Cash is a crucial command post of any economy, and therefore of any society. Society rests upon a network of voluntary exchanges, likewise known as the “free-market economy”; these exchanges imply a division of labor in society, in which producers of eggs, nails, horses, lumber, and immaterial services such as teaching, treatment, and performances, exchange their goods for the goods of others. At each action of the method, every participant in exchange benefits immeasurably, for if everyone were forced to be self-dependent, those few who handled to make it through would be minimized to a pitiful standard of living.
Direct exchange of goods and services, also known as “barter,” is hopelessly unproductive beyond the most primitive level, and certainly every “primitive” tribe quickly discovered its method to the discovery of the significant advantages of showing up, on the marketplace, at one especially valuable commodity, one in basic demand, to utilize as a “medium” of “indirect exchange.” If a particular product remains in prevalent use as a medium in a society, then that basic circulating medium is called “money.”
The money-commodity becomes one term in every one of the many exchanges in the market economy. I sell my services as a teacher for money; I utilize that money to buy groceries, typewriters, or travel accommodations; and these manufacturers in turn utilize the cash to pay their workers, to purchase equipment and inventory, and pay lease for their structures. Thus the ever-present temptation for several groups to take control of the crucial money-supply function.
Lots of helpful items have actually been chosen as moneys in human societies. Salt in Africa, sugar in the Caribbean, fish in colonial New England, tobacco in the colonial Chesapeake Bay region, cowrie shells, iron hoes, and lots of other commodities have actually been used as moneys. Not only do these cash serve as media of exchange; they enable people and organization companies to participate in the “computation” needed to any innovative economy. Moneys are traded and reckoned in terms of a currency system, almost always units of weight. Tobacco, for example, was reckoned in pound weights. Prices of other products and services might be figured in terms of pounds of tobacco; a certain horse may be worth eighty pounds on the market. A business company could then determine its earnings or loss for the previous month; it could figure that its income for the past month was 1,000 pounds and its expenditures 800 pounds, netting it a 200 pound earnings.
Gold or Government Paper
Throughout history, two products have been able to outcompete all other products and be picked on the market as money– 2 rare-earth elements, gold and silver (with copper coming in when one of the other rare-earth elements was not readily available). Gold and silver was plentiful in what we can call “moneyable” qualities, qualities that rendered them exceptional to all other products. They are in uncommon sufficient supply that their worth will be stable, and of high value per unit weight; for this reason pieces of gold or silver will be quickly portable, and usable in everyday transactions; they are uncommon enough too, so that there is little likelihood of sudden discoveries or boosts in supply. They are resilient so that they can last virtually forever, and so they offer a safe “store of worth” for the future. And gold and silver are divisible, so that they can be divided into little pieces without losing their worth; unlike diamonds, for example, they are homogeneous, so that one ounce of gold will be of equal value to any other.
The universal and ancient use of gold and silver as moneys was explained by the first great financial theorist, the eminent fourteenth-century French scholastic Jean Buridan, and then in all conversations of money down to money and banking textbooks until the Western governments eliminated the gold requirement in the early 1930s. Franklin D. Roosevelt took part this deed by taking the United States off gold in 1933.
There is no aspect of the free-market economy that has suffered more refuse and contempt from “modern” financial experts, whether honestly statist Keynesians or presumably “free market” Chicagoites, than has gold. Gold, not long ago hailed as the standard staple and foundation of any sound financial system, is now regularly knocked as a “fetish” or, as when it comes to Keynes, as a “barbarous relic.” Well, gold is undoubtedly a “relic” of barbarism in one sense; no “barbarian” worth his salt would ever have accepted the counterfeit paper and bank credit that we contemporary sophisticates have actually been bamboozled into using as money.
But “gold bugs” are not fetishists; we don’t fit the standard image of misers running their fingers through their hoard of gold coins while babbling in ominous fashion. The fantastic thing about gold is that it, and just it, is cash supplied by the free market, by the people at work. For the stark option prior to us constantly is: gold (or silver), or government. Gold is market money, a product which should be provided by being dug out of the ground and then processed; but federal government, on the contrary, materials virtually costless fiat money or bank checks out of thin air.
We know, in the first place, that all federal government operation is wasteful, inefficient, and serves the bureaucrat instead of the consumer. Would we choose to have shoes produced by competitive personal firms on the free market, or by a huge monopoly of the federal government? The function of providing cash might be dealt with no much better by federal government. However the scenario in cash is far even worse than for shoes or any other product. If the government produces shoes, at least they might be used, although they might be pricey, healthy severely, and not please customer wants.
Money is different from all other commodities: other things being equal, more shoes, or more discoveries of oil or copper advantage society, considering that they help alleviate natural deficiency. But once a commodity is established as a money on the marketplace, no more cash at all is required. Since the only use of money is for exchange and reckoning, more dollars or pounds or marks in blood circulation can not give a social advantage: they will merely dilute the exchange worth of every existing dollar or pound or mark. So it is an excellent boon that silver or gold are limited and are expensive to increase in supply.
However if government manages to develop paper tickets or bank credit as money, as equivalent to gold grams or ounces, then the federal government, as dominant money-supplier, becomes free to produce money costlessly and at will. As a result, this “inflation” of the money supply ruins the worth of the dollar or pound, increases prices, cripples economic estimation, and hobbles and seriously damages the workings of the market economy.
The natural propensity of government, as soon as in charge of money, is to pump up and to damage the worth of the currency. To comprehend this fact, we need to take a look at the nature of federal government and of the production of cash. Throughout history, federal governments have been chronically except earnings. The factor ought to be clear: unlike you and me, federal governments do not produce helpful products and services that they can offer on the market; federal governments, instead of producing and selling services, live parasitically off the marketplace and off society. Unlike every other individual and organization in society, federal government gets its income from coercion, from taxation. In older and saner times, indeed, the king was able to acquire enough earnings from the products of his own personal lands and forests, as well as through highway tolls. For the State to attain regularized, peacetime tax was a struggle of centuries. And even after tax was established, the kings recognized that they might not quickly impose brand-new taxes or greater rates on old levies; if they did so, revolution was really apt to break out.
Managing the cash Supply
If taxation is completely short of the style of expenses preferred by the State, how can it comprise the distinction? By getting control of the money supply, or, to put it candidly, by counterfeiting. On the marketplace economy, we can only acquire great money by offering an excellent or service in exchange for gold, or by receiving a gift; the just other way to get cash is to engage in the costly procedure of digging gold out of the ground. The counterfeiter, on the other hand, is a thief who tries to benefit by forgery, e.g., by painting a piece of brass to appear like a gold coin. If his fake is identified immediately, he does no genuine harm, but to the extent his fake goes undiscovered, the counterfeiter has the ability to steal not just from the manufacturers whose goods he purchases. For the counterfeiter, by introducing phony money into the economy, has the ability to steal from everybody by robbing every person of the value of his currency. By diluting the worth of each ounce or dollar of genuine money, the counterfeiter’s theft is more sinister and more genuinely subversive than that of the outlaw; for he robs everyone in society, and the robbery is stealthy and concealed, so that the cause-and-effect relation is camouflaged.
Just recently, we saw the scare heading: “Iranian Government Attempts to Destroy U.S. Economy by Counterfeiting $100 Costs.” Whether the ayatollahs had such grand objectives in mind is dubious; counterfeiters do not need a grand reasoning for getting resources by printing cash. However all counterfeiting is certainly subversive and destructive, in addition to inflationary.
But in that case, what are we to state when the government takes control of the cash supply, eliminates gold as money, and establishes its own printed tickets as the only cash? To put it simply, what are we to say when the federal government becomes the legalized, monopoly counterfeiter?
Not only has actually the fake been discovered, however the Grand Counterfeiter, in the United States the Federal Reserve System, rather of being reviled as a massive thief and destroyer, is hailed and celebrated as the wise manipulator and guv of our “macroeconomy,” the firm on which we rely for keeping us out of recessions and inflations, and which we depend on to figure out rate of interest, capital prices, and work. Instead of being repeatedly assailed with tomatoes and rotten eggs, the chairman of the Federal Reserve Board, whoever he might be, whether the enforcing Paul Volcker or the owlish Alan Greenspan, is generally hailed as Mr. Indispensable to the financial and financial system.
Undoubtedly, the very best method to permeate the mysteries of the modern-day financial and banking system is to realize that the federal government and its reserve bank act exactly as would a Grand Counterfeiter, with extremely similar social and financial impacts. Many years ago, the New Yorker magazine, in the days when its cartoons were still funny, published a cartoon of a group of counterfeiters looking eagerly at their printing press as the first $10 expense came rolling off journalism. “Boy,” said one of the team, “retail spending in the area is sure in for a shot in the arm.”
And it was. As the counterfeiters print new cash, costs goes up on whatever the counterfeiters want to purchase: personal retail products on their own, in addition to loans and other “basic well-being” functions in the case of the government. However the resulting “prosperity” is counterfeit; all that happens is that more money bids away existing resources, so that prices increase. In addition, the counterfeiters and the early recipients of the new money quote away resources from the poor suckers who are down at the end of the line to get the new money, or who never ever even get it at all.
New cash injected into the economy has an unavoidable causal sequence; early receivers of the brand-new cash invest more and bid up costs, while later on receivers or those on repaired earnings find the rates of the items they should buy unaccountably rising, while their own incomes lag behind or stay the same. Monetary inflation, simply put, not just raises costs and damages the value of the currency unit; it likewise serves as a giant system of expropriation of the late receivers by the counterfeiters themselves and by the other early receivers. Monetary expansion is a huge scheme of surprise redistribution.
When the federal government is the counterfeiter, the counterfeiting process not just can be “discovered”; it declares itself openly as financial statesmanship for the general public weal. Monetary growth then ends up being a giant plan of hidden taxation, the tax falling on set earnings groups, on those groups remote from government costs and subsidy, and on thrifty savers who are naive enough and relying on enough to hold on to their cash, to have faith in the value of the currency.
Costs and going into debt are motivated; thrift and hard work discouraged and punished. Not only that: the groups that benefit are the unique interest groups who are politically near to the government and can apply pressure to have the brand-new cash invested in them so that their incomes can rise faster than the cost inflation. Federal government contractors, politically linked organizations, unions, and other pressure groups will benefit at the expense of the uninformed and unorganized public.
[Originally appeared as “Taking Refund,” pt. 1, The Freeman, October 1995. Available in The Rothbard Reader.]