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WHAT Has GOVERNMENT DONE
To Our Money?


WuHaAtT Has GOVERNMENT DONE
To Our Money?


Murray N. ROTHBARD


LvMI


MISES INSTITUTE


Copyright © 1991, 2005, 2008 Ludwig von Mises Institute
Copyright © 1963, 1985, 1990 by Murray N. Rothbard
Copyright © 2005 Ludwig von Mises Institute, fifth edition


Copyright © 2010 Ludwig von Mises Institute and published
under the Creative Commons Attribution License 3.0.
http://creativecommons.org/licenses/by/3.0/


Published by Ludwig von Mises Institute, 518 West Magnolia Avenue,
Auburn, Alabama 36832
Mises.org


ISBN: 978-1-61016-142-8


CONTENTS


I. Introduction wncnds esa pesteus as eda ceed 1
I. Money ina Free Society .............02-000. 4
1. The Value of Exchange.................. 4
2: Banter 2.%.2d05 bid tarsatainws Gaba eh dene 5
3. Indirect Exchange ................0000. 6
4. Benefits of Money ............-0 eee ee 10
5. The Monetary Unit ................0.. 12
6. The Shape of Money. ...........-00-0-5 15
7s, Private Coma genie i nccetrewie haem doe 16
8. The “Proper” Supply of Money........... 20
9. The Problem of “Hoarding”............. 26
10. Stabilize the Price Level? ............... 31
11. Coexisting Moneys ................0.. 33
12. Money Warehouses ..........--00-000- 36
13; SUMMALy 2495 atest tens alas de sas} 47
HI. Government Meddling With Money ......... 49
1. The Revenue of Government ............ 49
2. The Economic Effects of Inflation ........ 51
3. Compulsory Monopoly of the Mint....... 56
4. Debasementit. ¢iis.i2.5seeser cb oe ek oes 58
5. Gresham’s Law and Coinage ............ 59
a. Bimetallism ...............002000- 59
b. Legal Tendetis «ici. gees adi peed 62
6. Summary: Government and Coinage. ..... 64
7. Permitting Banks to Refuse Payment...... 65
8. Central Banking: Removing the Checks


ON InHatiob 06. i cece cus ceeseeenea eas 68


vi


What Has Government Done to Our Money?


9. Central Banking: Directing the Inflation. . . 73
10. Going Off the Gold Standard ........... 75
11. Fiat Money and the Gold Problem........ 78
12. Fiat Money and Gresham’s Law.......... 81
13. Government and Money .............-. 85

IV. The Monetary Breakdown of the West ........ 88

1. Phase I: The Classical Gold Standard,

1815-1914 ides os Sao wn ae BE 89
2. Phase II: World War I and After ......... 92
3. Phase III: The Gold Exchange Standard

(Britain and the United States) 1926-1931 .. 93

4, Phase IV: Fluctuating Fiat Currencies,

V9 B11 9 AS seco a scalar tion eras pdr accede aes 96

5. Phase V: Bretton Woods and the New

Gold Exchange Standard (the United

States) 1945-1968 ..... 20... 0... ee eee 98
6. Phase VI: The Unraveling of Bretton

Woods, 1968-1971 ih avcvayden es bead dn 102
7. Phase VII: The End of Bretton Woods:

Fluctuating Fiat Currencies,

August—December, 1971 .............. 105
8. Phase VIII: The Smithsonian Agreement,

December 1971—February 1973......... 106

9. Phase IX: Fluctuating Fiat Currencies,

Match 1973-2 wi scsnccesceeneea naan 108
TidOxs. 24 den cas Sha do-0s Be Awne a oneea gee eae 113


L
INTRODUCTION


FEW ECONOMIC SUBJECTS ARE more tangled, more
confused than money. Wrangles abound over “tight
money” vs. “easy money,” over the roles of the Federal
Reserve System and the Treasury, over various versions
of the gold standard, etc. Should the government pump
money into the economy or siphon it out? Which
branch of the government? Should it encourage credit
or restrain it? Should it return to the gold standard? If
so, at what rate? These and countless other questions
multiply, seemingly without end.

Perhaps the Babel of views on the money question
stems from man’s propensity to be “realistic,” i-e., to
study only immediate political and economic prob-
lems. If we immerse ourselves wholly in day-to-day
affairs, we cease making fundamental distinctions,
or asking the really basic questions. Soon, basic issues
are forgotten, and aimless drift is substituted for firm
adherence to principle. Often we need to gain perspec-
tive, to stand aside from our everyday affairs in order to
understand them more fully. This is particularly true in
our economy, where interrelations are so intricate that


1


2 What Has Government Done to Our Money?


we must isolate a few important factors, analyze them,
and then trace their operations in the complex world.
This was the point of “Crusoe economics,” a favorite
device of classical economic theory. Analysis of Crusoe
and Friday on a desert island, much abused by critics
as irrelevant to today’s world, actually performed the
very useful function of spotlighting the basic axioms
of human action.

Ofall the economic problems, money is possibly the
most tangled, and perhaps where we most need per-
spective. Money, moreover, is the economic area most
encrusted and entangled with centuries of government
meddling. Many people—many economists—usu-
ally devoted to the free market stop short at money.
Money, they insist, is different; it must be supplied by
government and regulated by government. They never
think of state control of money as interference in the
free market; a free market in money is unthinkable
to them. Governments must mint coins, issue paper,
define “legal tender,” create central banks, pump money
in and out, “stabilize the price level,” etc.

Historically, money was one of the first things con-
trolled by government, and the free market “revolution”
of the eighteenth and nineteenth centuries made very
little dent in the monetary sphere. So it is high time
that we turn fundamental attention to the life-blood
of our economy—money.

Let us first ask ourselves the question: Can money
be organized under the freedom principle? Can we have
a free market in money as well as in other goods and


Murray N. Rothbard 3


services? What would be the shape of such a market?
And what are the effects of various governmental con-
trols? If we favor the free market in other directions, 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.


TL
Mon Ey IN A FREE SOCIETY


1.
The Value of Exchange


How DID MONEY BEGIN? Clearly, Robinson Crusoe
had no need for money. He could not have eaten gold
coins. Neither would Crusoe and Friday, perhaps
exchanging fish for lumber, need to bother about
money. But when society expands beyond a few fami-
lies, the stage is already set for the emergence of money.

To explain the role of money, we must go even
further back, and ask: why do men exchange at all?
Exchange is the prime basis of our economic life.
Without exchanges, there would be no real econ-
omy and, practically, no society. Clearly, a voluntary
exchange occurs because both parties expect to benefit.
An exchange is an agreement between A and B to trans-
fer the goods or services of one man for the goods and
services of the other. Obviously, both benefit because
each values what he receives in exchange more than
what he gives up. When Crusoe, say, exchanges some
fish for lumber, he values the lumber he “buys” more


4


Murray N. Rothbard 5


than the fish he “sells,” while Friday, on the contrary,
values the fish more than the lumber. From Aristotle to
Marx, men have mistakenly believed that an exchange
records some sort of equality of value—that if one
barrel of fish is exchanged for ten logs, there is some
sort of underlying equality between them. Actually, the
exchange was made only because each party valued
the two products in different order.

Why should exchange be so universal among man-
kind? Fundamentally, because of the great variety in
nature: the variety in man, and the diversity of location
of natural resources. Every man has a different set of
skills and aptitudes, and every plot of ground has its own
unique features, its own distinctive resources. From this
external natural fact of variety come exchanges; wheat
in Kansas for iron in Minnesota; one man’s medical
services for another’s playing of the violin. Specialization
permits each man to develop his best skill, and allows
each region to develop its own particular resources. 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.


2.
Barter


Yet, direct exchange of useful goods and services
would barely suffice to keep an economy going above


6 What Has Government Done to Our Money?


the primitive level. Such direct exchange—or barter—
is hardly better than pure self-sufficiency. Why is this?
For one thing, it is clear that very little production
could be carried on. If Jones hires some laborers to
build a house, with what will he pay them? With
parts of the house, or with building materials they
could not use? The two basic problems are “indivis-
ibility” and “lack of coincidence of wants.” Thus, if
Smith has a plow, which he would like to exchange
for several different things—say, eggs, bread, and
a suit of clothes—how can he do so? How can he
break up the plow and give part of it to a farmer and
another part to a tailor? Even where the goods are
divisible, it is generally impossible for two exchangers
to find each other at the same time. If A has a supply
of eggs for sale, and B has a pair of shoes, how can
they get together if A wants a suit? And think of the
plight of an economics teacher who has to find an
ege-producer who wants to purchase a few econom-
ics lessons in return for his eggs! Clearly, any sort of
civilized economy is impossible under direct exchange.


3:
Indirect Exchange


But man discovered, in the process of trial and error,
the route that permits a greatly-expanding economy:
indirect exchange. Under indirect exchange, you sell
your product not for a good which you need directly,
but for another good which you then, in turn, sell for


Murray N. Rothbard if


the good you want. At first glance, this seems like a
clumsy and round-about operation. But it is actually
the marvelous instrument that permits civilization to
develop.

Consider the case of A, the farmer, who wants to
buy the shoes made by B. Since B doesn’t want his eggs,
he finds what B does want—let’s say butter. A then
exchanges his eggs for C’s butter, and sells the butter
to B for shoes. He first buys the butter not because he
wants it directly, but because it will permit him to get
his shoes. Similarly, Smith, a plow-owner, will sell his
plow for one commodity which he can more readily
divide and sell—say, butter—and will then exchange
parts of the butter for eggs, bread, clothes, etc. In both
cases, the superiority of butter—the reason there is
extra demand for it beyond simple consumption—is
its greater marketability. If one good is more market-
able than another—if everyone is confident that it will
be more readily sold—then it will come into greater
demand because it will be used as a medium of exchange.
It will be the medium through which one specialist can
exchange his product for the goods of other specialists.

Now just as in nature there is a great variety
of skills and resources, so there is a variety in the
marketability of goods. Some goods are more widely
demanded than others, some are more divisible into
smaller units without loss of value, some more durable
over long periods of time, some more transportable
over large distances. All of these advantages make for
greater marketability. It is clear that in every society,


8 What Has Government Done to Our Money?


the most marketable goods will be gradually selected
as the media for exchange. As they are more and more
selected as media, the demand for them increases
because of this use, and so they become even more
marketable. The result is a reinforcing spiral: more
marketability causes wider use as a medium which
causes more marketability, etc. Eventually, one or two
commodities are used as general media—in almost
all exchanges—and these are called money.

Historically, many different goods have been used as
media: tobacco in colonial Virginia, sugar in the West
Indies, salt in Abyssinia, cattle in ancient Greece, nails
in Scotland, copper in ancient Egypt, and grain, beads,
tea, cowrie shells, and fishhooks. Through the centu-
ries, two commodities, gold and silver, have emerged as
money in the free competition of the market, and have
displaced the other commodities. Both are uniquely
marketable, are in great demand as ornaments, and
excel in the other necessary qualities. In recent times,
silver, being relatively more abundant than gold, has
been found more useful for smaller exchanges, while
gold is more useful for larger transactions. At any rate,
the important thing is that whatever the reason, the
free market has found gold and silver to be the most
efficient moneys.

This process: the cumulative development of a
medium of exchange on the free market—is the only
way money can become established. Money cannot
originate in any other way, neither by everyone sud-
denly deciding to create money out of useless material,


Murray N. Rothbard 9


nor by government calling bits of paper “money.” For
embedded in the demand for money is knowledge of
the money-prices of the immediate past; in contrast to
directly-used consumers’ or producers’ goods, money
must have preexisting prices on which to ground
a demand. But the only way this can happen is by
beginning with a useful commodity under barter, and
then adding demand for a medium for exchange to the
previous demand for direct use (e.g., for ornaments,
in the case of gold).' Thus, government is powerless to
create money for the economy; it can only be developed
by the processes of the free market.

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 impor-
tant 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


" On the origin of money, cf. Carl Menger, Principles of Economics
(Glencoe, IIl.: Free Press, 1950), pp. 257-71; Ludwig von Mises, The
Theory of Money and Credit, 3rd ed. (New Haven, Conn.: Yale University
Press, 1951), pp. 97-123.


10 What Has Government Done to Our Money?


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.)


4.
Benefits of Money


The emergence of money was a great boon to the
human race. Without money—without a general
medium of exchange—there could be no real spe-
cialization, no advancement of the economy above
a bare, primitive level. With money, the problems of
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