The Mises Institute is currently in a campaign to distribute copies of Rothbard’s What has government done to our money. You can order free copies from the front page of Mises.org.
Hello and welcome to another episode of the Minor Issues podcast. I’m Mark Thornton coming to you from the Mises Institute. Please like, share, and subscribe. Thank you.
In What Has Government Done to Our Money?, Murray Rothbard changes your whole view of the world, not just money. He does so by opening our eyes and clarifying the mysteries of money, banking, and the role of government. He uses “common sense” of old-school theory and American history.
It changed my mind. I’ve used it in teaching economics classes or for extra credit assignments. Some students say it was the best part of the class. We can never get to any type of libertarian society without returning to sound money.
Even if you are already opposed to government control and meddling in money and banking and the economy, it can really clarify the reasons why it is so necessary, beyond just all the evil and inefficient results. People who fear a lack of government oversight of money and banking will find they have a strengthened backbone against the prevailing winds of socialism.
Rothbard does this by drawing a theoretical distinction between society, on the one hand, and the government, on the other. He then asks what the reader may consider “common sense” questions.
While they might seem to be just “common sense,” the questions are actually the critical theoretical questions that economists must ask and answer. The reader is, of course, free to disagree, but Rothbard’s conclusions are unassailable.
He begins with free exchange, or making trades, as the basis of society—with all such interactions making individuals better off—the “lifeblood of civilization itself.”
Rothbard shows how mutual benefits materialize with simple barter transactions and how money facilitates exchange, establishing the mechanism and rationale for money to develop in the free market from a simple commodity, where government plays no role.
Some primitive societies developed money on the basis of things like grain and salt, but later metals proved to be better money. This simple natural selection process facilitated the transformation of primitive humanity into a cultured and developed society based on an increasingly intricate specialization and division of labor.
Rothbard demystifies issues related to the size, shape, and overall quantity of money, including various changes in the supply and demand for money, such as the bogus problem of “hoarding” too much money. Say a devious cult in society decided to “hoard” their money. This would increase the purchasing power of all our money units. People willing to part with some of their money would find that everything would be on sale! Meanwhile, the cult would live an impoverished lifestyle.
Rothbard also refutes the canards that the purchasing power of money must be perfectly stable or that only one type of money can be allowed to circulate. These myths emanate from people trying to impose an engineering mindset on the workings of the economy. However, the biological analogy is superior as the economy is naturally self-regulating. Attempting to re-engineer the economy can lead to chaos and crisis and, at a minimum, “unintended consequences.”
This section ends with a long chapter on money warehouses or banking. This is where many issues and questions develop, such as inflation of the money supply. However, most importantly, we must remember that banking is a critical component of capitalism in that money can be exchanged and transferred to a whole new level. Warehouse banks issue warehouse receipts (deposits) for money which can be exchanged directly. Today we can write checks, wire money, or use our debit cards.
But what if these warehouses issue more receipts, either by printing and lending them (counterfeiting), or by lending the true owner’s money without their consent (fractional reserve banking)? Rothbard shows that, in a free society, there are natural checks and balances that defeat or at least limit a bank’s ability to inflate their balance sheet. Also, the legal system in a free society might deem such banking practices as fraud and, therefore, illegal. Thereby, a free society limits such shenanigans through competition and law.
In sum, freedom can run a monetary system as superbly as it runs the rest of the economy. Contrary to many writers, there is nothing special about money that requires extensive governmental dictation. Here, too, free men will best and most smoothly supply all their economic wants. For money as for all other activities of man, “liberty is the mother, not the daughter, or order.” In other words, liberty creates order. Order is not the source of liberty.
The next section deals with government meddling with money, providing a theoretical vantagepoint for observing actual history. The key feature of this section is that government acquires resources by force, but inflation is a more obscure and supposedly less painful means to that end.
The economic effects of inflation are brilliantly described by Rothbard and are well worth contemplating. The counterfeiters are obvious beneficiaries along with whomever they share or spend the money. This will cause prices to rise and dilute the purchasing power of money units possessed by anyone not tied to the scheme. There are winners and losers from inflation.
But inflation is a negative-sum game in that it has “other disastrous effects.” Reading groups should discuss the types of effects Rothbard describes in terms of current affairs or historical remembrances.
The inflationary process also causes the business cycle and interested readers should follow up with Rothbard’s tiny pamphlet, Economic Depressions: Their Cause and Cure.
But while the inflationary process can be cyclical, it can also be terminal, leading to the crack-up boom and hyperinflation, which can have disastrous economic and ideological effects on society. However, there is always room for hope, if not optimism, for rational reform.
The rest of this section describes all the general problems government can cause with respect to money and banking, generating chaos where there was order and maximum prosperity. Before transitioning to the final section, it is important to highlight Rothbard’s core points:
- Money is a market phenomenon that requires no government for optimal provision.
- Government intervention harms the usefulness of money and sends negative economic shockwaves throughout society.
- Statists and socialists seek control over money to benefit themselves and to exploit us.
The final section recaps the monetary breakdown of the West from the Classical Gold Standard to the beginning of the full fiat monetary system in the early 1970s. The reason the Classical Gold Standard failed was not internal contradictions, but rather that “Classical” meant that it increasingly relied on the trust in governments, central banks, government currencies, and their promises—all of which unraveled in WWI. The “system” continued to unravel, in fits and starts, until the final break with gold in 1971. This begins the current Age of Fiat Inflation.
The historical phases that Rothbard describes illustrate the abject failure of government solutions. Knowing this history is vital for reform efforts. We cannot trust governments. True monetary reform can only be achieved by what Rothbard deemed a “return to a free-market commodity money such as gold, and by removing government totally from the monetary scene.”
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The Mises Institute is currently in a campaign to distribute copies of Rothbard’s What has government done to our money. You can order free copies from the front page of Mises.org.
