical gold standard at a realistic gold price, the international money system is fated to shift back and forth between fixed and fluctuating exchange rate,s with each system posing unsolved problems, working badly, and finally disintegrating. And fueling this disintegration will be the continued inflation of the supply of dollars and hence of American prices which show no sign of abating. The prospect for the future is accelerating and eventually runaway inflation at home, accompanied by monetary breakdown and economic warfare abroad. This prognosis can only be changed by a drastic alteration of the American and world monetary system: by the return to a free market commodity money such as gold, and by removing government totally from the monetary scene.
The conjoined volume, “The Case for the 100 Percent Gold Dollar,” takes a few pieces of the first volume, elaborates on how they abet the central bank in inflating, addresses some popular objections, and presents a rough plan for returning to a classical gold standard. Of these, I’d say only the last is essential, but it’s just a sketch. For more detail, you’ll need one of the scholarly tomes. If there’s any interest, I may write about one of them next. Fair warning.
So here it is. Yes, I’m angry. Not as angry as Rothbard, but angry. However, my anger is not directed toward any individual on Ricochet, and I was wrong preemptively to forestall debate from those I am admittedly already satisfied are wrong — not evil, just wrong. The right thing to do is make what case I can, and let that speak for itself. I hope this first attempt is of value to someone.