Weekend Economists Reminisce: Black Monday October 19, 1987-2012

[Demeter]

17. Paper Money = Despotism By Wendy McElroy

http://dailyreckoning.com/paper-money-despotism/

“Fiat” is money with no intrinsic value beyond whatever an issuing government is able to enforce. When it enjoys a monopoly as currency, fiat inevitably turns the free market functions of money inside out. Instead of being a store of value, the currency becomes a point of plunder through monetary policies such as quantitative easing. Instead of greasing society as a medium of exchange, the currency acts as a powerful tool of social control. The second harm is far less frequently discussed than inflation, but it is devastating. The personal freedoms that we know as “civil liberties” rest upon sound money. In his classic book The Theory of Money and Credit (1912), the Austrian economist Ludwig von Mises argues, “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically, it belongs in the same class with political constitutions and bills of rights.”

Yet the best solution to the harms caused by fiat is often dismissed even by staunch free market advocates; namely, allow the private issuance of money that freely competes with fiat as currency. This would involve removing all prohibitions, other than fraud, abandoning monetary controls such as legal tender laws and all reporting requirements. In turn, this might well eliminate the Federal Reserve, although people would be free to accept whatever money they wished.

In his invaluable book What Has Government Done to Our Money? the Austrian economist Murray Rothbard addresses the strange reluctance to consider private currencies, “Many people, many economists, usually devoted to the free market, stop short at money. Money, they insist, is different; it must be supplied by government and regulated by government.” (Note: Technically, the currency is generated through a banking cartel with government support.) History frowns upon that theory. Before the United States Mint issued its first coin in 1793, the 13 colonies were awash with an assortment of currencies that included both private and government-issued ones. Current fiscal reality also frowns on this. Privatizing zealot Martin Durkin calls the idea of government guaranteeing the quality of money “the sickest joke in economic history. Governments have always robbed their subjects by debasing the currency, but this abuse, in recent years, has burst all bounds of decency and sanity.”

But focusing upon economics and efficiency can miss the reality of how a currency monopoly is intimately connected with the violation of traditional civil liberties. A key reason Mises viewed sound money as a necessary protection of civil liberties is that it reins in the growth of government. When a government prints money without the restraint of competing currencies — even if the restraining “competition” is a gold standard — runaway bureaucracy results. Wars are financed; indeed, it is difficult to imagine the extended horrors of World War II without governments’ monopoly on currency. A white-hot printing press can finance the soaring numbers of prisons and law enforcement officers required to impose a police state. Floods of currency can prop up unpopular policies like Obamacare or the War on Drugs. That is why government holds onto its monopoly with a death grip. In The Theory of Money and Credit, Mises observes, “The gold standard did not collapse. Governments abolished it in order to pave the way for inflation. The whole grim apparatus of oppression and coercion, policemen, customs guards, penal courts, prisons, in some countries even executioners, had to be put into action in order to destroy the gold standard." (Note: Mises addresses “sound money,” which is distinct from private money, but both forms of currency would serve the function of putting a severe brake on a government’s ability to swell.) Another way a currency monopoly threatens civil liberties is by permitting government to monitor virtually all transactions through the financial institutions with whom it maintains an intimate partnership. Total surveillance is a prerequisite to total control, which is what the government wants to establish as quickly as possible. For example, prior to establishing the Suspicious Activity Report (SAR) in 1996 — a form that financial institutions submit to the U.S. Treasury — banks were required to automatically report any transaction over $10,000. Now any activity deemed “suspicious” is vulnerable.

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Wendy McElroy is a Research Fellow at The Independent Institute. Her books include the Independent Institute volumes, Liberty for Women: Freedom and Feminism in the 21st Century, and Freedom, Feminism, and the State.

A contributor to numerous books, Ms. McElroy was Series Editor for Knowledge Products’ audio-tape series, The World of Philosophy, The World’s Political Hot Spots, The United States at War, and The United States Constitution, and she authored the scripts for Vindication of the Rights of Woman, The Liberator, Civil Disobedience, and Discourse on Voluntary Servitude in the Audio Classics Series. Her scripts have been narrated by George C. Scott, Harry Reasoner and Walter Cronkite. She is a contributing editor to the magazines, the Freeman, Free Inquiry, and Liberty, and the author of numerous articles in The Independent Review, Journal of Libertarian Studies, Literature of Liberty, National Review, Reason, SpinTech, Freedom Daily, Maire Claire, Penthouse, and Toronto Globe and Mail.