Against Government Money

Back in the olden days, people simply bartered products.  One might trade a couple of loaves of bread for a fish.  In order to ease this process so people didn’t have to bring their produce to market, over time people turned to gold, later paper money backed by gold and ultimately paper money backed by faith in government as currency in trade.  Money itself should thus be considered as merely a commodity to be exchanged for other commodities.  It only differs from other goods to the extent that it is not consumed like milk or sugar or a house.  Its value is in serving as a medium of exchange of other goods and services.

As such, it makes no sense that governments should create money through “quasi-private” central banks, or at the very least impose legal tender laws that prevent others from doing so.  If there is consumer demand for facilitating the exchange of goods and services, then there will arise through the spontaneous order of the free market a system of competing providers of currencies.  Presumably, those who produce money that will retain its value will drive out of the market those incompetent or unscrupulous competitors producing depreciating money.  This is because money that retains its value over time will make the exchange of products easier because businesses will be able to make better calculations in exchange, and because as with any product, a premium will be placed on maintenance of value over depreciation.

One could speak to a host of problems with government currency: that inflation of the money supply unfairly benefits debtors at the expense of creditors and serves as an outright tax on all; that a constantly debased currency allows the government to fund unjustifiable wars in addition to all sorts of social programs and other means of unjust and unconstitutional wealth redistribution; that government naturally will mismanage the money supply just as they do all programs from a purely economic standpoint; that it is absurd that the government should have the power to outlaw monopolies yet grant itself a monopoly on a commodity like money that serves a specific special interest of the banking sector; and finally that government’s record in management of the money supply has been horrendous, with central banks creating a perpetual boom-bust cycle and constantly devaluing the people’s money.  Concentrating the monopoly power over the money supply in the hands of a select group of bureaucrats is an asinine, irrational and furthermore dangerous policy.

But without going into these sometimes arcane economic phenomena, the most important thing to understand is that at its core, money supply is just like the supply of any other good or service except to the extent that its value is derived from its use as a commodity in exchange, rather than from the utility we gain in consuming a traditional good or service.  If the market can provide other goods and services in the proper quantities and qualities to meet the demands of society, then surely it too can provide the proper quantity and quality of money.  To believe that somehow, government provision of money is any more sacred or preferable to government provision of any other good or service is pure folly.

Sound Money for a Sound State

Every day we see signs of waning confidence. The politicians pontificate and the markets plunge. Talking heads rile the trading floors. People are panicking, but are unsure as to what drives the panic. Lying behind this turmoil is the fundamental flaw in our economy: our money. The antidote is gold.

Over the last few months we have seen gold rally up to $1000. Suddenly it is being heralded as the investment (if you held it since 2001, you’d really be laughing at this), and rightfully so. Even mindless stock jockeys speak to the fact that in times of uncertainty, gold is the place where people should park their cash. It is the asset of last resort. Yet if this is considered the only safe place to put our money when times are hard, then why not just make this our currency? Why do we have a paper dollar whose intrinsic worth is equivalent to that of paper and ink, or alternatively your faith in Nancy Pelosi?

As the always pithy Daily Reckoning notes, over the last 2,500 years, an ounce of gold has maintained a value roughly equivalent to 350 loaves of bread. Seems like a pretty safe store of wealth to me. Alternatively, the value of the dollar has dropped over 95% since the government (under the auspices of the Federal Reserve) took control of our money less than one hundred years ago. You have to ask yourself, would you rather have your government constrained in the money it creates by a tangible asset that has always held its value, or a government that holds its heavy hand on the cranks of the printing press?

This brings into question another issue. The government does not control the bread supply, the iPod supply or the Kudlow supply. But when it comes to money, a good exchangeable for these other goods and services, we give the government free rein. Sure, one might argue that the central bank is technically private, but this is just the deceitful nature in which the government bends the rules of its Constitution. It is akin to Fannie and Freddie being “quasi-public” entities. But why should the government grant itself a monopoly on this product, while subjecting all private firms to its anti-trust laws?

And how does the government maintain this monopoly on money? Why, legal tender laws of course. There was a time when money was coined privately, but those days are long gone. The question is, why shouldn’t the government allow a little friendly competition for the paper that it prints? The answer is that the power to control the money supply is great. Mainly, it allows the government to plunder the people. Here are a few politicians on the matter:

“Of all the contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money.”

Daniel Webster’s disdain is matched by that of Thomas Jefferson:

“The evils of this deluge of paper money are not to be removed until our citizens are generally and radically instructed in their cause and consequences, and silence by their authority the interested clamors and sophistry of speculating, shaving, and banking institutions. Till then, we must be content to return quoad hoc to the savage state, to recur to barter in the exchange of our property for want of a stable common measure of value, that now in use being less fixed than the beads and wampum of the Indian, and to deliver up our citizens, their property and their labor, passive victims to the swindling tricks of bankers and mountebankers.”

On the other hand, he asserts,

“Specie is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war.”

What of Woodrow Wilson, the man who signed the Fed into existence?

“I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”

How about an economist for good measure? Perhaps our old friend Mr. Keynes:

“The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

Thanks for that one, Johnny.

If paper money through inflation impoverishes the citizenry and destroys capitalism, then one has to wonder why the people continue to allow this system to hold sway across all nations. Further, the historical track record of paper monies shows that every single one has failed. But we continue to entrust our money to our politicians. To be sure it is great for some — for the bankers, the war-profiteers and the debtors, inflation is a boon. Not to mention the fact that it allows the government to do whatever it wishes — to run up unlimited debts, fight endless battles and further extend its largesse to its favored sons. This is an immoral process and one that undermines the integrity of our nation.

As we see the flood of people to gold as the only safe asset, in a time without price inflation no less, it behooves us to question the paper money through which our politicians pilfer. Restore power to the rightful hands of the people to produce their own currencies, and we can give the central bankers a run for their money. Our liberty depends upon it.

Ten Questions for Paulson, Bernanke & Co.

1. Can we increase our debt and devalue our currency in order to restore our prosperity?

2. Do you believe it is our right as citizens to know how the TARP money is being spent, and what banks are using as collateral for the cash they are receiving?

3. Why will the economic stimulus package work, and historically has this type of stimulus ever worked?

4. Why does the Federal Reserve still hold gold in its reserves?

5. What is the paper USD intrinsically worth, and can you explain why it is okay for you to have a monopoly on it?

6. Can you name a fiat currency that has not eventually failed? (the answer can be found here)

7. Why has the purchasing power of the dollar decreased 95% since the Federal Reserve was created in 1913?

8. Can you explain why after a bubble bursts, falling prices are bad for consumers?

9. Can you explain why if inflation makes the price of goods higher for the consumer that it is good for the economy?

10. If we saw that pumping in massive amounts of credit to our financial system led to an unsustainable bubble, why is the goal of your policies to create massive amounts of credit?