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What Has Government Doneto Our Money?



What Has Government Doneto Our Money?

Murray N. Rothbard

LvMIMISES INSTITUTE



Cp © 1991, 2005, 2008 L M ICp © 1963, 1985, 1990 M N. RCp © 2005 L M I, fi

Cp © 2010 L M I p

C C A L 3.0.p://.///3.0/

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ISBN: 978-1-61016-142-8



Contents

I. I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

II. M F S . . . . . . . . . . . . . . . . . . . . 41. T V E . . . . . . . . . . . . . . . . . . 42. B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

3. I E . . . . . . . . . . . . . . . . . . . . . 64. Bfi M . . . . . . . . . . . . . . . . . . . . 105. T M U . . . . . . . . . . . . . . . . . . . 126. T Sp M. . . . . . . . . . . . . . . . . . . 157. P C . . . . . . . . . . . . . . . . . . . . . . 168. T “Pp” Spp M. . . . . . . . . . . 209. T P “H” . . . . . . . . . . . . . 26

10. Sz P L . . . . . . . . . . . . . . . 3111. C M . . . . . . . . . . . . . . . . . . . 3312. M W . . . . . . . . . . . . . . . . . . . 3613. S . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

III. G M W M . . . . . . . . . 491. T R G . . . . . . . . . . . . 492. T E Eff Ifl . . . . . . . . 513. Cp Mp M. . . . . . . 564. D . . . . . . . . . . . . . . . . . . . . . . . . . 585. G’ L C . . . . . . . . . . . . 59

. B . . . . . . . . . . . . . . . . . . . . . . 59. L . . . . . . . . . . . . . . . . . . . . . . 62

6. S: G C. . . . . . 647. P B R P . . . . . . 658. C B: R C

Ifl . . . . . . . . . . . . . . . . . . . . . . . . . 68



What Has Government Done to Our Money?

9. C B: D Ifl. . . 73

10. G Off G S . . . . . . . . . . . 7511. F M G P. . . . . . . . 7812. F M G’ L . . . . . . . . . . 8113. G M . . . . . . . . . . . . . . . 85

IV. T M B W . . . . . . . . 881. P I: T C G S,

1815–1914 . . . . . . . . . . . . . . . . . . . . . . . . . . 892. P II: W W I A . . . . . . . . . 923. P III: T G E S

(B U S) 1926–1931 . . 934. P IV: F F C,

1931–1945 . . . . . . . . . . . . . . . . . . . . . . . . . . 96

5. P V: B W N G E S ( US) 1945–1968 . . . . . . . . . . . . . . . . . . . . 98

6. P VI: T U B W, 1968–1971 . . . . . . . . . . . . . . . . . . 102

7. P VII: T E B W:F F C,

A–D, 1971 . . . . . . . . . . . . . . 1058. P VIII: T S A,

D 1971–F 1973 . . . . . . . . . 1069. P IX: F F C,

M 1973– . . . . . . . . . . . . . . . . . . . . . . 108

I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 A M I . . . . . . . . . . . . . . . . . . . . . 117



1

Few economic subjects are , confused than money. Wrangles abound over “tightmy” v. “ay my,” v l FalRv Sym a auy, v vau v

gl aa, . Sul gvm pumpmoney into the economy or siphon it out? Whichba gvm? Sul uag a ? Sul u gl aa? I , T q

p, .Pap Babl vw my qu ’ pp “,” .., study only immediate political and economic prob-lems. If we immerse ourselves wholly in day-to-day affairs, we cease making fundamental distinctions,

akg ally ba qu. S, ba u , fia ppl. O w ga pp-v, a a m u vyay affa ua m m ully. T paulaly u u my, w la a a a

I.

Introduction



2 What Has Government Done to Our Money?

w mu la a w mpa a, aalyz m,

a a pa mplx wl.T p “C ,” v laal m y. Aaly Cu F , ’ , p p

.O all m pblm, my pbly

, pp p-pv. My, mv, m aa mu a agl w u gvmmeddling. Many people—many economists—usu-ally devoted to the free market stop short at money.My, y , ff; mu b uppl by gvm a gula by gvm. Ty v free market; a free market in money is unthinkable

. G , pp,fi “lgal ,” a al bak, pump my , “z p ,” .

Hally, my wa fi g -ll by gvm, a mak “vlu” g a u ma vy

p. S - —.

L u fi ak ulv qu: Can my b gaz u m ppl? Ca w av



Murray N. Rothbard 3

W p

A wa a ff vau gvmal -l? I w av mak , pa ppy, w av m mpa ak a xpl way a ma a mak my.



4

1.Te Value of Exchange

How did money begin C, R C

a my. H ul av a glcoins. Neither would Crusoe and Friday, perhapsexchanging fish for lumber, need to bother aboutmy. Bu w y xpa by a w am-l, ag alay mg my.

o explain the role of money, we must go evenfurther back, and ask: why do men exchange at all?Exchange is the prime basis of our economic life.

Without exchanges, there would be no real econ- , p, . C, xag u bau b pa xp bfi.

A xag a agm bw A a B a- g v ma g a . O, fi each values what he receives in exchange more than p. W C, , fi , “”

II.

Money in a Free Society




fi “,” F, ,

valu fi m a lumb. Fm Al Max, m av makly blv a a xagrecords some sort of equality of value—that if one fi , ulyg equality bw m. Aually, exchange was made only because each party valued

p different . Wy ul xag b uval amg ma-

kind? Fundamentally, because of the great variety inau: vay ma, a vy laof natural resources. Every man has a different set of kll a apu, a vy pl gu a wuqu au, w v u. Fm ; in Kansas for iron in Minnesota; one man’s medicalv a’ playg vl. Spalzap p ,

p p . I , p -ffi ,

wul av a, a wul baly maalv. Exag lbl, ly u my, z .

2.Barter

Y, direct exchange wul baly uffi kp a my gg abv




pmv lvl. Su xag— barter —

aly b a pu l-uffi y. Wy ?F , p . I J build a house, with what will he pay them? Withparts of the house, or with building materials they T p “-

” “ .” T, S p, for several different things—say, eggs, bread, anda suit of clothes—how can he do so? How can hebak up plw a gv pa a am aanother part to a tailor? Even where the goods arevbl, gally mpbl w xag fi a a am m. I A a a upply , B p , A A plight of an economics teacher who has to find an

-p p - ! C, vlz my mpbl u xag.

3.

Indirect ExchangeBu ma v, p al a ,

p -p :indirect . U , p , , ,




. A fi ,

- p. B p z p.

Consider the case of A, the farmer, who wants tobuy ma by B . S B ’ wa gg,he finds what B does want—let’s say butter. A then

exchanges his eggs for C’s butter, and sells the butter B . H fi , p . S, S, p-, plow for one commodity which he can more readily divide and sell—say, butter—and will then exchangep , , , . I cases, the superiority of butter—the reason there isextra demand for it beyond simple consumption—isits greater marketability . If one good is more market- — fi

be more readily sold—then it will come into greaterma bau wll b u a a medium of exchange .I wll b mum ug w pal axag pu g pal.

Now just as in nature there is a great variety of skills and resources, so there is a variety in the

makably g. Sm g a m wly , mall u wu l valu, m m uabl p , pv lag a. All avaag mak ga makably. I la a vy y,




m makabl g wll b gaually l

a ma xag. A y a m a mselected as media, the demand for them increases , marketable . Te result is a reinforcing spiral: moremarketability causes wider use as a medium whichau m makably, . Evually, w

media— — .

Hally, may ff g av b u ama: ba lal Vga, uga WI, al Abya, al a G, al Sla, pp a Egyp, a ga, ba,, , fi. T -, w mm, gold a silver, av mg amy mp mak, a avdisplaced the other commodities. Both are uniquely marketable, are in great demand as ornaments, and

xl ay qual. I m,, , , gl m uul lag aa. A ay a, p ,

ffi .Tis process: the cumulative development of a

— way money can become established. Money cannotoriginate in any other way, neither by everyone sud-ly g a my u ul maal,




pp “.” F

my-p mma pa; a - ’ p’ , must have preexisting prices on which to grounda demand. But the only way this can happen is by bgg w a uul mmy u ba, a

ag ma a mum xag previous demand for direct use (e.g., for ornaments, a gl).1 Tu, gvm pwl a my my; a ly b vlp p .

A m mpa u abu my w mgm u u: my a mmy. Lag p ’ p-a ak. S av ppl alk abu my as something much more or less than this. Money ,

; for exchanging; it is not a “claim on society”; it isnot a guarantee of a fixed price level. It is simply acommodity. It differs from other commodities in .But aside from this, it is a commodity—and, like

all commodities, it has an existing stock, it faces pp , . L

1 On the origin of money, cf. Carl Menger, Principles of Economics (Glencoe, Ill.: Free Press, 1950), pp. 257–71; Ludwig von Mises, Te Teory of Money and Credit, 3 . (Nw Hav, C.: Yal Uvy P, 1951), pp. 97–123.




mm, “p”— m g—

pp, stock, and the total demand by people to buy and . (Pp “” and services for it, just as they “sell” money when .)

4.Benefits of Money

T human race. Without money—without a generalmedium of exchange—there could be no real spe-cialization, no advancement of the economy above , p . W , p vbly a “ wa” a plaguthe barter society all vanish. Now, Jones can hire p . . . . S

his plow in exchange for units of . . . money. Temoney-commodity is divisible into small units, and p . A v a l my, a my u buy g a v a ppl . Bau , “ p”

b m, w la, lab v, a apal gp p p .

T ablm my vy a gabfi. S all xag a ma my, all xag-a a xp my, a ppl




p

that of every other good. If a V set exchanges forthree ounces of gold, and an automobile exchangesfor sixty ounces of gold, then everyone can see thatone automobile is “worth” twenty V sets on themarket. Tese exchange-ratios are prices, and the-

all p. Oly ablm my-pon the market allows the development of a civilized, p calcu-late economically. Businessmen can now judge how w llg-p pu mpa wthe prices they have to pay productive factors (their“”). S p p of money, the businessmen can determine whetherthey are making profits or losses. Such calculations , ,

search for monetary income on the market. Only p — .

M -tions: a medium of exchange, unit of account, or

“measure of values,” a “store of value,” etc. But it p : xag. Bau gl a gal mum, m, the future as well as the present, and all prices are




p .2 B

medium for all exchanges, it can serve as a unit of p, p , p. I mpa alz a my a b a aba , p .

5.Te Monetary Unit

N , wa , w may ak: w my-mmy u? Spfially, wa k, upply, my ,

I fi pla, m agbl pyal g atraded in terms of weight. Weight is the distinctiveunit of a tangible commodity, and so trading takesplace in terms of units like tons, pounds, ounces,

grains, grams, etc.3

Gold is no exception. Gold, like mm, wll b a u wg.4

I bvu a z mm u - ff .O uy, m ym, may p figu

2 My “mau” p valu; mm m-a xp. I , p a xp my; y .3 Even those goods nominally exchanging in terms of volume (bale,, .) p .4 O aal vu gl a my homogeneity —ulk , ff q. A p q p .




“Joachim’s thalers,” or, finally, “thaler.” Te name

“” “.”O , , u may av a mply definitions of units of weight. When we were “on the gold standard” before 1933,pp “p ” “fiat twenty dollars per ounce of gold.” But this was a

aguly mlag way lkg a u my. Actually, “the dollar” was defined as the name for (pp) 1 ⁄ 20 . I - “ ” ’ . T “p ” “” fi “.”5 T - fi 1 ⁄ 20 , p , , fi ¼ a gl u, mply a 5 ⁄ 20 a gl u.C, , ,

were confusing and misleading. How they arose is

w blw ap gvm mlg with money. In a purely free market, gold wouldsimply be exchanged directly as “grams,” grains, or, , ,., pfl. T, , we will treat money as exchanging directly in terms

.Claly, mak wll a mm

z -

5 Aually, pu lg xag $4.87, bu w a ug $5 .




v. I plaum w my, wul lkly

b a m a a u; wu, wul b k pu . Claly, z ff .

6.

Te Shape of Money If the size or the name of the money-unit makes

ll m ff; ap . S , entire , , ’ . I ff p . I , all the iron is money, whether it is in the form of bars,uk, mb palz may.6 Gla b a a my aw m ugg,

as gold dust in sacks, and even as jewelry. It should p , , traded in many forms, since their important feature .

I u, wv, a m ap a m . I ,

coins, ,ay--ay aa, a lag ba bggtransactions. Other gold is transformed into jewelry a am. Nw, ay k ama

6 I av b u xvly a my, b Aa a Aa.




m ap a m, ff, a

u. Dg wk wll b a bu lk ay , a p v wll b uualmanner. Most people agree that it is legitimate for , pp . Y, mak, ag ally

.May ppl blv, ay gl a-

, “” p, “” (, , any other shape). It is true that coins commanded apmum v bull, bu wa au by ay myu vu ; mm m a a ml bak bull. Bau ff, .

7.Private Coinage

T a pva ag m ag ay that it is worth examining carefully. We are used tokg ag a a “y vgy.” Y,

, “ p,” A p , , pp.

How would private coinage work? In the same , , . E p z p




p . T p

p .Te standard objection is that it would be toomuch trouble to weigh or assay bits of gold at every aa. Bu wa pv pva m p fi P

least as well as a government mint. Abraded bits of metal would not be accepted as coin. People wouldu m w b pua q p. W precisely how the “dollar” became prominent—as ap .

Opponents of private coinage charge that fraud wul u ampa. Y, am pp wulu gvm pv ag. Bu gv- , , pag, gvm ul a la b u pv

pu au. I uually aum a pv- p , , al jufia gvm. Bu gvm pp p l up, wa p a labl ag p p p-

p I ,

why can government be trusted when it finds itself in a position of total control over money and may debase coin, counterfeit coin, or otherwise with full




lgal a pm a l vlla mak

place? It is surely folly to say that government mustalz all ppy pv ay m pp. Y p .

M, - . T

; p p . T p -, . A pua palz, val ual pu a pfi.T buy a ½ bl mu g a ½ bl a 3 ⁄ 8 .

Yet, business has not broken down. Few peoplesuggest that the government must nationalize the- p aa aga au. T m mak my

contains an infinite number of intricate exchanges,most depending on definite standards of quantity and quality. But fraud is at a minimum, and thatmmum, a la y, may b pu. S

wul b w pva ag. W a b ua a m’ um, a mp, wul

p fi .7

7 See Herbert Spencer, Social Statics (New York: D. Appleton 1890),p. 438.




Camp gvm’ ag mply

have claimed that money is different from all othercommodities, because “Gresham’s Law” proves that“ba my v u g” m ula. H, p pp . B p G’ . T

“ fi government will drive out of circulation artificially .” Spp, p, -u gl ula. A a w ya wa a a, l u ay a m wg ly .9 ounces. Obviously, on the free market, the worn 90 p ull-b , a mal a-valu m wul av b pua.8 I ayg, wll b “ba” a wll b v m market. But suppose the government decrees that

q , , a mu ap m qually paym b. Wa a gvm ally ? I aimposed price control by coercion on the “exchange” p . B the par-ratio when the worn coins should exchange

at 10 percent discount, it artificially overvalues the

8 m pblm wa-a-a, pva mg p , aw, a gal a lw wg. W may a p z p p .




w a undervalues w . Cquly,

, xp w. “Ba my v u g my,”, , .

Dp v-g aam by gvm,making conditions highly precarious, private coins

have flourished many times in history. rue to the - , fi p . I , gvm fi bga mplz ag, yal b guaa pva bak, whom the public trusted far more, apparently, thany gvm. Pvaly-m gl C 1848.9

8.Te “Proper” Supply of Money

N : pp y a w a upply u? I paula, wmay raise the perennial question, how much money

9 F p p , B.W. B, “T P M U S,” Quarterly Journal of Economics (1916–17): 617–26; Cal A. Ca, Te Principles of Money and Banking (Nw Yk: Hap B., 1905), vl. I, pp. 127–32; LyaSp, A Letter to Grover Cleveland (B: B.R. uk, 1886), p. 79; J. L L, A New Exposition of Money, Credit and Prices (Cag: Uvy Cag P, 1931), vl. I, pp. 47–51. O -, M, Teory of Money and Credit, pp. 65–67; EC, Money, 8 . (L: Sp P, 1935), pp. 33ff.




“do we need”? Must the money supply be regulated

by some sort of “criterion,” or can it be left alone to F, the total stock, or supply, of money in society at

any one time, is the total weight of the existing money-stuff. L , , one mmy abl mak a my.

Let us further assume that gold is that commodity ( , ; p market, , mmy u a my). S my gl, al upply my al wg gl xg . T shape —p agg ap a way ga (.., ). I , p chosen by the market as the money-of-account, and p p

.Changes in the total gold stock will be gov-

.Increases will stem from greater production frommines; decreases from being used up in wear anda, uy, . Bau mak wll

a uabl mmy a my, a bau my u up a a mm—bu mply a a mum xag— pp w aual pu al k wll q . C , , p .




W “” pp A

p : mv aa w ppula, w “vlum ,” “ p,” p “p ” , . F av ugg lavg mak. Bumy ff m mm al

fact. And grasping this difference furnishes a key tounderstanding monetary matters. When the supply of any other good increases, this increase confers aal bfi; a ma gal jg. M the public; more capital goods mean sustained anda lvg aa uu. T vy w, l la aual u al pm , p . B D pp fi p

Cum g a u up by um; apalg a aual u a u up p pug um g. Bu my uup; u a a a mum xag—abl g a v avl m xpuly p . T

made in terms of money prices. Tus, if a televisionset exchanges for three gold ounces, we say that the“price” of the television set is three ounces. At any , - p. A , , gl, mm ma all p. Bu




D “p” S

p p -, . B,in this case, the “price of money” is an array of thefi - .

Tu, upp a a lv glu, a au xy u, a la ba 1 ⁄ 100 a

ounce, and an hour of Mr. Jones’s legal services oneounce. Te “price of money” will then be an array of alternative exchanges. One ounce of gold will be“w” 1 ⁄ 3 a lv , 1 ⁄ 60 a au, 100loaves of bread, or one hour of Jones’s legal service. A . T p , , “p p” — , . I p , -p .

What determines the price of money? Te same p —vabl bu ally u law: “upply a ma.” W pp , p ; ’ , p . T

for money. An increase in the supply of money will lw “p;” a a ma my wll a . Bu wa ma my?I a gg, w kw wa “ma” ma; amu my um a wllg p , p pp.




S, , “”

vau g ff xag my, plu p p. I , “pp” .

Wa app, , upply gl a,ma my mag am? T “p

my” all, .., puag pw my- . A now be worth less than 100 loaves of bread, 1 ⁄ 3 of atelevision set, etc. Conversely, if the supply of gold, p p - .

Wa ff a ag my upply?Fllwg xampl Dav Hum, fim, w may ak ulv wa wul app ,vg, m g ay lpp pk, pu,and bank vaults, and doubled our supply of money.In our example, she magically doubled our supply of

gl. Wul w b w a ? Obvuly . Wamak u a abua g, a wa lm : ,lab, a apal. Mulplyg wll wk . W feel mm, bu laly all w a g diluting my

upply. A publ u u p w-u wal, p wll, vy ugly, ubl— a la ul ma afi, a my lg b .

T, supply, like an increase in the supply of any good,




lowers its price, the change does not—unlike other

goods—confer a social benefit. Te public at large isnot made richer. Whereas new consumer or capitalgoods add to standards of living, new money only p—.., p p.T pzz only useful for its exchange value. O g av vau “al”

utilities, so that an increase in their supply satisfiesm um wa. My a ly uly p-pv xag; uly l xag valu, “p p.” O — fi— q .

A a my upply, , ly lu ffv a gl u; a, pp p . W doesn’t matter what the supply of money is.

Ay upply wll a wll a ay upply. T mak wll mply aju by agg puagpower, or effectiveness of the gold-unit. Tere is no p pp .

A p, p :

“A , p pp, ’ Shouldn’t the government keep the money supply , p ” T might be plausible to those who hold no principled ,




. B

bj vlk a mpa p: a gl , , , commod-ity . An increased supply of gold may not confer any monetary benefit, but it does confer a non-monetary fi—.., pp ump (am, al wk, a lk)

and in production (industrial work). Gold mining,, .

W lu, , a mg upply , , . A advantages of freedom over coercion, no dictatedquay my wll wk b, a p

w lav ably ay um-, p p .10

9.Te Problem of “Hoarding”

Te critic of monetary freedom is not so easily , . T , p, bugbear of “hoarding.” Te image is conjured up of

lfi l m w, pap aally, pap , p -lar or treasure trove—thereby stopping the flow of

10 Gl mg , u, m pfiabl a ay bu; -, q .




circulation and trade, causing depressions and other

p. I I fi p, p pp a ma my pa m. As a result, prices of goods fall, and the purchasingp - . T y, w mply a w a lw av

pp “p” .Ev w pbl vw ma, ,

, - ffi . B p . F pp more less .

L , p, . Wy ppl kp ay a bala a all? Suppa all u w abl ll uu w ab-lu ay. I a a, wul av kpa bala a. Evy wul kw xaly

p, , . H p money at hand, but will lend out his gold so as toreceive his payments in the needed amounts on the p. B, ,

w aly lv a wl uncertainty . Ppl

ply kw wa wll app m, wa uu m wll b. T m u-a a aul y a, m a bala y ; , wll w kp a. A a kpga al a u al wl uay.




I pp p p

uu, y wll p my w wl my m valuabl, u “ag” a ug ma my. Cvly, y xp p , p , wll a. Ppl’ ma a bala, ,

.Em y blv mg wg

when money is not in constant, active “circulation.”M , , but it is not only useful at the actual moment of exchange. Tu a b vlk. My ju a uul when lying “idle” in somebody’s cash balance, evenin a miser’s “hoard.”11 For that money is being held p — pp , , pxag a ay m—p uu— w

.It should be remembered that all gold must be

, be held in people’s cash balances. If there are 3,000tons of gold in the society, all 3,000 tons must bew a l, a ay m, a bala

pp. T is always identical with the total supply of money

11 A wa p a ma’ a bala bm a aly puabl“a,” pu ma a m? I mpbl fix ay fi: , “” A p B ppp A.




in the society. Tus, ironically, if it were not for the

uay al wl, ul b m- ! I , , society would fall infinitely, prices would skyrocket , . I

, monetary exchange, it is absolutely necessary to any .

It is misleading, furthermore, to say that money “ula.” Lk all map ak m pyal, m maal p,p uma wll, w mv a a ap fl, “.” A, “”; , , , transferred p’ a bala a’. T x my, aga, p up ppl’ wllg

. A bgg , w aw a “a-

g” v bg ay l y. Nw, w wll a mvm p my au by ag p -fi—a pv a ay by a uppl

g a v. W av a al um q pp . L pp ma a, ay a 3,000 . Nw, upp,

whatever reason—perhaps growing apprehension—people’s demand for cash balances increases. Surely,




it is a positive social benefit to satisfy this demand.

Bu w a b afi w al um amu ma am? Smply a llw: w pplvaluing cash balances more highly, the demand for , p . A , al um a bala w a g “al”bala, .., g pp p

goods—to the work that money has to perform. Inshort, the effective cash balances of the public haveincreased. Conversely, a fall in the demand for cash p p. Tpublic’s desire for lower effective cash balances willbe satisfied by the necessity for given total cash top .

Terefore, while a change in the price of money stemming from changes in supply merely alters theff - bfi, a all au by a ag demand

for cash balances does yield a social benefit—for itsatisfies a public desire for either a higher or lowerpp a bala wk by a.O a, a a supply my wll frustrate p effective a (m ffv m puag pw).

People will almost always say, if asked, that they ! B really want is not more units of money—more goldounces or “dollars”—but more effective units, i.e.,greater command of goods and services bought by money. We have seen that society cannot satisfy its




ma m my by ag upply—

a a upply wll mply dilute ffv , plul a b. Ppl’ aa lvg (xp ) mg m gl. I ppl wa m ffv glu a bala, y a g m ly

p ff .

10.Stabilize the Price Level?

Sm ag a a may ym , “z p ,” .., p -. M,y ay, upp b a fix yak a vchanges. Terefore, its value, or purchasing power,

z. S p amly fluua mak, m mube overruled by government management to insureably.12 Sably wul pv ju, xampl,to debtors and creditors, who will be sure of paying , , p

p . Y, a b wa g aga

future changes in purchasing power, they can do so

12 How the government would go about this is unimportant at thisp. B, - pp.




aly mak. W y mak -

, p adjusted -p umb ag valu my. T ablz- , , p-p bfi m m ably, av aly aval

pp. M a “bfi” ppl w av alay App, a ak a, wl mabluncertainty, on their ability to anticipate the condi-tions of the market. After all, the price of money is ff p .Ty a ag p ag ma ; p

Afial ablza wul, a, uly and hamper the workings of the market. As we have

indicated, people would be unavoidably frustrated intheir desires to alter their real proportion of cash bal-; pp bala pp p. Fum, mpv p of capital investment. Increased productivity tends to

lw p (a ) a by bu u p p, . F ppp p p lvl pv pa g lvg aa.

Money, in short, is not a “fixed yardstick.” It isa commodity serving as a medium for exchanges.




Flxbly valu p um ma

p fi p .

11.Coexisting Moneys

So far we have obtained the following picture of my a puly my: gl lv mg ; mpv pva fim, ulag by wg; pfluctuating freely on the market in response to con- pp p .Fm p aly mpl m mv- p p -;

would be impossible to use force and interfere withmvm valu my wu mula-ously crippling freedom of prices for all goods. Te

. O contrary, the economy would move swiftly and effi - pp . T .

Tu a, w av mplfi pblm by aum-g ly may mal—ay, gl. Supp a

two m my u ula wlmak—ay, gl a lv. Pbly, gl wll b , both may circulate side by side. Gold, for example,being ounce-for-ounce more valuable on the marketthan silver, may be used for larger transactions and




lv mall. Wul w my b mpbly

a? Wul’ gvm av p amp a fix a bw w (“bmallm”)or in some way demonetize one or the other metal(p “ ”)

I p , ,mg vually abl gl mal a my.

Bu u, lv ubbly ma challenge gold. It is not necessary, however, for thegovernment to step in and save the market from itsw lly maag w my. Slv ma p (mall ag, xampl). Slv a gl ul aly ula by , a av pa. Trelative supplies of and demands for the two metals

wll m xag a bw w, a a, like any other price, wll ually fluua p . A ,

xampl, lv a gl u mg xag a 16:1, 15:1, . W u au p uma . I , most transactions will be reckoned in gold ounces,a lv u wll xag a a ly-fluuag

p .It should be clear that the exchange rate and the

p p pp. I p fi m a mu lv a y a gl, 15:1. I ,




wll pay xag m ul pay

a. Tu, p a fi m a mu m lv a gl wl lv/ gl 20:1, ppl will rush to sell their goods for gold, buy silver, and , p ga p. T wll qukly “pu-ag pw pay” xag a; a gl g

ap m lv, lv p g g up, p .

T , , orderly .

What kind of “standard” will a free money pro- T p imposed by government decree. If left to itself, themarket may establish gold as a single money (“goldaa”), lv a a gl my (“lv aa”),or, perhaps most likely, both as moneys with freely-

fl (“p ”).13

13 F p p , W. S J, Money and the Mechanism of Exchange (London: Kegan Paul, 1905),pp. 88–96, and Robert S. Lopez, “Back to Gold, 1252,” Economic History Review (December 1956): 224. Gold coinage was introducedinto modern Europe almost simultaneously in Genoa and Florence.Florence instituted bimetallism, while “Genoa, on the contrary, in pp pbl, y a fix la bw ff,” . O p , M, Teory of Money and Credit, pp. 179f. For a proposal that the United States go a paalll aa, by a ffi al U.S. Aay Offi , I.W.S, Bullion Certificates as Currency (N Y, 1882).




12.

Money WarehousesSupp, , a mak a abl

gl a my (gg aga abu lv ak p). E p ,

. F , p p pounds of gold. But the free market, ever ready to , . G, fi pla, mu b mw, a ju a p-z ffi ,

wll b m ffi waug bu.C fi, , p . S

wau, a wll gl mya w. A , ’

warehouse receipt .Te receipt entitles the owner to claim his goods atay m . T wau wll a pfi ff —.., p .

Tere is every reason to believe that gold ware-houses, or money warehouses, will flourish on the

wll pp. I a, waug play a v mimportant role in the case of money. For all other p p,




wau a a wl b u up pu

ump. Bu my, a w av , maly not “used” in the physical sense; instead, it is usedto exchange for other goods, and to lie in wait foru xag uu. I , my so much “used up” as simply transferred from onep .

I u a ua, v vably la transfer of the warehouse receipt instead of the physical gold itself. Supp, xampl, a Sm a Jb gl am wau. J llSm a aumbl 100 gl u. Ty ul p p S’ -g p, a mvg gl J’ ffi ,

w J ug g au a pg gold again. But they will undoubtedly choose a farmore convenient course: Smith simply gives Jones a p 100 .

I , p more and more to function as money substitutes. F ; pp . A p, p-

cess. One is the extent that people us these money wau—all banks —a a. Claly, J, , ’ ,S p . Tsecond lm x ll each bank .In other words, the more transactions taking place




bw l different bak, m gl wll

av b ap. T m xag a maby l am bak, l ap gl. I J a Sm w l ff

wau, Sm’ bak ( Sm ml ) wulav ap gl J’ bak. Tird, ll mu av fi uw

bak. I y uly fi u, xampl,a bak ffi al av a mal , bak wll lkly l bu . I respect, all warehouses—and all businesses resting — .

A fi p,their clients may find it more convenient in many cases to waive their right to paper receipts—calledbank notes—and, instead, to keep their titles as openbook accounts . I may alm, av bcalled bank deposits . Instead of transferring paper

receipts, the client has a book claim at the bank; hemak xag by wg a wau p .Tus, in our example, Smith will order the bank totransfer book title to his 100 gold ounces to Jones.T check .

It should be clear that, economically, there is noff p. B p ;both are transferred similarly as money substitutes,and both have the identical three limits on theirx u. T l a , ag




convenience, whether he wishes to keep his title in

, p, .14

Now, what has happened to their money supply as a result of all these operations? If paper notes orbank deposits are used as “money substitutes,” doesthis mean that the effective money supply in the

a ma am? Caly . F my ubu a mply wau p aually-deposited gold. If Jones deposits 100 ounces of gold p , pcan be used on the market as money, but only as av stand-in gl, a a m.Te gold in the vault is then no longer a part of theff pp, reserve p, .

A a a u ubu, ,x ag my upply. Oly form

upply ag, al. Tu my upply a mmuy may bg a mll gl. T, p , u gl , wup ffv upply : , u gl lam pap . T al my

pp .C, pp

p

14 A third form of money-substitute will be token coins for very smallag. T a, ff, quval bak , bu “p” pp.




pa “100 p v” ba (gl alway

p by p). Y, al pblm,ay m a ay wau. Alm all waukp all g w (100 p v) — , . T pfi m v ag um. T bak a

ag v am way. I bjthat customers will not pay the high service charges, ma a bak’ v a vy gademand, and the use of their services will fall to the fi .

We come now to perhaps the thorniest problemag may m: a valua “a-tional reserve banking.” We must ask the question:

would fractional reserve banking be permitted in a , p I well-known that banks have rarely stayed on a “100

p” ba vy lg. S my a ma wau a lg p m, bak mp u m my w au—mpal bau ppl aly a w the identical gold coins they deposited. Te bank is

p, pp’ pfi .

I bak l u gl ly, p, u, a w paally vala. T a w m p w gl b m; , ff , p




meet its own obligations if called upon to do so. It

cannot possibly hand over its customers’ property, .Gally, bak, a akg gl ly,

p “p” p, .., p there. Tese are then loaned at a profit. Clearly, the

m ff am. M wau pare printed than gold exists in the vaults. What thebak a u gl wau p wp , pp p 100p a valu gl. T pu-pp p, ff supply of the country. In the above example, if the p, , pp country will rise from ten to twelve million gold

— -p - . T , p, , .

Issue of pseudo-receipts, like counterfeiting of

, a xampl inflation, w wll b uu blw. Inflation may b fi a any increase in the economy’s supply of money not consisting of anincrease in the stock of the money metal. Fractional , , fl .




D bak ply a llw: bak a

simply functioning like other businesses—they take. A, p p lam, bak wul b bakup, uagp . B, p ak a—uually jufi—a vy

will ask for his gold. Te great difference, however,

between the “fractional reserve” bank and all otherbusiness is this: other businessmen use their own orbw apal vu, a y bw ,they promise to pay at a future date, taking care toav ug my a a a a m blga. I Sm bw 100 gl u a ya, 100 that future date. But the bank isn’t borrowing from p; ’ p p certain date in the future. Instead, it pledges to pay p , . I ,

bak p a IOU, b; a wau p ppl’ ppy. Fu, w a buma bw l my, not add to the money supply. Te loaned funds aresaved , p pp a m av bw. Bak u,

a, afially a my upply p-p .

A bak, , akg uual bu k.It does not, like all businessmen, arrange the timepattern of its assets proportionately to the time pat- labl, .., a wll av ug




, , p . I,

, .T , , lk vy l, av aqu my by pug a llg v. I , bak already p; p is only revealed when customers get suspicious and

ppa “bak u.” N bu xp p “.” N plug bakupy vg mply bau p pp. N bu a fiu w my, w wllp .

T m ff aal bak my wll b xpl x ap. H w lua, mally, u bakg wul av m g mpl . I u a p

kp a ull bakg gl a a all m. Bu p , p, -g au, mmaly bm mpbl bak kp plg a m all

p.15 F, , committed when the act of issuing pseudo-receiptstakes place. Which particular receipts are fraudulent

15 See Amasa Walker, Te Science of Wealth, 3rd ed. (Boston: Little,Bw, 1867), pp. 139–41; a pp. 126–232 a xll u p - .




can only be discovered after a run on the bank has

occurred (since all the receipts look alike), and the- .16

I p , fractional reserve banking would have to meet theam a.17 Supp, wv, a au a aalreserve banking are permitted, with the banks only

q fi . A p. S “ .” W -l u my ubu, w ulg afialcreation of new money? Many people have assumedso, and believed that “wildcat banking” would thenp fl pp . B,on the contrary, “free banking” would lead to a far“” .

T bak wul b k by am lm-

a w abv, a k a guly.

16 Pap a lbaa ym wul “gal waa p”(which allow the warehouse to return any homogeneous good to thedepositor) as “specific warrant deposits,” which, like bills of lading,paw k, k waa, ., abl wp a pfiearmarked objects. For, in the case of a general deposit warrant, the p own pp, bg ppy um. T ply wa bak avb g. S Jv, Money and the Medium of Exchange, pp. 207–12.17 Fraud is implicit theft, since it means that a contract has not beenp . I , A B labeled “corn flakes” and it turns out to be straw upon opening, A’sfraud is really theft of B ’s property. Similarly, the issue of warehousep , p, p p pp.




I fi pla, a bak’ xpa wll b lm

by a l gl a bak. F a bak a ly p own .Suppose, for example, that Bank A, with 10,000 p, 2,000 false warehouse receipts to gold, and lends them to p, . T

bw, m l u, wll p w my vau g a v. Evually, my gg u wll a a w w another , B .

At that point, Bank B will call upon Bank A toredeem its receipt in gold, so that the gold can be B B ’ . C, ’ , -ents trade with one another, the more scope there is p pp.For if the bank’s clientele is narrow, then soon after

its issue of created money, it will be called upon toredeem—and, as we have seen, it doesn’t have the

wherewithal to redeem more than a fraction of itsobligations. o avoid the threat of bankruptcy from q, , p ’, p

, p. I bank in each country, there will be far more scope p p mmuy. O g bg qual,then, the more banks there are, and the tinier theirz, “a”—a b— may upply




wll b. Smlaly, a bak’ ll wll al b lm

by w ’ u a bak a all. T m ppl , fl.

Suppose, however, that the banks form a cartel,and agree to pay out each other’s receipts, and notcall for redemption. And suppose further that bank

money is in universal use. Are there any limits lefton bank expansion? Yes, there remains the check of client confidence in the banks. As bank credit andthe money supply expand further and further, morea m l wll g w v lwg v a. A, a uly y, bakg ym wll b abl m ABak Lagu la. I , lagu ug bak u, a ma, wll b abl p a v

p.None of this discussion is meant to impugn the

general practice of credit, which has an importantand vital function on the free market. In a credit, p ( p) IOU p

( IOU “ ”) ag fl g valua pg v uu g mak. Bu bak p a not ; y a wau p, (.., ) vaults. Te debtor makes sure that he pays his debt




when payment becomes due; the fractional reserve

banker can never pay more than a small fraction of . W u, x ap, a uy va-

ous forms of governmental interference in the mon- — , pauul u, bu ay, mv

fl.

13.Summary

Wa av w la abu my a -ety? We have learned that all money has originated,a mu ga, a uul mmy by the free market as a medium of exchange. Te unit p commodity—usually a metal, such as gold or silver.

Under freedom, the commodities chosen as money, ap a m, a l vluay of free individuals. Private coinage, therefore, is just .T “p” my puag pw mof all goods in the economy, and this is determined

by its supply, and by every individual’s demand formy. Ay amp by gvm fix p wll w aa ppl’ ma . I pp fi , m mak wll b m by lav




ma a uppl, a wll qual a

of their respective purchasing power. Once there isenough supply of a metal to permit the market to a my, a upply a mpv . A pp

wll mly lu ffv a u my wu lpg my. A a

k gl lv, wv, ulfill m nonm-ay wa (am, ual pup, .) vby mal, a ally uul. Ifla(an increase in money substitutes not covered by anincrease in the metal stock) is never socially useful,but merely benefits one set of people at the expenseof another. Inflation, being a fraudulent invasion of pp, p .

In sum, freedom can run a monetary system asp . C may w, g pal abu my

q . H,, pp m wa. F my a all av- , “ , , .”



49

1.Te Revenue of Government

Governments, in contrast to -zations, do not obtain their revenue as payment fortheir services. Consequently, governments face anm pblm ff m a vy l.P q p of what others want. Governments need only findsome method of expropriating more goods without ’ .

I a ba my, gvm ffi al a ly

pp : z inkind. I fi to seize monetary assets, and then use the money toaqu g a v gvm, l pay

III.

Government Meddling With Money




my a ub av gup. Su zu

taxation.1

axa, wv, uppula, a, ltemperate days, frequently precipitated revolutions.T , a, al p a m ubl u gvmalxppa u. O mak, my

q p v a ppl wa, by mg (a bu pfi, , ). B fi counterfeit-ing —the creation of new money out of thin air—itcan quickly produce its own money without takingthe trouble to sell services or mine gold. It can thenappropriate resources slyly and almost unnoticed, ff .I a, ug a a vy vm p pp.

C fla—b ag w “my” a a-a gl lv, a b ug mlaly. Aw w wy gvm a ly fla-: fl p gvm aqu publ’ u, a

pal a all m agu m axa.1 D z xppa. Ia m ll ug a “u p”zu la u m ma, quag p a u-pied country, and especially compulsory confiscation of labor service(.g., mlay p, mpuly juy uy, a g bu p ).




2.

Te Economic Effects of Inflation gaug m ff fla, l u

wa app w a gup u abu wk. Supp my a a upply 10,000gl u, a u, ug a y

cannot be detected, pump in 2,000 “ounces” more. W q F, . T -a my a u buy g a v. I w amu New Yorker a, wg agup u b mpla

: “R p shot in the arm.” Precisely. Local spending, indeed,does . T

way, p by p, ugu m ym. A w my pa, b p up—a w av

, ff a lla. Bu lu ak m a uv; mam, m ppl ga a ppl l. I , u a lalal av u m a b ay p . B,

other hand, people in remote areas of the economy, , fi p . R , p, ffl. T fi v w my ga m, p .




Inflation, then, confers no general social benefit;

a, bu wal av fi- p . A fl , ff, — the new money earliest. Te latecomers—the onesuk w l—a all “fix mgroups.” Ministers, teachers, people on salaries, lag

uly b gup aqug w my. Paula uff wll b pg fixed money contracts—contracts made in the daysbefore the inflationary rise in prices. Life insurancebfia a aua, p lvg ff p, lal w lg m la, bl , , fl. T “.”2

Ifla a au ff. I a : . S

prices do not all change uniformly and at the samep, bm vy ffi ul bu paa , ma um pa.F p, p “” a a a amu bu a pa . Bu

fl , p

2 I ff p “-servatives” for the “widows and orphans” hurt by inflation. And yet ply pblm a mu b a. I ally “progressive” to rob widows and orphans and to use the proceeds toz




w wa u wll b a ga a a

on the books. As a result, business accounting willuly va pfi ug fla—a p p -ing their investments.3 Similarly, stockholders andal a l wll aqu apal ga ug afla a a ally “ga” a all. Bu y may

p p z p.

By ag lluy pfi a g mcalculation, inflation will suspend the free market’spenalizing of ineffi cient, and rewarding of effi cient,firms. Almost all firms will seemingly prosper. Tegeneral atmosphere of a “sellers’ market” will lead q um, um p a qualy.4 T qualy wk wll l a fla

: pp “g--quk” m, mgly w gapin an era of ever-rising prices, and often scorn sobereffort. Inflation also penalizes thrift and encourages, p

3 T fi qp,and in the most heavily capitalized industries. An undue number of fim, , wll pu u ug a fla. F - , W.. B, “T

Aua’ Cbu a Cyl,” Economica (May 1955):99–112.4 I ay ap a “--lvg x” (.g., ala-

wag a) g v a p u a way .




In short, if people wish to save and invest about 20

percent of their incomes and consume the rest, new bank money loaned to business at first makes theavg pp lk g. W w my p w publ, -abl l 20–80pp, a may vm a w val b waul. Lqua waul vm

flaay bm u depression pa .6

3.Compulsory Monopoly of the Mint

F , p the road away from the free market. Governmentcould not simply invade a functioning free marketa p w pap k. D abuply, w

ppl wul ap gvm’ my. Ev , pp “ ”av mply u ap pap my, a on trading only in gold. Governmental incursion,, .

Ul a w u ag, w bak, a

g mav fla a a ay. Wa ul

6 For a further discussion, see Murray N. Rothbard, America’s Great Depression (P, N.J.: D. V N, 1963), P I.




T fi p, ak fimly by vy zabl gv-

m, wa z a ablu mply minting . T p l ag upply. T kg’ l’ p-u wa amp up , a my wa ppa-ga a ag a al pgav yal baal “vgy.” T mag mply allw

pp , a publ, wa. A a ul, vay mak wa bly u. Fum,the mint could now charge a high price, greater than (“”), p (“-”), pp . S p p, p p the conversion of bullion to coin; gratuitous coinage, , , p p z .

H q p, -ments fostered the use of the name of the monetary unit, doing their best to separate the name from its . T,, p p, gvm m y abg by m-

mon money of the world market. Instead of usinggrains or grams of gold or silver, each State fosteredits own national name in the supposed interests of p: , , , like. Te shift made possible the preeminent means : .




4.

Debasement Dbam wa Sa’ m u-

ing the very coins it had banned private firms frommakg am vgu p m-ay aa. Smm, gvm mm

p , ,makg wg . M aaally, ,gvg ubj bak am umb “pu” “mak,” bu a lg wg. T lv u gl lv w pk by Kg a u

pay xp. I a way, gvm ually juggl a fi vy aa wa plg p. T pfi “” .

Rap a v bam wa a allmak

Ml Ag, alm vy uy Eup. Tu,in 1200 A.D., the French livre tournois was definedat ninety-eight grams of fine silver; by 1600 A.D. itgfi ly lv gam. A kg a dinar, S Sp. T dinar consisted of sixty-five gold grains, when first coined

. T S ably u may ma, a by ml wl uy, dinar wa ll xy ga. At that point, the Christian kings conquered Spain,and by the early thirteenth century, the dinar (now all maravedi ) wa u u ga. S




gl wa lg ula, a wa -

silver - lv. T, , wa ba, a by m-fi, maravedi 1.5 , .7

5.Gresham’s Law and Coinage

A. Bimetallism

Gvm mp p l lagly v publ a m gvmal fla

to the alleged evils of the free market. As we haveseen, “Gresham’s Law”—that an artificially overval- fi my u ula— a xampl galconsequences of price control. Government places, ff, p p

terms of the other. Maximum price causes a short-age—disappearance into hoards or exports—of thecurrency suffering the maximum price (artificially uvalu), a la b pla ula p .

We have seen how this works in the case of new versus worn coins, one of the earliest examples of Gam’ Law. Cagg mag my m

wg m al, a aazg ma

7 On debasement, see Elgin Groseclose, Money and Man (New York:F U, 1961), pp. 57–76.




w a a publ’ v,

gvm all w a w by amam, v ug y w ff wg. A aul, ppl a xp ull wg w , p , governments hurling maledictions at “speculators,”g, mak gal, a

. A paulaly mpa a Gam’ Law wa

p p “.” W “p ” a lv, a ly fluuag la pp . B p by ppg “mply” ma. Hw mu lag wul b, y l, gl a lv w fix aa fi a, ay, wy u lv u ! T,

fix a—a, a m mpaly, gvm fi by weight instead of by tale. Let us imagine a unit, “,” fi R 1 ⁄ 20 . W p “”

unit of its own right, only loosely connected to gold. Wa b way g a fix gl/lv T, “” 1 ⁄ 20 ,but also u lv. T p mag

w “u”—a am gl wg— w l, appl bg k “u” a mg agbl




, ,

g a ffi pup, a qual a wg .Now we see the importance of abstaining from

p .O u a labl pla gz wl u ,

manipulate the money unit and give it an apparent . T fi - , bimetallism, ampl ak vy aly. I not, however, fulfill its other job of simplifying thenation’s currency. For, once again, Gresham’s Law came into prominence. Te government usually set bmall a gally (ay, 20/1) a gg . B , mak p, vably ag v m, a upply and demand conditions change. As changes occur, fix bmall a vably bm bl.

C . Gthen disappears into cash balance, black market, orp, fl out of cash balances to become the only circulatingcurrency in Ruritania. For centuries, all countriesstruggled with calamitous effects of suddenly alter-

. F fl a gl appa; , a lav mak a, p pp.8

8 Many debasements, in fact, occurred covertly, with governmentsclaiming that they were merely bringing the offi cial gold-silver ratio .




Fally, a way u bmall up-

, p ,generally gold. Silver was relegated to “token coin”au, mall ma, bu a ull wg.(Te minting of token coins was also monopolizedby gvm, a, bak 100 p by gold, was a means of expanding the money supply.)

Te eradication of silver as money certainly injuredmany people who preferred to use silver for varioustransactions. Tere was truth in the warcry of thebimetallists that a “crime against silver” had beencommitted; but the crime was really the originalmp bmallm lu paalll aa.B p ffi ,

which the government could either meet by going (p ) by picking one of the two metals as money (gold or ). F ,

, q; p.

B. Legal ender

H pcontrols on monetary exchange rates? By a device

kw a legal tender laws . My u paymof past debts, as well as for present “cash” transac-. W ’ pm aug a aual wg, -a bga plg paym a amu “my.” Legal tender laws a wa a “my”




could be. When only the original gold or silver was

ga “lgal ,” ppl aml, z p- .If the government sticks to the original money, its pfl .9 O ,

-q -- gal. Tu, gvm may w p ff , gold equivalent to each other in the fixed ratio. Telgal law bg Gam’ Law bg.

When legal tender laws enshrine an overvaluedmy, y av a ff; y av b a p . F p- p p than they had borrowed, and creditors are swindledu my gully . T fia

ppy, wv, ly bfi uagb; future b wll b bu by ay

9 Lord Farrer, Studies in Currency 1898 (London: Macmillan, 1898),p. 43.

Te ordinary law of contract does all that is necessary without any law giving special functions to particular

. W p . . . . I I p p 100 , p I bu pay 100 vg, a a, qu pay 100 , I p .

On the legal tender laws, see also Ludwig von Mises, Human Action(N H, C.: Y U P, 1949), pp. 432. 444.




of credit generated by the memory of government

p .

6.Summary:

Government and Coinage

T mpuly mg mply a lgal legislation were the capstones in governments’ driveto gain control of their nations’ money. Bolstering mau, a gvm mv abl ula all m by val gvm.10

W a uy, ly w vgcould now be used; between countries, unstampedgold and silver bullion was used in exchange. Tisfurther severed the ties between the various parts of wl mak, u ug uy m, p

lab. Y, puly a my lav mup gvmal fla. T w lm the debasing that governments could engineer, and pfi k l a gvm vits own territory. Te rulers were still held in check

p .Gvmal l my ul ly bm

absolute, and its counterfeiting unchallenged, as

10 T p M A U S .




money-substitutes came into prominence in recent

u. T av pap my a bak p-, silver, provided the open sesame for government’sa pw v my, a by v .

7.Permitting Banks to Refuse Payment

T , p banks and money-substitutes, provides the goldenpp my upply a pm fla a .

We have seen in section 12, page 38, that there are ga k pw ay bak flaunder a “free-banking” system: (1) the extent of theclientele of each bank; (2) the extent of the clientele

wl bakg ym, .., x wpp -; (3) fi l bak. T aw llof each bank, of the banking system as a whole, or ak a fi, wll b fl . G’

pvlgg a llg bakg ym ap p .

All lm, u, uamalblga: uy bak m wlabl ma. W av a aal-reserve bank can redeem all of its liabilities; and we




takes. But it is, of course, essential to any system of pva ppy a a blga b ulfill.Te bluntest way for government to foster inflation,then, is to grant the banks the special privilege of refusing to pay their obligations, while yet continu- p. W p

b g bakup, bak a pm p p, p u. T uual am a “up pp.” A “for theft;” for what else can we call a governmentalp fi’

In the United States, mass suspension of speciepayment in times of bank troubles became almost a. I W 1812. M

’ N E, -tion unsympathetic to America’s entry into the war.Tese banks refused to lend for war purposes, and . T pp . T fl

mp fl w bak, pally from the conservative nonexpanding banks of New England, where the government spent most of itsmoney on war goods. As a result, there was a mass“p” 1814, ( ); ,




p p,

.Tis suspension set a precedent for succeeding ; 1819, 1837, 1857, . A result of this tradition, the banks realized that they av a bakupy a a fla, a, u, mula fla a “wla bak-

.” T p Ama a a xampl “ bakg,” al alz mpa la l uy fi .

Te governments and the banks, persuaded thepubl ju a. I a, ay yg “p” p , banks were often commended for patriotically bail-ing out the community in a time of trouble. Many people, however, were bitter at the entire proceed-

ing and from this sentiment grew the famous “hard” J fl C W.11

Dp U S, ppvlg bak a l a a gal ply . I ,

p ( p pp would patronize banks that never paid their obliga-tions)—and, what’s more, it provided no means of

11 S Ha W, Money and Banking, 4 . (B: G, 1911),pp. 322–27.




government control over the banking system. What

governments want, after all, is not simply inflation,but inflation completely controlled and directed by mlv. T mu b ag bak u- . A , , , pma m wa v, a l publa a allmak vlza l—Cal Bakg.

8.Central Banking:

Removing the Checks on Inflation

Cal Bakg w pu am la wmodern plumbing and good roads: any economy ’ “,” “p,”plly u wm. Ama’ ap Fal Rv Sym—u Cal Bak— 1913 was greeted as finally putting us in the ranks of the

“” .C B p-

vate individuals or, as in the United States, jointly by private banks; but they are always directed by -pp ffi , . W p ,

B E S B U S, pp pfi fl.

A Central Bank attains its commanding posi- monopoly of the note issue. T p.




I, p p

, a pvlg v Cal Bak.Te private banks can only grant deposits. If theircustomers ever wish to shift from deposits to notes,, C B get them. Hence the Central Bank’s lofty perch asa “bankers’ bank.” It is a bankers’ bank because the

. A ,bank deposits became redeemable not only in gold, C B . A

w ju pla bak . Ty w labl C B, . G, , pp B ffi p p. I , .

As a result of these measures, all the banks in thecountry became clients of the Central Bank.12 Gold

p C B p ,a, xag, publ g Cal Bak a . G ff “ffi ” p , -, -fi—a a “,” pap uul l’socks at Christmas, but that’s about all. How much

, , ffi resting as bullion in the mighty vaults of the Central

12 I U Sa, bak w by law j FalReserve System, and to keep their accounts with the Federal ReserveBak. (T “a bak” a a mmb Fal RvS p .)




Bak! Ba by ppagaa, a flu by

v a gvmal bakg , p pp . I, fl CBak w, m “alz,” pm a a ga fl -.

I U Sa, Fal Rv A m-

p p p , 1917, p F R B. Gcould no longer be part of a bank’s legal reserves; it p F R B.

Te entire process took the public off the goldhabit and placed the people’s gold in the none-too- a Sa—w ul b fia p. I bull lag-al aa, bu y w fi pp pp.

O a publ ul b lu m confidence had in the Central Bank. Surely, the Central Bank,p , by the might and prestige of government, could not p! A

C B . B wy ? Bau mm uw bu vy could not p ! I -m mm allw pva bak uppaym, w mu m aly wul pm Central Bank—its own organ—to suspend when in




trouble! Te precedent was set in Central Banking

y w Egla pm Bak Egla up la g uy, a allw p .

Te Central Bank thus became armed with thealmost unlimited confidence of the public. By this, p C B

wa bg allw u a wll, a y ma fi qu. I am Cal Bak a mply a great national bank, performing a public service, p .

T C B p p p’ fi. T ffi . T C B “ ” —.., B

, p p p .

Governments also continued to prop up banks by uagg bak “u” (.., a w may lsuspect chicanery and ask to get back their property).S, p p p-

m, a mpuly bak “lay” 1933. Law p p p u, a, a 1929 p Ama, gv-m ampag aga “lfi” a “upa” gl“a.” Ama fially “lv” pky pblm bak alu w ap Fal Dp Iua




1933. T Fal Dp Iua Cpa a

pp “” p “.” B p mp (a a may wll b aua) a p p. A ,

mma va publ fi bakg, C B.

W , p C B,governments have greatly widened, if not removed,two of the three main checks on bank credit infla-tion. What of the third check—the problem of the ’ R k ma a Cal Bak’. I - , fl bak wul la ma mpby bak, ll ay bak

vly lm. Bu Cal Bak, by pumpgv all bak, a mak u a y aall xpa g, a a a um a. I all bak p, p p p , fi . I ,

lm bak xpa a mmauably w,from the clientele of each bank to that of the whole . O , can expand further than the Central Bank desires.Tu, gvm a fially av pw l a fla bakg ym.




In addition to removing the checks on inflation,

the act of establishing a Central Bank has a directfl p. B C B , p ; fl the Central Bank in exchange for deposits with theBank, which are now reserves for the commercialbanks. But the Bank itself keeps only a fractional

v gl w labl! T, a C B p fl p .13

9.

Central Banking:Directing the Inflation

P C B ak gulag pva bak? By llg bak’ “v”— p au a Cal

Bak. Bak kp a a a v p , U Sgvm l ma a by mpg a lgal . T C B mula fla, , by pug v

13 T ablm Fal Rv way a lthe expansive power of the banking system of the United States. TeF R S q-m all bak m appxmaly 21 p 1913 10 pby 1917, u u ublg flaay pal—a mbp fl -. S C A. Pp, .F. MM,a R.W. Nl, Banking and the Business Cycle (Nw Yk: Mamlla,1937), pp. 23ff.




bakg ym, a al by lwg v a,

p -p.I p /p 1:10, “x v” (abv qu a) ml-lion dollars will permit and encourage a nationwidebank inflation of 100 million. Since banks profit by credit expansion, and since government has made it

almost impossible for them to fail, they will usually y kp “la up” allwabl maxmum.

Te Central Bank adds to the quantity of bank reserves by buying assets on the market. What hap-p, xampl, Bak buy a a (ay a) M. J, $1,000 T C B M. J $1,000 p . T C B p accounts, so Mr. Jones takes the check and deposits . J’ $1,000p, p C B,

w a bak w a a $1,000 v. T $1,000 v pm a mulpl bak p, p p .

If the Central Bank buys an asset from a bank , ;

v, a a ba mulpl xpa .

U, C B pua a b gvm u. I a way, gvm au a mak w u.Government can easily inflate the money supply by




issuing new bonds, and then order its Central Bank

pua m. O Cal Bak uak pp p , fl B, q pp fl.

B buyg a, Cal Bak a aw bak v a way: by lg m.

T C B “ .” C, -rowed reserves are not as satisfactory to the banks , pu paym. Cag u a p, m mpa mpa mvm q .

W Cal Bak ll a bak publ, lw bak v, a au pu a a fla—lwg—

my upply. W av , wv, a gvmare inherently inflationary; historically, deflationary action by the government has been negligible andfleeting. One thing is often forgotten: deflation canly ak pla a a pvu fla; ly pu-p, gl , a b a lqua.

10.Going Off the Gold Standard

T C B k bak xpa, a pu flaay




g pa. I mv all a,

wv. T ll pblm Cal Bak . T z Central Bank, but this is most improbable. A more .F p clients of other, nonexpanding banks, so does mon-

p z . C p p bakg ym gl mp. T wa la p ; ’Central Bank would generate bank credit expansion;p ; p m g ll, g wul m amore try to redeem the currency in gold. Finally, theCentral Bank would have to call a halt and enforce a a av may aa.

Tere is one way that foreign redemption can beav: -Cal Bak pa. I all CalBak ag fla a abu am a, uy wul l gl ay , a all wlg ul fla alm wu lm. W vy gvm jalu w pw a pv

ff pu, wv, u g-p pa- p p. O pp A F Ragm pm m fla 1920 lp Ga Ba a pv m l- U S.




I w uy, gvm, a a

fla lm w fla, av mply “goff the gold standard” when confronted with heavy demands for gold. Tis, of course, insures that theCal Bak a al, w bm . I , fi u pay b, a a vually ablv

bakg ym m a u uy. Pu-pto gold were first issued without backing and then,

w ay kg w a, bakupy wa amlly mpl by mply lmag glredemption. Te severance of the various national (, p, ) p.

A fi, gvm u am a waa pma mau. Ty “up p paym,” a wa alway u aeventually, after the war or other “emergency” had

, gvm wul aga m blga-. W Bak Egla w ff gl a g uy, u a , a gl paym wul b um a F .

emporary “suspensions,” however, are primrosepaths to outright repudiation. Te gold standard, , p ff government whim decrees. Either a gold-receipt ismabl ; mp up .




A p lw x gl my wa

ablm “gl bull aa.” U ym, uy lg mabl ; , , ba. T, ff, lm gl mp a aul p . T , p

a gl. T Eupa “gl aa” 1920 p- p.14

F, “ff ” ffi mplly, a u abu aga g a“unpatriotic gold hoarders.” Government paper now bm fiat aa my. Smm, auy a a Cal Bak pap a b fia my,pally b vlpm a Cal Bakgsystem. Te American Continentals, the Greenbacks,and Confederate notes of the Civil War period, theFrench assignats, were all fiat currencies issued by the

au. Bu w auy Cal Bak, ff fia u am: may aa w a my gvm, a bak p p pp.

11.Fiat Money and the Gold Problem

W ff onto the fiat standard, it adds to the number of

14 S M P, “T M G S,” Journal of Business (J 1941): 299–304.




“my” x. I a mmy

my, gl a lv, w flu p- my by a gvm mpgits fiat rule. And just as gold and silver will havean exchange rate on the free market, so the mar-ket will establish exchange rates for all the various. I fi , ,

p, fl . W , pp- p-p p, turn are determined by the respective supplies andma vau u. W a uy -p fi pp,fi q , . F, ff , q . W

pp , puag-pw, a xag a, qukly pa la gl. A gvm ly flaay, wll kp pag a .

Such depreciation is highly embarrassing to the

— z pgoods. Te existence of gold in the economy is aa m p qualy gv-ment paper, and it always poses a threat to replacethe paper as the country’s money. Even with thegvm gvg all bakg pg a




its legal tender laws to its fiat paper, gold coins in

p ppa a ma gvm’ pw v ’ .

In America’s first depression, 1819–1821, four Western states (ennessee, Kentucky, Illinois, andMu) abl a-w bak, ug fia

pap. Ty w bak by lgal pv a, a mm by lgal pb agadepreciating the notes. And yet, all these experi-, p, q w pap pa aply glgbl valu.T pj a b wly aba. La, gbak ula a fia pap N uga a Cvl Wa. Y, Cala, pplrefused to accept the greenbacks and continued to . A p p :

In California, as in other states, the paper was

legal tender and was receivable for public dues;

nor was there any distrust or hostility toward

the federal government. But there was a strong

lg . . . av gl a aga pap. . . .

Evy b a lgal g pay ff bin depreciated paper. But if he did so, he was a

mak ma ( wa lkly p m

p pp)

boycotted. Troughout this period paper was

not used in California. Te people of the state




u aa gl, wl all

U Sa u vbl pap.15

It became clear to governments that they couldnot afford to allow people to own and keep their. G p a a’ uy, ppl, w , ul

repudiate the fiat paper and turn to gold for theirmy. Agly, gvm av ulaw gllg by z. Gl, xp a glgblamu pm ual a amal pu-p, a gally b aalz. ak u publ’ fia ppy w p -.16

12.Fiat Money and Gresham’s Law

With fiat money established and gold outlawed,the way is clear for full-scale, government-run infla-. Oly vy ba k ma: ulmaa yp-fla, ak-up uy.Hyp-fla u w publ alz a gvm b fla, a va

15 Frank W. aussig, Principles of Economics, 2nd ed. (New York:Mamlla, 1916), vl. I, p. 312. Al J.K. Up, Money in Politics,2 . (B: Lp P, 1895), pp. 69 ff.16 F p A -ment confiscated the people’s gold and went off the gold standard in1933, G G, Te People’s Pottage (C, I: CP, 1953), pp. 15–41.




flaay ax u by pg my

a a a pbl wl ll a m valu. Ulyp-fla , wv, gvm a w fl .Nw ffi ul a, wv. A alway, gvmv u pblm a a w,uxp pblm. I a wl fia my, a

uy a w my. T aal v lab, ba a aal uy, a bbroken, and countries tend to divide into their own . L p . T . E -flexchange rates with all other currencies. A country inflating beyond the others no longer fears a loss of ; p q. Txag a uy all la gcurrencies. Tis is not only embarrassing but even

disturbing to citizens who fear further depreciation.I p , pp .

I ya, , gvm av mvto abolish freely-fluctuating exchange rates. Instead,

y fix abay xag a w u-. Gam’ Law ll u ply ul ay p . W - , m m ay--ay mak. T, uy wll alway b afially vvalu a




, . G,

— pa, a al bau qu a l-lw. W a uy vvalu by , pplu xag uvalu uy a baga a; au a uplu vvalu, a , . T ,

, pv m mvg la xag. I p , generally been overvalued relative to the dollar. Te p “- ”— p G’ L.

Fg u, lamg abu a “lla -age,” thus brought it about by their own policies. It p ff, () A “

shortage in the free world,” and (b) it gave them anxu a mp m Ama. Uvalug p A fi cheap and exports to America artificially expensive.Te result: a trade deficit and worry over the dollardrain.17 Te foreign government then stepped in to

pp p: p, p “ .”

17 In the last few years, the dollar has been overvalued in relation to , from U.S.




p, fi

g xag lg z, bakg upa afially g valua m uy by g z ap a l m my than they could have acquired on the free market.Tus, foreign exchange, as well as gold, has beennationalized, and exporters penalized. In countries

p, -m “xag l” mp vual alza my. A afial xag a u gvu a xu mag g a a p .18

A p, wl m a a wl-ter of exchange controls, currency blocs, restrictionson convertibility, and multiple systems of rates. In “ ” is legally encouraged to find out the true rate, andmultiple discriminatory rates are fixed for different

p . A fiaa, bu y av a uag am , p fia “ gl bull aa.” Aually, gl used not as a true definition for currencies, but as av by gvm: (a) fixg a uy’

p xag m ay uy; a (b) gl ll u by ff gvm. S xag

18 For an excellent discussion of foreign exchange and exchange con-, G W, Te Free Convertibility of Sterling (L:B P, 1955).




fi, some

uy’ paym, a gl al aa. I gl lg wl’ my; w governments’ my, u paym a.

Claly, fla’ am m wlpaper money, manipulated by a world governmenta Cal Bak, flag vyw a a mm

. T , ; , currency problems have so far been too diverse andfl p . Y,the world has moved steadily in this direction. TeIaal May Fu, xampl, baally an institution designed to bolster national exchange , p. T F q uy fix xag a, a pl gla lla l gvm a fi mlv

.

13.Government and Money

M pp , p

m am avaag, a pu aa. Ng “pla,” vyg apaza.Gvm a, a, m mpland orderly; decrees are handed down and they are. I pval a fil my. Smgly, my,




a la, mu m u g gvm l.

But money is the lifeblood of the economy; it is themedium for all transactions. If government dictates , p p , pp- . W , p-

, ; , , ffi .

Wa, , av w la abu gvm amy? W av a, v u, gv-ment has, step by step, invaded the free market andz mpl l v may ym. Wav a a w l, mm mgly uu, a bg w a u l. Whave seen that governments are inherently inflation-, fl p q S p. T

bu a zu may a u b () fl p ; () .

Furthermore, government meddling with money a ly bug ul yay wl;

a al bug a a . I a agm p, p p, bbl a amp by mya , l,afial a, uy bakw, . I a lpbg abu wa by amg a wl paul




intercourse into a jungle of warring currency blocs.

I , fi , , , , fl .



88

Since the first edition of bk wa w,the chickens of the monetary interventionists have

come home to roost. Te world monetary crisis of Fbuay–Ma, 1973, llw by lla plug J, p u aaly vabl qu gv-m v may ym. A a mpaly allay by a “Ba-A” lu,the governments of the West loudly announce thatthe world monetary system has now been placed onsure footing, and that all the monetary crises havebeen solved. President Nixon went so far as to call

the Smithsonian Agreement of December 18, 1971, “ga may agm y ,” p a ll v a ya. Ea “lu” a umbl mrapidly than its predecessor. o understand the cur- may a, ay a bfly

IV.

he Monetary Breakdownof the West




aal may vlpm w

uy, a w a uu fla-ist interventions has collapsed of its own inherentproblems, only to set the stage for another round of interventions. Te twentieth century history of the

wl may a b v pa.L .

1.Phase I:

Te Classical Gold Standard, 1815–1914

W p “” -, W twentieth centuries, as the literal and metaphoricalG A. W p problem of silver, the world was on a gold standard, ( ,

pound, franc, etc.) was merely a name for a certainfi weight gl. T “lla,” xampl, wafi 1 ⁄ 20 , p ¼ , . T “ ” fi,

, way a pu wg fi a bg qual .

Te international gold standard meant that thebfi avg my mum w xthroughout the world. One of the reasons for the




wl a v kw, a w wk,

which kept business cycles from getting out of hand,a w abl vlpm aal, , .1

2.

Phase II: World War I and After

I , bak w? I bk w bau gvm

w u w ak kpg may p, p, , ,., w alway mabl gl a y a controlled banking system had pledged. It was notgold that failed; it was the folly of trusting govern- p p. p W W I, fl

pp pp . S fl p -ring governments to keep their pledges, and so they “ff ,” .., p, . A p U Sa, w wa la, a

fl pp . B, p U S, ff

1 F , early phases of its breakdown in the twentieth century, see MelchiorPaly, Te wilight of Gold, 1914–1936 (Cag: Hy Rgy, 1972).




Nvaa ly-fluuag xag a (w all

“y fla”), mpv valua, wag u-y bl, xag l, aff a qua, a bakw aal a a vm.T fl p, , , ., pin relation to gold and the dollar; monetary chaos .

I , pp, -m al ua a may al. I wagally gz a Pa II wa l aal a, a pla a mlooked around for ways to restore the stability and .

3.Phase III:

Te Gold Exchange Standard (Britain and the United States) 1926–1931

How to return to the Golden Age? Te sensible z aly, a pa pu, a, mak,., fia: a a a wul gz xg upply

my a p lvl. T B pu, xampl,a b aally fi a a wg w ma q $4.86. B W W I, fl B p approximately $3.50 on the free foreign exchange. O p.




Te sensible policy would have been for Britain to

return to gold at approximately $3.50, and for the fla u am. Pa I ulav b mly a aply . Ia, B p $4.86.2 I Baal “pg,” a a va amp abl

London as the “hard money” financial center of the . p , B would have had to deflate severely its money supply a p lvl, a a $4.86 pu B xpp w a g b mpv wl. B fl p qu, gw a u, bu by a aw ym umplym ua, a ; fl, B gvm wul av a v . I , B

u fla my a p. A a ul mbg fla w a u a vvalu pa,B xp w p all ug 1920 aumplym wa v all ug p wm wl wa xpg a m bm.

Hw ul B y av ak a a

B monetary order which would induce or coerce other gvm flag gg bak gl a

2 On the crucial British error and its consequence in leading to the1929 p, L R, Te Great Depression (N Y:M, 1934).




vvalu pa w u, u pplg

w xp a ubzg mp m Ba.Tis is precisely what Britain did, as it led the way, at G C 1922, - , - .

T gl-xag aa wk a llw: TU Sa ma laal gl aa,

mg lla gl. Ba a u- W, , p-aa, Ba 1926 a u authe same time. British pounds and other currencies p , -z, . Tprevented the ordinary citizens of Britain and otherEupa u m ug gl aly l, p pp fl. B , B p , ;

countries redeemed their currencies not in gold, but p. A by Ba u gl a vvalu pa. Tresult was a pyramiding of United States on gold, of B pu lla, a Eupa u- pu— “gl-xag aa,” w

p “ .”Now when Britain inflated, and experienced a

deficit in its balance of payments, the gold standardmechanism did not work to quickly restrict Britishfla. F a u mg pu gl, y kp pu a fla




p m. H Ba a Eup w pm

to inflate unchecked, and British deficits could pilep p aa. A U Sa, Ba wa abl u U Sa fla lla a l may lla v gl U Sa.

Te point of the gold-exchange standard is that

; pp p, fl-ary boom. As sterling balances piled up in France, U S, , confidence in the increasingly shaky and jerry-builtinflationary structure was bound to lead to generalp. T p pp 1931; fl Ep, amp “a my” Fa a lgbala gl, l Ba g ff gl aacompletely. Britain was soon followed by the other

Ep.

4.Phase IV:

Fluctuating Fiat Currencies, 1931–1945

Te world was now back to the monetary chaos W W I, p p . T economic order had disintegrated into the chaos of clean and dirty floating exchange rates, competingdevaluations, exchange controls, and trade barriers;




international economic and monetary warfare raged

. Ia a vm am a vual all; a -u by gvm mpg a flg w a. Say Sa Cll Hull paly p u a may a m fl

1930 W W II.3T U S

w ya, a , 1933–34, w ff la- p p. Ama z ul lg mlla gl, a w v pb m wg , . B U S, 1934, p standard, in which the dollar, now redefined to 1 ⁄ 35 of a gold ounce, was redeemable in gold to foreigngovernments and Central Banks. A lingering tie to

. F, Eup l gl flwg ly lavly a , U S.

T the 1930s points up an important lesson: the griev- political fl (p p)

in the Milton Friedman-Chicago School monetary m ly-fluuag fia u. F wathe Friedmanites would do—in the name of the free

3 Cll Hull, Memoirs (Nw Yk, 1948), vl. I, p. 81. Al RaN. Ga, Sterling-Dollar Conspiracy (Ox: Cla P, 1956),p. 141.




W, Nw Hamp, m-1944, a afi by

Cg July, 1945. Wl B Wym wk a b a a 1930, fl gl-xag aa 1920 a—lk 1920— .

T -

aa 1920 bu w lla uly pla-ing the British pound as one of the “key currencies.”N , 1/35 , b only ky uy. T ff m 1920 gold to American citizens; instead, the 1930’s system

was continued, with the dollar redeemable in goldonly C B.No private individuals, only governments, were tobe allowed the privilege of redeeming dollars in the

world gold currency. In the Bretton Woods system,

the United States pyramided dollars (in paper money p) p , could be redeemed by foreign governments; while allother governments held dollars as their basic reserveand pyramided their currency on top of dollars. And U S p-

(pp $25 ) p p p p . Fum, ym ul “wk” a wl ’ p-W W II p, were highly overvalued in terms of their inflated and




pa u. T fla pu lg,

p, $4.86, p p market. Since the dollar was artificially undervaluedand most other currencies overvalued in 1945, the , ff -all lla ag, w Ama axpay

wa upp b blga mak up by g a.I , xp uplu jy by uvalu

Ama lla wa b paly fia by apl A p .

Tere being plenty of room for inflation before , U S mbak p-wa ply ual may fla, a ply a puu mly v . By aly 1950, ug Ama fla bga u aal a. F wl USa wa flag a xpag my a ,

maj Eupa gvm, may m fluby “Austrian” monetary advisers, pursued a relatively “a my” ply (.g., W Gmay, Swzla,Fa, Ialy). Sply fla Ba wa mpll fl p ( pp $2.40).

A , p Europe, and later Japan, led to continuing balance of p fi U S. A 1950a 1960 w , U Sa bam m am fla, b abluly a lavly Japaand Western Europe. But the classical gold standard




k fla—pally Ama fla—wa

g. F ul B W gam pvthat the West European countries had to keep pilingp , fl .

Bu a 1950 a 1960 u, a-my u W Eup (a Japa) bam

l a bg pl up lla a w w agly vvalu a uvalu. A p p fell, they became increasingly unwanted by foreigngvm. Bu y w lk a ym a

was more and more of a nightmare. Te Americana Eupa mpla, a by Fa DG’ , gold-standard economist Jacques Rueff, was merely a buqu mal. Ama pla am mply la a Eup wa forced

u lla a uy, a ul gabu gwg pblm, a US p fl p policy of “benign neglect” toward the international q .

But Europe did have the legal option of redeem-

$35 . A bam agly vvalu m a my u a gl, Eupa gvm bga mand more to exercise that option. Te gold standardk wa mg u; gl flw aly u U Sa w a a aly




1950s, until the United States gold stock dwindled

v p m v $20 bll $9 bll. Alla kp flag up a wlg gl ba, w ul U Sa kp mg g lla gl— B W ym?T p UStates inflation of dollars and prices, or the United

States policy of “benign neglect,” which resulted by 1960 pp $80 billion in unwanted dollars in Europe (known E). p Ep p , U S plal pu Eupa gvm, mlabu a a lag al B ajlg Fa 1931.B , , up with governments, and this is what happened to fl-pp U S

1960. T gl-xag ym B Woods—hailed by the United States political andeconomic Establishment as permanent and impreg-— p 1968.

6.Phase VI:Te Unraveling of Bretton Woods,

1968–1971

A p p fl , U S




ffi ul maa p gl a $35 a u

gl mak a L a Zu. Ty-fi ,and while American citizens have been barred since1934 m wg gl ayw wl, z av jy m w gl bulla . H, way vual Eupa

m lla gl wa ll lla $35 . A lla kp flag a pag, a a Amabala paym fi u, Eupa a pva z bga ala al dollars into gold. In order to keep the dollar at $35an ounce, the United States government was forced pp $35 p L Z.

A fi lla glmak l U Sa ff a uamal

M 1968. Ta wa p pky gl mak m vaga agg B W aagm.H wa b “w- gl mak.” T a z; would be strictly insulated from the real monetary

action in the Central Banks and governments of the world. Te United States would no longer try to keep the free-market gold price at $35; it would , governments agreed to keep the value of the dollar $35 . T




Central Banks of the world would henceforth buy

“” ; would simply move as counters from one CentralBank to another, and new gold supplies, free goldmak, pva ma gl wul ak w u mplly paa m may

. Along with this, the United States pushed hard

ppv, Spal Dawg Rg (SDR), w wahoped would eventually replace gold altogether andserve as a new world paper currency to be issued by a future World Reserve Bank; if such a system were , U S flunchecked forevermore, in collaboration with other ( au a wlw uaway fla a

p pp ). B SDR,combatted intensely as they have been by WesternEp “-” , pp A .

All pro-paper economists, from Keynesians to

Friedmanites, were now confident that gold wouldappa m aal may ym; uff “pp” , all confidently predicted, the free-market gold price $35 , ma “ual” may gl p




$10 . I, p ,

$35, $35, 1973 $125 , fia p-pap m wul av ug p- .

F p system, the two-tier gold market only bought a few

; A fl fi -u. Eulla aumula aply, gl uto flow outward, and the higher free-market priceof gold simply revealed the accelerated loss of worldfi . T - p — fi B W.4

7.Phase VII:

Te End of Bretton Woods:Fluctuating Fiat Currencies,

August–December 1971

On August 15, 1971, at the same time thatPresident Nixon imposed a price-wage freeze in ava amp k bug fla, M. Nx

p B W a crashing end. As European Central Banks at lasta m mu wll k

4 O - , Jq Rff, Te Monetary Sin of the West (N Y: M, 1972).




lla gl, P Nx w ally ff gl.

F fi m Ama y, lla waally fia, ally wu bakg gl. Ev uu lk w gl maa 1933 wa w . T p fi —a w, w v lla

wa lg lk gl. Aa lm a

spectre of currency blocs, competing devaluations,m waa, a bakw aala a vm, w wlw p .

Wa ? Ampg a aalmonetary order lacking a link to gold, the UnitedS S A D 18, 1971.

8.Phase VIII:

Te Smithsonian Agreement,December 1971–February 1973

T S A, PNx a “ga may agm -y wl,” wa v m aky a uu

a gl-xag aa 1920 aB W. F , p fi , m w gl wl my gv ay u-y bakg. Fum, may Eupa u




were fixed at undervalued parities in relation to the

; U S p valua ffi al lla a $38 a u.B , -tion was significant in violating an endless round of ffi al Ama pum, w a plg maa $35 a vm. Nw a la

$35 p p .

I wa vabl a fix xag a, v w w ag z fluua, bu lakg a wlmedium of exchange, were doomed to rapid defeat.Tis was especially true since American inflation of my a p, l lla, a bala p fi .

T wll upply Eulla, mb w u fla a mval gl bak-ing, drove the free-market gold price up to $215 an

u. A a vvalua lla a uvalua Eupa a Japa a my , fi apart on the world markets in the panic months of Fbuay–Ma 1973. I bam mpbl WGermany, Switzerland, France and the other hard

money countries to continue to buy dollars in orderto support the dollar at an overvalued rate. In littlev a ya, Sma ym fix xag p .




9.

Phase IX:Fluctuating Fiat Currencies,

March 1973–?

W p, aga, a ym fluuag fia u. W

W Ep , a, a U Sa aga valu ffi al lla a by a k amu $42 a u.

A lla plug g xag m ay ay, a W Gma mak, Sw a, a Japa y ul upwa, Ama au-

, F , . I lla uplu a u bala paym p fl rates. Furthermore, American export firms began to

l a allg lla a ma Ama gcheaper abroad, and therefore benefitted exports. It p xag fluua (“y” a “la” fla), F p.

Bu bam la all a all a m wll u aal may ym. Tlg-u pblm a a-my u wll p p fi A p. I A fl




a lla pa u, y wll

to the competing devaluation, exchange controls,currency blocs, and economic warfare of the 1930s.B : fact that depreciating dollars means that Americanimports are far more expensive, American touristssuffer abroad, and cheap exports are snapped up by

g u aply a a p xpat home (e.g., the American wheat-and-meat pricefl). S A p bfi, bu ly a xp fla-

Ama um. T pplg uay ap fl to Americans with the rapid plunge of the dollar in J 1973.

Since the United States went completely off gold A 1971 F fl- fi M 1973, U S

a wl av uff m a mua bu pam fla y wl. I ul b la by w a aly a . B lla wa u l m gl,K F, v fia pap my, fily p a

fi , p gl wul all pmply may lvl, ma a abu $8 a u. I gl,b gup maa a wa mgy lla ppp p p , . S 1971, p




b blw l fix p $35 a u, a a

alm alway b muly g. W, ug 1950 a 1960, m u a Jaqu Ruff p $70 ounce, the price was considered absurdly high. It isw v m abuly lw. T a g gl p a a alamu a

“” .

I up w up fla, USa a ugu wl, a a b pakby fluuag fia uy a augua 1973.

W a al way xm vlaly a up- . T q fi , ’ -fial plal ably aual uay

-mak p ym. T Fma am fl fi , uaabl yag u a aal fi .

U, -, A

world leaders is the old Keynesian vision of a one- fi pp , W R B (WRB). W uy b m “ ba” (ff by Ky), “” (pp W W II U Sauy ffi al Hay Dx W), “px”




(ugg by Te Economist ) umpa. T val

point is that such an international paper currency, p WRB ul u a mu ba a w asupply them to its country of choice, would provide p - fl-, --p

or by declines in exchange rates. Te WRB wouldthen be the all-powerful determinant of the world’smy upply a aal bu. T WRB

will be a wisely-controlled inflation. Unfortunately, the unimaginably catastrophic economic holocaustof world-wide runaway inflation, nothing, that is,p p WRB fi- .

W - pp C B

ma ulma gal wl’ Kya-leaders, the more realistic and proximate goal is areturn to a glorified Bretton Woods scheme, exceptthis time without the check of any backing in gold.

Alay wl’ maj Cal Bak a amp- “” p,

harmonize rates of inflation, and fix exchange rates.T mla v a Eupa pap uy uby a European Central Bank seems on the verge of . T pby the fallacious claim that a free-trade EuropeanEconomic Community (EEC) necessarily requires




an overarching European bureaucracy, a uniformity

axa ugu EEC, a, paula, aEp C B pp . O av, l a w Fal Rva maj Cal Bak wll llw mmaly.

A , ul a Wl Cal Bak b a b?Short of that ultimate goal, however, we may soon

p B W, the attendant crises of the balance of payments andG’ L fi fi .

A , p and for the international monetary system is grimindeed. Until and unless we return to the classicalgl aa a a al gl p, aalmy ym a bak a bwfix a fluuag xag a w a ympg ulv pblm, wkg baly, a fially

disintegrating. And fueling this disintegration willbe the continued inflation of the supply of dollars A p abag. T pp uu alag avually uaway fla a m, ampa by .

T pg a ly b ag by a a ala- A : the return to a free market commodity money sucha gl, a by mvg gvm ally m .



113

A , 55

B, 110B E, 68, 71, 77B

, 68–75, 78, 44–45, 65, 67, 72, 71, 37–39, 65, 91–92p , 39–40 , 43, 46, 66, 71 , 44, 67 , 110–12See also M

B, B.W., 20B, 5–6, 9, 10, 49, 55, 97B, W.., 53B, 33–35, 59–62B, 57B-, C,

55B W, 98–102B , 55, 56, 91, 92

C, 11, 52, 53

C, E, 20C , 27–32, 61C , 67, 78, 80C

, 16–17

, 15–16, 22–23,

57–59, 60, 64–65p, 16–20, 48, 66

C , 6C, C A., 20C, 55, 78C S, 13C, 41, 50, 56–57,

58–59, 64C, 42, 45–46, 63

p , 72, 74–76,100

C , 2, 4–5

D, 57, 58–59, 62, 65D, 46, 53, 63, 77, 80Dfl, 75, 94D p, 43, 44, 65,

72

Index




D, 58D fl, 93, 96, 108D

fi , 89p, 79–82, 93,

100, 103, 109 , 13–14, 54, 59, 83, 100

E, 102, 105, 107Ep E

C (EEC), 111–12E, ; see B

, 81–83, 90,103–04

, 4, 11, 6–10 ; see M

, 10, 11, 23 , 5–6, 24–25, 4

F, L, 63F Dp I

Cp (FDIC), 71F R S, 1, 68

,68, 73

p , 70–73p , 73, 76F A, 84, 100F ; see BF, M (C

S), 97, 104, 108, 109,110

G, R N., 97G, G, 81G C 1922, 95G , 78, 84G ,

95–96, 98–102G , 14, 16, 35, 62,

75–78, 89–92, 110, 112

G ; see B W

G, 78, 80G’ L, 19, 59–62,

81–85, 112G, E, 59

H, 26–31, 28, 59,71, 78

H, C, 97H, D, 24, 90

Ifl, 41, 48, 51–56,

65–68, 72–75, 101ff , 52–56, 89–92p-, 55, 81, 82 , 49–56, 86, 55–56,

96–98, 105–06

J “H M”, 67 J, W. S, 35, 44

K, 104, 109

L, J. L, 20




L , 2, 62, 63,

80, 91

Livre tournois, 58

Lpz, R S., 35

MM, .R., 73

M, C, 9

M, L , 9, 20,

35, 63M , 78, 81,

88–112

p, 20, 24, 28, 30,

41–42, 45–46, 48,

51–53

z, 31–33

M , 9,

16–20, 32–33, 49–50,

56–57, 64–65, 67,

68–73, 81–85, 85–87

, 7, 9, 29,

78–79

,7–12, 25, 28, 33, 36,

47, 107

, 11–12,

29, 34

, 12, 13,

58–59, 89

p,

36–37, 39, 41–42, 44,

45, 46

, 33–35

, 9, 23–24,

27–30, 54

fi, 78–81, 81–85,109–110, 112

, 8, 11, 12, 12,16, 21, 33–34, 36, 39,48, 56, 61–62, 70,78–81, 90

, 64, 67, 94, 96, 100,101, 104, 107, 108

, 4, 8, 47, 56–57p , 9, 16, 19, 23–25,

28, 31–33, 47, 102–05p , 15–16, 21, 36, 65 , 8, 13, 15, 34–35,

48, 62 , 37–39,

39, 41, 44, 48, 65, 70pp , 12, 20–26,

28–30, 41, 54, 93 , 29 , 36–47

M , 13–14, 35, 79,82, 89, 92, 109–112

N, R.W., 73N, R M., 88, 105,

106

P, M, 78, 92P , 35, 35,

60–62,Pp, C A., 73P, 110P , 13, 14, 89–91,

100P, 23

, 19, 59




, 2, 9, 22, 31–33, 91,93–94

P p, 23–25, 27,30, 31, 33–35, 47, 48, 54,79, 100, 101

R 39, 70, 74, 75R , 49–50R, L, 94R, M N., 56Rff, Jq, 101, 105, 110

S, 27, 55S B U

S, 68S, 57, 58S A, 88,

106–07Sp D R

(SDR), 104Spz, 5, 10, 36, 90Sp, H, 18

Sp, L, 20S p, 10

S, J.W., 35

, F W., 81, 49–50T, 14

, 82, 92, 93,97, 100, 106

, 22- , 103

U, 110Up, J.K., 81

W, A, 43 W 1812, 66 W, H D, 110 W, H, 67 W, G, 84 W R B (WRB),

110 W W I, 92, 93

W W II, 55, 97, 98, 99,110



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