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Against Government Money

January 23, 2010 1 comment

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.