[Excerpted from Ludwig von Mises on Money and Inflation: A Synthesis of Several Lectures, compiled by Bettina Bien Greaves. This lecture was given at the Foundation for Economic Education (FEE).]
Government interference with the market and with money occurs ideally only in cases in which individuals are not prepared to do what they voluntarily promised to do. Having chosen for himself the field in which he wants to work, he must barter or trade what he himself has produced in order to survive, in order to obtain the things he needs to live. If the acts of exchange are such that not everybody gives and receives the goods and services contracted for at the same time, difficulties can arise. The value and the meaning of the things that are given away and those that are received are never equal or identical, not only in size and quality but also, what is still more important, as to the time period over which an exchange is to be carried out.
If people enter into a contract, if both parties decide that something must be done immediately, there is as a rule no reason for any disagreement between the parties. Both parties to the exchange receive immediately the thing they want to acquire for what they give away. The whole act of exchange is then finished; there are no further consequences. But most exchanges are not of this kind. In reality there are many exchanges wherein both parties do not have to deliver immediately what they are obligated to deliver.
If the parties to a contract, to an exchange, want to postpone the settlement, the execution, of their contract, differences of opinion can arise, some very serious differences of opinion, concerning the correctness of one or the other party’s contribution. Translated from the more abstract language used by lawyers and economists, that means that if one man has entered into a contract with another man wherein he has promised to do something at a later date, the question may arise when that time comes whether this promise was really executed correctly according to the tenets of the contract.
Money is a medium of exchange, a phenomenon that developed out of the market. Money is the result of an historical evolution that, in the course of many hundreds and thousands of years brought about the use of exchange through the intermediary of a medium of exchange. Money is the generally accepted and generally used medium of exchange; it is not something created by the government; it is something created by the people buying and selling on the market.
But if people don’t comply with their voluntarily accepted agreements, then the government has to interfere. And in any interference of the government, the government has to find out before it interferes whether there really was a violation of voluntarily entered contracts. Such contracts are the results of agreements, and if the people do not comply with what they have promised then it is the state that has to interfere in order to prevent individuals from resorting to violence.
The government is called on to protect the market against people who don’t want to comply with the obligations that they have to fulfill under the market, and among these obligations is the obligation of making payments in definite sums of money. If somebody wants to appeal for government interference against other people because these other people failed to comply with what they had accepted voluntarily as an agreement, then it is the duty of the government, of the courts, of the judges, to determine what money is and what it is not. Now, what governments did, what governments had done for thousands of years, we could say, is to misuse the position this gives them in order to declare as money what is not money, or what has a lower purchasing power per individual piece.
“Money is not something created by the government; it is something created by the people buying and selling on the market.”The market, the real social institution, the fundamental social institution, has one terrific weakness. The weakness is not in the institution of the market but in the human beings who are operating on the market. There are people who do not want to comply with the fundamental principle of the market — voluntary agreement and action according to voluntary agreement. There are people who resort to violence. And there are people who do not comply with the obligations that they have voluntarily accepted in agreement with other people.
The market, the fundamental human social institution, cannot exist if there is not an institution that protects it against those people who either resort to violence or who are not prepared to comply with the obligations that they have voluntarily accepted. This institution is the state, the police power of the state, the power to resort to violence in order to prevent other people, ordinary men, from resorting to violence.
Now, violence is a bad thing. The fact that violence is necessary, that it is indispensable in some situations, such as in settling disputes concerning contracts, does not make the institution imposing the violence, the government, a good institution. Nevertheless, the idea prevails, more or less throughout the whole world that, on the one hand, government, the institution that resorts to violence, is a great and a good thing, and that, on the other hand, the market, the system of voluntary social cooperation, though perhaps necessary — although most people don’t even realize this — is certainly not something that must be considered good.
Now, everything that human action has achieved is the outcome of the voluntary cooperation of men. What the government does, or what the government ought to do, is to protect these activities from people who do not comply with the rules that are necessary for the preservation of human society and all that it produces. As a matter of fact, the government’s main function, or let us say even its only function, is to preserve the system of voluntary action or cooperation among people by preventing people from resorting to violence. What the government has to do with respect to this medium of exchange is only to prevent people from refusing to comply with the commitments they have made. This is not a function of building something; it is a function of protecting those who are building.
“The fact that violence is necessary, that it is indispensable in some situations, such as in settling disputes concerning contracts, does not make the institution imposing the violence, the government, a good institution. “Among the things refractory individuals sometimes do is to fail to fulfill their obligations under market agreements. To say it very simply, an individual made an agreement, and yet this individual does not comply with his obligations under that agreement. Then it is necessary to resort to government action.
What can you do if the other party to an agreement says, “Yes, I know. I received something from you under an agreement by which I was bound to give you something in exchange. But I shan’t give it to you. I am a bad man. What can you do about it? You must just grin and bear it.” Or it is possible that the person who has to deliver at a later time says, “I’m sorry but I cannot, or I will not, deliver.” This makes the whole market system of exchanges, the whole system based upon the voluntary actions of individuals, break down.
If a man has offered in a contract to deliver potatoes in three months, for instance, the question may come up when he delivers whether what he gives the buyer really is potatoes in the meaning of the contract. The party who was bound to deliver potatoes may have delivered something that the second party does not consider potatoes. Then the second party says, “When we made an agreement concerning potatoes we had something else in mind. We had something in mind that had certain qualities that these potatoes don’t have.”
Then it is the duty of the government, of the judge whom the government appoints for this purpose, to find out whether or not these questionable potatoes are really what was understood by the contracting parties to be “potatoes.” They must not be spoiled; they must be of a certain character; they must be potatoes according to commercial usage; and so on. They may be potatoes from the point of view of a professor of botany but not potatoes from the point of view of the businessman. This is something that trade usage determines everywhere.
The judge cannot be familiar with everything that is going on in the world and, therefore, he very often needs the advice of an expert. The expert must say whether or not the potatoes in question should really be considered the kind of potatoes meant in the agreement. And then it is the business of the judge to consider the expert’s advice and to determine whether what has been delivered really is potatoes or whether they are something else.
Agreements concerning products such as potatoes — or anything else for that matter, wheat, for instance — which are made regularly on the market through the intermediary of a medium of exchange, popularly called “money,” can be violated, as we have seen, on the commodity side. But they can also be violated on the side of the money. That means that a conflict, a difference of opinion, may arise between the two parties to a contract concerning the money that has to be paid to comply with the contract. And then the government, the judges, must determine whether what is offered under the name of money in this case is really what the people had in mind when they made the contract.
Government was not directly involved in the development of money; the task of the government in this connection is simply to see that people fulfill the terms of their contracts with respect to the money. Just as the judge can say what is, or what is not, meant in the contract by the term “potatoes” or “wheat,” so, under special conditions, to preserve peaceful conditions in the country, the judge must determine what was meant when the parties to a contract mentioned “money.”
“It possible to do anything with money, to falsify it, or to debase it, in any way you want so long as you have the government, its judges, and its executioners on your side.”What did the people use as a medium of exchange? What did they have in mind in their contract when they said, “I will pay you certain units of ‘money’ when you do what you have promised.” Whether these units are called dollars, or thalers, or marks, or pounds doesn’t matter; the government has only to find out what the meaning of the contract was.
This is what government has to decide. The government does not have the power to call something “money” that the parties didn’t have in mind as money when concluding their contract any more than it has the power to call non-potatoes “potatoes,” or to call a piece of iron, let us say, “copper.” It is not that the government says what money is originally; it is just that it must say what is meant by “money” in the case of the contract that is in conflict.
I have to say all these things in order to point out something people do not seem to know today, namely that money is not created by government. People today don’t know this because the étatist, statist, ideas about the market and about money have destroyed knowledge of how money is created.
It is only in dealing with the problem of whether or not the money obligations in contracts have been filled that the government or, let us say, the judge, has anything to say about money. It is only in this way that the government comes into touch, originally into touch, with money — just as it comes into touch with everything else, that is with potatoes, wheat, apples, motor cars, and so on.
Therefore, it is not true that money is something derived from the government, that the government is sovereign with regard to money, and that it can say what money is. It is not true that the government’s relationship to money is different from what it is to other things. Money is a product of market agreements just as is everything else that enters into exchange agreements.
If a judge were to say that a horse is whatever the government calls a horse, and that the government has the right to call a chicken a horse, everybody would consider him either corrupt or insane. Yet, in the course of a very long evolution, the government has converted the situation that the government must settle disputes concerning the meaning of “money” as referred to in contracts into another situation. Over centuries many governments and many theories of law have brought about the doctrine that money, one side of most exchange agreements, is whatever the government calls money. The governments are pretending to have the right to do what this doctrine tells them, that is to declare anything, even a piece of paper, “money.” And this is the root of the monetary problem.
This makes it possible to do anything with money, to falsify it, or to debase it, in any way you want so long as you have the government, its judges, and its executioners on your side. And therefore a system developed that is very well known to everybody. The government presumes that it is the government’s right, duty, and privilege to declare what money is and to manufacture this money. This system brings about a situation in which it is possible for the government to do anything it wants, anything that can be done with money. And this creates a situation in which the government uses its power to print and to coin money for such purposes as increasing the means, the purchasing power, with which it appears on the market.
