Money
From Free Talk Live
Contents |
The American Monetary System of the past
Back in the day, early in America's history, Americans had a much different money system than they have now. The nation was on, not a gold standard actually, but rather a silver standard, under which the Government defined the dollar as a specified weight of silver. If Smith owed Black ten dollars, Smith owed Black a specific weight of silver. From year to year the quantity of silver in those ten dollars didn't change.
Back then, anyone could bring any amount of silver to the US Mint, and for no charge the Mint would take the silver and smoosh it into the shape of coins, stamped with the imprint of the Mint so anyone could look at it and know the weight.
So think about the Government trying to manipulate the money supply under this system. If the Government wanted to increase the money supply it could acquire silver and turn it into money. But if the government made too much money, it was a simple matter for private citizens to take the coins and melt them back down for other purposes. So the government couldn't increase the money supply beyond what the market wanted.
On the other hand, if the Government wanted to decrease the money supply, it could take its coins and melt them down for other purposes. But if the money supply got too low for the needs of commerce, private citizens could bring their silverware and jewelry to the Mint and have it turned it into money.
So one can see how no matter what the Government did to increase or decrease the money supply, the market would correct problems if the supply became too small or too great.
The System Today
Nowadays, to put it simply, the powers that be have the printing press, and they create as much money as they want, no silver required. Now, even the simple-minded can figure out that there must be a catch to this, and it just can't be that easy. So, in order to deny that this is what is happening, we have this cover story that they're not just unrestrainedly printing money, but actually, even though the Federal Reserve is creating the money (out of nothing), the Government is just borrowing it, and eventually they'll pay it back (with interest). Har-de-har-har. If you believe that, then I have a central bank to sell you.
There are several fine books that go into detail about this mechanism. In particular, Murray Rothbard's "The Mystery of Banking" describes the Fed and fractional reserve banking in gory detail including examples of banks' balance sheets as money is created; Ludwig Von Mises' "Theory of Money and Credit" describes central banking in deep and academic detail; and for those who like pondering conspiracies, Edward Griffin's "The Creature From Jekyl Island" is an exciting if infuriating narrative of the creation of the Federal Reserve Bank.
But the remainder of this space will be used to show what shocked this author when he first learned it, and that is the blatant unconstitutionality of our current money system. This is knowledge acquired from a wonderful book called "Pieces of Eight," by Edwin Vieira, Jr., a Harvard-educated lawyer.
Under the Articles of Confederation, which the Constitution replaced. Article IX says that "The United States in Congress assembled shall have authority...to borrow money, or emit bills on the credit of the United States..." Similarly, the first draft of the Constitution said, "The Legislature of the United States shall have the power...To borrow money, and emit bills on the credit of the United States;"
But if you look at the U.S. Constitution as it exists today, Article I, Section 8, clause 2 says, "The Congress shall have Power...To borrow money on the credit of the United States;" The power to emit bills of credit was removed. What's a bill of credit?
Black's Law Dictionary (8th ed.) explains that a bill of credit is "Legal tender in the form of paper, issued by a state and involving the faith of the state, designed to circulate as money in the ordinary uses of business." So obviously the Federal Reserve notes we use today are bills of credit. In fact, the framers of the Constitution, by a vote of nine states to two, took away the power of the Federal Government to emit legal tender paper money. Why'd they do that?
Here are some truly enlightening quotes from Madison's record of the debate that preceded the removal of these words from the Constitution during the Constitutional Convention in 1787:
Mr. Elseworth thought this a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By withholding the power from the new Governt. more friends of influence would be gained to it than by almost any thing else- Paper money can in no case be necessary- Give the Government credit, and other resources will offer- The power may do harm, never good.
...
Mr Wilson. It will have a most salutary influence on the credit of the U. States to remove the possibility of paper money. This expedient can never succeed whilst its mischiefs are remembered. And as long as it can be resorted to, it will be a bar to other resources.
Mr. Butler. remarked that paper was a legal tender in no Country in Europe. He was urgent for disarming the Government of such a power.
And this author's personal favorite:
Mr. Read, thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelations.
And yet this prohibited paper money is exactly what we use today.
The Libertarian System
What is money?
To understand the libertarian monetary system, one has to first understand what money is. Money, explained Carl Menger, the founder of the Austrian School of Economics, is a commodity which arises on the market. The foundation of the economy is voluntary exchange to mutual benefit. If Smith trades five dollars for Black's beer, obviously both of them are better of, otherwise they would not have traded. Smith values the beer higher than he values the five dollars, and Black's values are the opposite. Now, say Green is a blacksmith and Smith is an economics teacher. Green has no use for Smith's services, but Smith needs Green's. What to do? Simple. Use a medium of exchange. Smith sells his services to another person, Brown, who wants to learn about economics in exchange for some gold. He then goes to Green and trades the gold for, say, a shovel. One might think that this is ineffective, but it enables more transactions than possibly could be made with direct trade, barter. Money, as all other commodities, clearly arose on the market and is necessary for the market to work. Without money many transactions could not be made, and saving would be almost impossible. How, for example, does a teacher accumulate capital? Therefore, money should be handled by the market. Private currencies is the way to go for the libertarian.
Inflation
Generally, the value of one unit of money (one dollar) is dependant on the amount of goods in the economy and the supply of money. Because money has no value in itself (That is, unless you're Scrooge McDuck), the only relevant issue is what one can trade one's money for. As the amount of goods in the economy increases, the value of money rises, assuming the supply of money is constant. Assume there is only one commodity in the economy, except money, eggs. To begin with, there are 20 eggs in the economy and 10 dollars. One dollar can buy two eggs. If the productivity increases and there now are 50 eggs in the economy, one dollar will buy five eggs. Clearly, a constant money supply and growth leads to falling prices, which is good for consumers and everyone else. If, on the other hand, money supply increases, the value decreases and inflation occurs. Inflation is an undue increase in the money supply. Now, a government which wants to pay for some costly project, in which it should not be involved at all, such as education, can, if it controls the monetary system, simply create more money. Need $100 million? Print more notes! Prices will rise, but the consequences are far worse. The first actors to get the new money will be able to trade it at the old value of money, but once the money starts circulating in the economy, other actors will not be able to trade it for as much goods as the first owner. They will be made poorer, and the first owner richer. Inflation, then, is nothing but redistribution of wealth and theft of some people's money. Further, inflation causes the business cycles, which leads to recessions.
The Gold Standard
The reason why this is possible is that there's no standard, no backing of the money. A dollar is a green note, nothing else. In the libertarian society, the dollar note is a certificate. It could say "The owner of this 20 dollar note is the owner of one ounce of gold in the Jones Bank's vault and this gold will be given to him at his request." Each bank then, can only emmit as many notes as it has gold to cover. If a bank has access to a kilo of gold and a dollar is a gram of gold, the bank can emmit only notes of a total $1000. This is a gold standard. Money is gold and gold is money. But in the libertarian society, it is wrong to speak of a gold "standard". Under Laissez-Faire Capitalism, the government cannot force banks to use gold as money. What to use as money is up to the market to decide. One bank might use gold, another silver, and a third might use gold and silver. Most likely, this would be the case. Previously, gold and silver have won and been used as money. However, what the government can do is establish full reserve banking, as opposed to fractional reserve banking. Many liberatarians believe fractional reserve banking is fraud, and should therefore be outlawed.
