Rothbard’s What Has Government Done to Our Money? – Parts 1-3

~1250 words, ~6 min reading time

[Since this series is focused on the Mises U readings, I focused only on the sections that are required for that. Full book available from the Institute or Amazon.]

I – Introduction – Discussions of money are confused, largely because of a desire to be “realistic” – to consider only minor deviations from the current system. This constraint on thinking prevents us from thinking about what a free market in money would really look like, since government has interfered in the monetary system for such a long time.

II – Money in a Free Society

1 – The Value of Exchange – because of the variety of locations of natural resources and the variety of people’s wants and abilities, exchange is a useful way to get what you want from those who are most able to provide it.

2 – Barter – barter runs into issues of the “double coincidence of wants” (that is, I have to have what you want and you have to have what I want) and indivisibility of many goods. So, barter’s ability to be the primary means of exchange is limited.

3 – Indirect Exchange – It may be beneficial to receive something that I don’t directly want if it is widely marketable. So, I will exchange what I have for something I don’t want, but can easily get rid of for what I DO want.

4 – Benefits of Money – Money allows for more specialization – and the resulting productivity boost. Money prices also allow for economic calculation, which opens the way to complicated production processes.

5 – The Monetary Unit – in a free market, money is a commodity like any other, and so will be denominated in the natural unit of physical goods: by weight.

6 – The Shape of Money – the entirety of the stock of the monetary commodity counts as the money supply – coins, bars, dust, etc. – as it is the commodity rather than the form that makes it money.

7 – Private Coinage – in a free market for money, private companies would mint the monetary commodity into easily recognizable coins. They would determine size, shape, etc. based on consumer demand, and consumer demand combined with reputation would ensure quality – just as happens with other goods.

8 – The “Proper” Supply of Money – like with any other good, the proper supply is the supply entrepreneurs provide. The purchasing power of money can adjust to accommodate any money supply. At the same time, production of the monetary commodity is not inherently unproductive because the commodity has nonmonetary uses.

9 – The Problem of “Hoarding” – all hoarding does is increase money’s purchasing power. And there is no clear distinction between hoarding and simple money holding.

10 – Stabilize the Price Level? – Like all commodities, the value of money would fluctuate based on changes in supply and demand. It’s not clear why this is a bad thing. Some suggest that it changes the relationship between creditors and debtors – yet, these are free to adjust based on a price index if they wish. Yet, we do not see private lenders and borrowers doing this, suggesting the alleged benefit of stabilizing the price level is minimal in the eyes of those who are supposed to be the ones benefiting.

11 – Coexisting Moneys – we can’t rule out that there may be more than one money in a free market for money. (Example: gold and silver) If so, the two would have a floating exchange rate between them.

12 – Money Warehouses – in a free market, banks would be money warehouses. They would simply charge fees to store money – they would not engage in fractional reserve banking. But, even if we adopt free banking, the extent of fractional reserve banking would be quite limited.

13 – Summary – in short, the free market can provide money just like it provides anything else.

III – Government Meddling with Money

1 – The Revenue of Government – Governments often resort to monetary inflation to fund themselves, as the effects are less obvious than the effects of taxation.

2 – The Economic Effects of Inflation – Inflation redistributes wealth from late receivers to early receivers of the newly created money, makes economic calculation more difficult, which leads to economic inefficiency, can destroy the monetary system through hyperinflation if it goes unchecked, and leads to business cycles.

3 – Compulsory Monopoly of the Mint – Government has to take over the monetary system step-by-step. The first step is claiming a monopoly over minting coins, which allows government to charge a monopoly premium for minting.

4 – Debasement – once they have a monopoly over minting, the government can begin decreasing the size or at least the precious metals content of coins. The profits from reminting old coins as new can be used for revenue.

5 – Gresham’s Law and Coinage

a. Bimetallism – in setting a fixed ratio between gold and silver prices, government ended up creating a situation in which one money was used while the other was hoarded – and the two would switch back and forth. This led to an elimination of bimetallism and adopting a gold standard.

b. Legal Tender – legal tender laws require people to accept the standardized money in payment for debts. This gives the legal monetary standard an advantage, which opens the way for government to intervene more in the monetary system.

6 – Summary: Government and Coinage – The final step is making use of all foreign coin illegal. This, in turn, disrupts international trade and therefore the international division of labor. To increase government control beyond this point, the economy must move beyond hard money.

7 – Permitting Banks to Refuse Payment – One privilege that banks have been given is the ability to simply refuse to pay their obligations while staying in business. This allows banks to inflate without having to worry about bank runs as much. However, it does not provide much control over the inflation from the government’s perspective.

8 – Central Banking: Removing the Checks on Inflation – One of the key moments in the government taking over the banking system’s operation is when they monopolize note issue and centralize reserves in the central bank. This removes one of the key limits on banks’ ability to create money: the extent of their own clientele.

9 – Central Banking: Directing the Inflation – Government effectively controls the money creation process by injecting new reserves into the banking system through open market operations and discount window lending, and by controlling the legal required reserve ratio.

10 – Going Off the Gold Standard – While central banking loosens the restrictions on individual banks in their ability to inflate, the system as a whole faces the problem of gold outflows if they overinflate compared to other countries. This problem leads governments to take their currencies off of the gold standard entirely – leading to currencies that are purely fiat.

11 – Fiat Money and the Gold Problem – By leaving the gold standard, government increases the number of moneys as it is unreasonable to assume that people will just stop using gold as money and instead rely entirely on paper. This leads governments to ban the holding of monetary gold.

12 – Fiat Money and Gresham’s Law – in a world of fiat currencies, any attempt to peg exchange rates will lead Gresham’s Law to kick in – that is, the overvalued currency will fall out of use in international transactions while the undervalued currency (historically the dollar) will find more use. This leads to a shortage of the undervalued currency. The end result of this intervention seems to be a single, world fiat currency.

13 – Government and Money – In the end we have seen that the government got into money to acquire an easy source of revenue, and that to take full advantage of this required a series of increasing interventions – but each of these created a series of problems leading to more intervention. The world of national paper moneys creates barriers to the international division of labor – lowering our productivity.