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20140607 What Government done to our Money



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Main Idea:

The main idea is that only commodity money such as gold could support robust economy. All other forms of money from bimetallism to paper fiat money undermine economy bringing inflation and other problems.


I. Introduction
This introduction is about the nature of money as government-controlled tool versus natural equivalent of goods and services used in free market without government intervention.

II. Money in a Free Society
1. The Value of Exchange: Money is unit of measure for exchange of incomparable goods and services differently valued by participants of exchange

2. Barter: This is direct exchange good or service A for B

3. Indirect Exchange: This is two-step exchange Good A for money M for good B

4. Benefits of Money: This is about money being medium of exchange – the most liquid commodity around.

5. The Monetary Unit: Since money is commodity, usually gold or silver is the natural type of money with unit of money being weight of commodity.

6. The Shape of Money: The shape is irrelevant, but coins are more uniformed and easier to count, but need some work so they are more valuable.

7. Private Coinage: This chapter is in support of private coinage. Actually intervention of government into coinage was the first step of taking control over money.

8. The “Proper” Supply of Money: This is discussion about what should be proper supply of money. The inference is that it should be defined by free market as everything else.

9. The Problem of “Hoarding”: Contrary to usual perception hoarding does no harm to economy. It is just maintenance of cash balances by individuals regulating available money supply.

10. Stabilize the Price Level? The stabilization of price level is making no sense in free market economy. Since money is just a medium of exchange their value in relation to other goods is bound to vacillate and there is no problem with it.

11. Coexisting Moneys: This part is about multiple types of money serving as medium of exchange. Again since money is just another commodity, this would cause no problems on the free market.

12. Money Warehouses This is discussion about simplification of commodity money when banks and their notes just represent gold in bank warehouse and provides for more convenient use of money.

13. Summary: The free market could run money supply as well as it runs supply of any other commodity.

III. Government Meddling With Money
1. The Revenue of Government: The government is basically a violent organization designed to transfer resources from producers to bureaucrats. The two main methods are taxation that being always quite obvious is unpopular and money counterfeiting: the case when government establishes control over money supply and tend to oversupply money creating inflation.

2. The Economic Effects of Inflation: This chapter is review of consequences of inflation, the most important being a distortion of business calculations that in case of hyperinflation could bring economy down.

3. Compulsory Monopoly of the Mint: This is a short review of historically initial step in government counterfeiting of money – control over the mint.

4. Debasement: The second step is debasing – progressive decrease of gold content of the coins

5. Gresham’s Law and Coinage: Simple formulation: the bad money pushes out good money from the market.
a. Bimetallism: The changing market ratio between 2 metals causes less valuable to push out more valuable.
b. Legal Tender: The definition of some forms of money either commodity money or just paper money that government enforcement of contracts will use

6. Summary: Government and Coinage: The government’s counterfeiting of money is limited as long as commodity money are used. The switch to fiat money frees government to inflate money infinitely.

7. Permitting Banks to Refuse Payment: The options of refuse payment in specie given to banks by government caused crises of 1819, 1837, and 1857 and provided for banks initiative to `encourage inflation.

8. Central Banking: Removing the Checks on Inflation: The monopoly on notes issue granted to central banks removes any limitation on inflation of these notes.

9. Central Banking: Directing the Inflation: The Central Bank controls inflation via demand to regular banks to maintain a specific reserves. This moves money supply away from economic area to political area since decisions of central bank are in hands of politicians.

10. Going Off the Gold Standard: This is description of steps that moved world economic system away from gold standard.

11. Fiat Money and the Gold Problem: Coexistence of gold and fiat money at the same time expose value loss and inflation very clearly making government to strive to remove gold out of circulation.

19. Fiat Money and Gresham’s Law: The Gresham law when gold is forbidden works through currency exchange so the more reliable currency is going into savings with less reliable circulating on the market.

13. Government and Money: Free, commodity based money make people nervous because nobody in control, so they demand government control of the money. The history demonstrates that it is wrong and in reality it is government that causes chaos in money supply leading to crises and inflation.

IV. The Monetary Breakdown of the West: This was written in mid 1970s when USA went into stagflation with drastic reduction in the value of paper money and dissolution of Bretton Woods’s system. It goes through history of government takeover of money supply

1. Phase I: The Classical Gold Standard, 1815-1914: Slightly idealized period of international gold standard as related to prosperity.

2. Phase II: World War I and After: The reason of moving away from gold is need to finance war that was beyond economic ability of governments causing them to use inflation.

3. Phase III: The Gold Exchange Standard (Britain and the United States) 1926-1931: The temporary system was establish when USA remained on real gold standard while Britain moved to pseudo gold standard with exchange allowed only with large scale gold transactions.

4. Phase IV: Fluctuating Fiat Currencies, 1931-1945: everybody inkling USA for going away from gold standard to fluctuating exchange of currencies. However it was limited so gold still was used and moved to US.

5. Phase V: Bretton Woods and the New Gold Exchange Standard (the United States) 1945-1968: The after WWII system was established when currencies were linked to dollar and dollar to gold.

6. Phase VI: The Unraveling of Bretton Woods, 1968-1971: Accumulation of dollars abroad eventually overcome amount of gold in USA leading to stress on Bretton Woods system

7. Phase VII: The End of Bretton Woods: Fluctuating Fiat Currencies, August-December 1971: The final period of Bretton Woods.

8. Phase VIII: The Smithsonian Agreement, December 1971-February 1973: The clearly doomed attempt to base currency exchange on rigid system of government pledges. Obviously, it could not possibly work.

9. Phase IX: Fluctuating Fiat Currencies, March 1973-?: This is current system of free exchange of fiat money.

Preface: The short review of the first part.
Case for the 100 Percent Gold Dollar: Rothbard states his disagreement with majority of supporters of gold standard who would like to go back to 1932. He would like to have completely 100% gold standard.

Money and Freedom: The money is basis of economy, therefore free economy could not exist if money controlled by government. The stricter such control, the less freedom economic system has.

The Dollar: Independent Name or Unit of Weight? : All money names originated from units of weight used in gold-based transactions.

The Decline from Weight to Name: Monopolizing the Mint: The decline from weight to name occurred as result of government intervention and debasement of money. The government coins weighting a lot less then pound of gold in weight had to be considered as pound because government said so and is capable to bring force to the table to assure acceptance of this statement.

The Decline from Weight to Name: Encouraging Bank Inflation 100 Percent Gold Banking: This is discussion of fractional reserves banking. The fractional banking means that money issued by bank is only fractionally convertible which is pretty close to cheating and, therefore should be prevented by government.

Objections to 100 Percent Gold:
1. Banks would not be able to make profit – Response: they just should charge for services
2. Inadequate money supply for growing economy – Response: money supply does not matter because monetary units automatically are adjusted to needs of the market. The stability of prices is not relevant.
3. Money value could not be fixed and should not be fixed. Use of commodity money would allow fixing money’s real unit of measure – weight.

Professor Yeager and 100 Percent Gold: The problems of deflation, national reserves, and exchange rates are caused by fractional-reserve banking. They would not exist if whole world were on 100% gold standard.

The 100 Percent Gold Traditions: The 100% gold standard is original American position ably supported by both Jeffersonians and Jacksonians.

The Road Ahead: This is just in case somebody listens: 6 steps program of establishing gold standard.

My Take on It

All things being equal I would agree that gold standard would be the best form of money. However things are not equal and not static. They are changing all the time so my first concern would be that unchanging money supply would be falling behind demand for money because of growth in economy and need in money to support this growth. In theory it does not matter that one’s labor today is worth $10/hour while yesterday it was $100/hours if one can buy with $10 today the same as with $100 yesterday. In practice it does matter because this number also represents evaluation that individual receives on the market and therefore has impact on psychological wellbeing. People hate to loose anything and this immaterial loss in number has real impact. This is only one of many reasons why maintain gold standard would be tough due to inevitable deflation if economy and population is growing while amount of money remains the same.

Even more important is fact that money is not exists outside of system of coercion necessary to maintain contracts, avoid cheating, stealing, and other economic malfunctions. It is not conceivable that people on controlling side of this coercion would easily give up control over money that allows them to access a lot more resources that they would be able to without such control.

Finally there is an inherent flow in any kind of commodity money including gold – new technological discoveries could dramatically change availability of any commodity sending economy in tailspin and chaos.

I think that the best way would be free fluctuation of all types of money people could come up with including gold, but with one significant caveat – an independently elected economic agency not part of other government organizations providing easily available money, probably in form of transaction records with limited amount of money units maintained at such level that inflation of this unit against wide range of constant goods would be minimal. It would be important that this set of goods was constant, unchangeable, and minimally improvable. Something like gallon of gas, KW/Hour of electrical energy, pound of food of specific type, pound of gold, and similar unchangeable things. With wide range of money / goods equivalents it would be possible not only control money supply overall, but also control it at the lower resolution level preventing inflation bubbles for specific goods whether tulips or housing.

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