Please see the A-equals-A.com's Fundamental Economic Concepts page to review the complete list of topics in this series. The subject for today is money.
Money originates in the free market. There is no other way it could have come about. Just because the king's and ruler's faces appear on money, people tend to think that money originated with the State. This is false. Money is not the invention of a king, government, or any other central planner. Money always exists as a valuable good in an economy before it is monopolized and used as a tool for expropriation by the ruling class.
What is money and how does it originate?
- “He who controls the money supply of a nation controls the nation” - James A. Garfield
Money is a commodity. The only difference between money and any other commodity is that money is demanded as a medium of exchange. Money must be a directly serviceable good before it is used indirectly as a medium of exchange. In barter economies throughout history, people noticed that certain commodities (e.g. gold, silver, salt) tended to be more marketable than others because they were widely excepted for purposes of indirect exchange. It is difficult to trade a cow for eggs, but this problem is eased by trading in terms of a widely accepted good such as salt. Once a commodity is universally accepted as a medium of exchange it becomes money. Because money is universally accepted it provides a common unit with which to express different quantities of different goods and enables economic calculation.
How does money get its value?
According to Mises's regression theorem, as explained by Bob Murphy in The Origin of Money and Its Value, the purchasing power of money today is caused by its expected purchasing power tomorrow based on knowledge of its purchasing power yesterday.
Is money the root of all evil?
See the full text of Francisco d'Anconia's Money Speech for the most rousing explanation of the nature of money ever penned.
"If you ask me to name the proudest distinction of Americans, I would choose--because it contains all the others--the fact that they were the people who created the phrase 'to make money.' No other language or nation had ever used these words before; men had always thought of wealth as a static quantity--to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were the first to understand that wealth has to be created. The words 'to make money' hold the essence of human morality.” Additional Suggested Reading:
The Origin of Money and Its Value- Robert Murphy – Great Article! - "The importance of the Austrian school of economics is nowhere better demonstrated than in the area of monetary theory. It is in this realm that the simplifying assumptions of mainstream economic theory wreak the most havoc." What Has Government Done To Our Money - Murray Rothbard - This book is an excellent account of the origin of money, the history of the dollar, and a step by step explanation of how governments have systematically destroyed the purchasing power of money to expropriate wealth from its citizens. A $ A Subscribe to receive A-equals-A.com email updates by clicking here.
The price on the market for any particular resource emerges as producers and consumers compete for the resource's alternative uses – i.e. what has to be given up in order to obtain a scarce good for its highest subjectively valued use. It is important to remember the market is a complex series of events caused by the purposeful action of individual humans. It is not correct to say the market “sets” a price for goods. The very essence of every human action is change. As individuals act, their subsequent actions (including their valuations) change. For this reason prices refer to the price of a specific resource at that specific time based on the subjective valuations of the buyer and the seller.
Because individuals in the market are competing for scarce resources with alternative uses, prices emerging on the market provide vital information about the relative scarcity, surplus, and consumer demand for resources. It is only through the voluntary interactions of individuals participating in the market process that the relative importance for resources is determined and allocated based on the subjective preferences of consumers and producers.
Prices can be artificially set and enforced by coercive central planning / regulatory agencies. Regardless of the well meaning intentions of central planners, artificial price controls deviating from the market price (such as minimum wage laws and rent controls) always moves away from the subjective preference of consumers in the market. Resources are diverted away from their highest and best use and the result is always a net loss to an economy. One group may benefit from the government-granted special privilege, but only at the expense of the group that did not receive such privilege.
- “...every time some small adjustment in the allocation of resources had to be made—go explicitly through all the relations between ends and means which might possibly be affected...In any small change he will have to consider only these quantitative indices (or "values") in which all the relevant information is concentrated; and, by adjusting the quantities one by one, he can appropriately rearrange his dispositions without having to solve the whole puzzle...this problem can be solved, and in fact is being solved, by the price system....Fundamentally, in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people in the same way as subjective values help the individual to coordinate the parts of his plan.” - F.A. Hayek - "The Use of Knowledge in Society"
Artificial price control necessarily interferes with the essential role of prices in an economy (providing information regarding the relative subjective preferences of buyers and sellers in the market). The concepts of price and private property are inextricably linked. As Lew Rockwell notes, “...prices simply cannot do their work apart from private property and concomitant freedom to contract.”
Private property is a prerequisite for market prices. Market prices are the way buyers and sellers communicate knowledge and information regarding the preferred uses of scarce resources. Not only is coercive price control a violation of property rights, but as explained in the recent post about property, economic calculation is not possible without private property and prices.
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- “[Prices] are the exchange ratios of various goods, which result from the voluntary interactions of distinct individuals based on the institution of private property. Without the institution of private property, the information conveyed by prices simply does not exist. Private property is the necessary condition—die Bedingung der Möglichkeit—of the knowledge communicated through prices.” - Hans-Hermann Hoppe
Understanding the concept of comparative advantage is one of the keys to understanding economics. Most people (including those that make economic public policy for our country) do not understand this essential concept. Comparative advantage is the fundamental concept driving all economic transactions and forms the basis for human society. Division of labor and the benefits of exchange are among the primary reasons humans choose to live together and interact in society. Enormous benefits are realized through specialization and division of labor.
Comparative advantage may be best understood by thinking of the concept in terms of “low cost advantage”. Here's a quick example:
- “[The Law of Comparative Advantage] is the most important idea in the history of social analysis....This law -- a law like gravity, not a law like the speed limit -- is a description of why people cooperate and the ubiquity of the conditions that lead to this cooperation.” Jeffrey Tucker, Cooperation: How a Free Market Benefits Everyone
In our example above, Murray and Paul actually increase their total sum productivity by specializing and trading (note that their productive capabilities and technology was held constant). In economies of free free exchange, because of comparative advantage (low cost advantage), trade is beneficial and advantageous to both parties.
- Even if Murray is stronger, smarter, and more productive than Paul in every way, it is still mutually beneficial for both people to engage in trade. Let's say Murray has the ability to produce 20 hamburgers and 40 glasses of lemonade in a day. Paul has the ability to produce only 5 hamburgers and 20 glasses of lemonade in a day.
- The relative cost for Murray to produce a hamburger is 2 glasses of lemonade (40 divided by 20) while the relative cost for Paul to produce a hamburger is 4 glasses of lemonade (20 divided by 5). Remember, costs are measured by the alternatives you have to give up in order to obtain a particular good.
- If Murray devotes more time to specializing in the production of hamburgers (his low cost advantage) and Paul specializes in production of lemonade (his low cost advantage), the two can then trade to mutual benefit. In fact, using the above scenario, if Murray devotes an extra hour a day to producing hamburgers instead of lemonade, and Paul devotes all of his time to specializing in the production lemonade, they are actually able to produce 10 more glasses of lemonade than if they remained in isolation without specialization and trade.
Division of labor and free exchange is the path to increasing wealth in a society because of the law of comparative advantage. In a system of free exchange, neither party is exploited and both parties benefit. This system is especially advantageous to members of society that are less skilled, less capable, and/or “underprivileged” in absolute terms. Because of trade, they are able to obtain and enjoy goods and services that otherwise would have never been possible to them.
It is for this reason that nations that protect property rights and permit individuals to engage in relatively free exchange are infinitely more wealthy than those the do not respect property rights or allow individuals to exchange freely. Property rights and freedom to exchange (freedom from coercive control) are two keys to reducing if not eliminating poverty. Most everywhere that poverty exists in the world, it can be directly linked to forcefully government intervention in these two areas. Poverty is an economic problem caused by brutal, exploitative politics.
Additional Suggested Reading:
I, Pencil by Leonard E. Read...If you don't do anything else today, read this miraculous short story!!!Cooperation: How a Free Market Benefits Everyone- Jeffrey Tucker provides a great illustrative explanation of comparative advantage in this article.
Economics and Knowledge by F.A. Hayek
If you have the time, here is a great lecture on Division of Labor
by Hans-Hermann Hoppe. Hoppe goes on to discuss the theory of money
which is a great introduction to the next two parts in the A-equals-A Fundamental Economic Concepts
series: Prices and Money.
One of the most misunderstood economic concepts is that of the “market”. We hear the terms “free market” and “controlled market”, but what are we referring to by the market?
The market is a complex process of events caused by individuals acting purposefully; based on independent subjective valuations. The market is a process of constant change brought about by the choices and actions of individual humans. It is neither a static thing,nor is it an aggregation of homogeneous ingredients or broad generalities.
Change in the market is constant. The very essence of every human action is change. As individuals act, their subsequent actions (including their valuations) change. For this reason, Thomas Taylor notes, “...the dynamic market process should be examined; not the static condition of equilibrium.”
So, the term “free market” means nothing more than a process of events in which interacting humans are uninhibited from acting purposefully based on their independent subjective valuations. In any uncoerced exchange between humans (i.e. humans interacting in an unhampered market), both individuals exchange the goods and services they view as less important for goods and services they view as more important for their needs. Based on their subjective valuations, they are both better off.
A “controlled market” or “market intervention” refers to economies where forces outside of the naturally occurring market interfere with the choices and actions of individual human actors. But can coercive market intervention ever satisfy the needs and wants of consumers more than a free market of individual human actors?
- “[The] view [that free-market action must be brought back into optimality by corrective State action] completely misconceives the way in which economic science asserts that free-market action is ever optimal. It is optimal, not from the standpoint of the personal ethical view of an economist, but from the standpoint of the free, voluntary actions of all participants and in satisfying the freely expressed needs of the consumers. Government interference, therefore, will necessarily and always move away from such an optimum.”
Announcing the launch of a new free market study group in Atlanta called "The Rothbard Circle." The plan is to get together once a month and discuss the ideas of liberty, voluntary exchange, politics, and economics among friends of Liberty. The first meeting will be Monday, July 12th. In this first meeting, we will begin with an introduction and then move onto our main topic for the evening which is the electoral process. We will discuss the appropriateness of voting, "third" parties, and other matters pertaining to this topic. It is completely free to join and we welcome your participation. Please send me a message if you are interested in joining the discussion. Also you can check out the The Rothbard Circle group on Facebook for more information. "It is clearly absurd to limit the term 'education' to a person's formal schooling." - Murray N. Rothbard (Education: Free & Compulsory)
We are only concerned about economics because we live in a world of scarce resources with alternative competing uses. If we had an infinite supple of resources to fulfill our every want and desire without constraint, the problem of deciding how to best allocate goods and services of value would simply not exist. However, our resources (including our time and our physical bodies) are scarce, and they do have alternative competing uses.
As Hans-Hermann Hoppe details in the Economics and Ethics of Private Property, the very fact that we are able to argue at all “...implies there is a conflict over the use of some scarce resources, otherwise there would be no need for discussion. This is only possible because of objective boarders of property - borders which anyone can recognize as such on his own without having to agree first with anyone else with respect to his system of values and evaluations.” Hoppe goes on to explain:“The fact of being alive presupposes the right to property. No one who is alive could argue otherwise.”
While, the question of who should have the right to property (nature of property rights) is a question for Political Philosophy, there are significant economic implications as well.
Ludwig von Mises’s calculation argument states that economic calculation (the cost-benefit analysis of anticipated resource applications in terms of a common denominator) is literally impossible without private property. Because no private property necessarily implies no market prices for land, labor, and resources; no market prices means expected revenue and cost cannot be expressed in common terms. The absence of a common expression for calculating exchange relationships means accounting operations and economic calculations are impossible! No private property, no economy. It's that simple.Mises elaborates:
Socialism is unworkable in theory and in practice for the unavoidable reason that economic calculation is not possible in the absence of private property. Private property is the first theory of sound economics. It is no coincidence that the strongest economies in the world are those that have historically protected individual's rights to private property. Most people in America are quick to agree that respect for private property is essential for a free and prosperous society. It is easy to see the political and economic devastation in nations where the right to justly acquired property is ignored. However, few people (even those that claim to champion property rights), consistently defend this essential concept. Most people concede that there are just some cases where private property doesn't work; typically citing arguments about the impossibility of the market's ability to produce “public goods” (like a road or lighthouse) or regulate externalities like air pollution. Others claim that private property should be respected...up until the point where the needs of the “common good” supersede individual rights. At this point, property seizure at the point of a gun (taxes) become justified. The arguments about the market's inability to provide so-called “public goods” and arguments justifying criminal theft in the name of the “common good” are logically flawed and are readily refuted. If you would like to learn more about a theory of just property (including a libertarian solution to the problem of automobile pollution), I highly recommend Murray Rothbard's article Law, Property Rights, and Air Pollution Originally published in the Cato Journal 2, No. 1 (Spring 1982): pp. 55-99.
- “Without economic calculation there can be no economy. Hence, in a socialist state wherein the pursuit of economic calculation is impossible, there can be--in our sense of the term--no economy whatsoever. In trivial and secondary matters rational conduct might still be possible, but in general it would be impossible to speak of rational production any more.”
Suggested Books for Additional Reading on the Topic of Property:Economic Calculation In The Socialist Commonwealth by Ludwig von Mises
The Economics and Ethics of Private Property by Hans-Hermann Hoppe
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So far, in the A-equals-A.com Fundamental Economic Concepts series, we've discussed
1 - Scarcity and Subjective Value
2 - Production, Time Preference, and Opportunity Cost
3- Incentives and Margin
Today's topic concerns production and consumption. We will discuss the importance of capital goods and savings - two concepts that are essential to understanding how an economy works.
The goal of all production is to make or obtain goods of value for consumption. Goods produced by an individual directly for consumption are referred to as consumer goods. Goods that are used as part of an individual's plan to produce a consumer good are referred to as capital (or production) goods. Like consumption goods, capital goods do not appear in nature in effortless abundance. They must be produced. Since every action incurs the cost of foregone alternatives, effort spent in producing consumer goods cannot be spent producing capital goods. Effort spent producing capital goods cannot be spent producing consumer goods. Therefore, for an individual to continue to enjoy a desired level of present consumption without disruption, the individual must amass a certain value of real savings in order to invest in the formation of capital goods. Savings is the exchange of present consumption for consumption in the future. Capital investment requires real savings; either a postponement of current consumption or a consumption saved goods.
The classic deserted island scenario depicts a survivor initially surviving on berries (consumer goods). Most all of the survivor's waking time is spent picking and eating berries. Eventually, the survivor decides to increase output or decrease berry consumption in hopes of generating enough real savings to last a few days. Once the savings level is sufficient to satisfy his need for berries, the survivor takes time off of picking berries and uses his mind and his effort to build a harvesting tool (capital good). After the tool is built, the survivor now only needs half a day to satisfy his consumption needs and uses the other half of the day to build hunting tools. The process continues. His standard of living is increased by the creation of capital goods, made possible by real savings.
This example shows that there is a difference between producing for consumption and producing for capital formation. Real savings is a requirement for investment in capital production. All other things equal, it is not possible to increase consumption and increase investment in capital production with a finite pool of resources. The magicians in Washington disagree. This article by Bob Murphy gives an excellent explanation of production, consumption, capital goods, and savings.
If you haven't read this article about the "Sushi Economy", I strongly suggest checking out this article by Bob Murphy.A $ A
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Each year on July 4th, we commemorate one of mankind's greatest achievements – The Declaration of Independence
. The unanimous Declaration of Independence by the Congress of the thirteen united States of America
was an act of consummate intellectual courage that delivered free States from the tyrannical shackles of an illegitimate and oppressive Government. The signers of the Declaration staked their entire fortunes and their lives on a single principled message. Much more than simply declaring independence from Great Britain, these men declared independence from the tribal philosophy of the Old World and gave birth to a new nation founded on the principle of individual human rights – the inalienable rights of Life, Liberty and the pursuit of Happiness
The history of mankind has endured thousands of years of oppression, exploitation, and stagnation. People existed as subjects to slavery and serfdom. The sacrifice of the individual to the King, Church, or State was morally praised as dutiful, noble, and virtuous. Intellectual and economic progress was slow to nonexistent. Mankind shuffled along in the darkness of irrational default – an automatic, animal-like consciousness – moored by primitive philosophy.
To date, the American Founding Fathers have come the closest to freeing the world from this ancient, barbaric philosophy by declaring that all people live by right - certain inalienable rights that no man or Government can deny. In less than one hundred years after declaring our independence from the crude philosophy of dutiful sacrifice, we witnessed non-violent transfers of power, eliminated slavery, and enjoyed the greatest proportional increase in standard of living of any society in the history of the world.
To paraphrase one of the great philosophers of the 20th century - the principle of individual human rights is still so new to the history of mankind that few people have yet to fully grasp it. 234 years ago we declared our independence, but the primitive philosophy of collectivism and sacrifice is still rooted deep in our culture. If, and only if, we understand individual human rights, can we truly declare independence!
- “I can say — not as a patriotic bromide, but with full knowledge of the necessary metaphysical, epistemological, ethical, political, and aesthetic roots — that the United States of America is the greatest, the noblest and, in its original founding principles, the only moral country in the history of the world.” - Ayn Rand
I wish all of you a safe and happy Independence Day! I also hope that we all remember to take time in between the cookout and fireworks to remember the great men and women who have made the things we enjoy (and all too often take for granted) even possible. Share the message of liberty with your friends and loved ones. It serves us well to take some time to remember exactly what we are celebrating each summer.
***Here are a few key lessons we can learn from the Declaration of Independence: 1) All People Live by Right
“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.”
Whether or not you believe in God, the nature of the human being and the human condition identifies the unalienable right to life for all people (nobody else can live for you). All people have the right to liberty (nobody else can form your thoughts or control your actions but you). All people have the right to use their life and liberty to pursue their own goals of happiness (nobody else can pursue your goals for you).
A right is freedom to act, freedom from coercion. Notice that the rights listed by the Declaration's author, Thomas Jefferson, do not require action by anyone else. Rights are not a positive obligation or an infringement on the rights of another.
The opposite of living by right is living by permission. Is the purpose of your life to live by the permission of a society or Government?
Anyone who believes it is acceptable to use force
to make one person provide any good or service (be it luxury entitlements or minimum life necessities) to another person is operating by the same philosophical principle that condones slavery. The initiation of force and the principle of liberty are incompatible. Period. 2) Governments Don't Make the Rules, People Do: The only power to which Government is permitted comes from the consent of the governed. Government has no right to take any action unless explicitly granted to it by the people who employ its services. Government can only function and operate to the extent that people allow. The only function of Government is to secure the rights of its individual citizens. If Government fails in its only legitimate function, it is not only the right, but the duty of the people to “...dissolve the political bands which have connected them”:
The idea that individuals live by right and that Government operates by permission was so important to the Founding Fathers that it was later included in the Bill of Rights amendments to the United States Constitution:
- “That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it....it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.”
The Declaration of Independence
- 9th Amendment: The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.
- 10th Amendment: The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.
The following is an excerpt from the introduction of The unanimous Declaration of the thirteen united States of America, JULY 4, 1776:
“When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another and to assume among the powers of the earth, the separate and equal station to which the Laws of Nature and of Nature's God entitle them, a decent respect to the opinions of mankind requires that they should declare the causes which impel them to the separation. We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn that mankind are more disposed to suffer, while evils are sufferable than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. — Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny...”
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“So constantly have the ideas currency and government been associated—so universal has been the control exercised by lawgivers over monetary systems—and so completely have men come to regard this control as a matter of course, that scarcely any one seems to inquire what would result were it abolished. Perhaps in no case is the necessity of state-superintendence so generally assumed; and in no case will the denial of that necessity cause so much surprise. Yet must the denial be made.”
- Herbert Spencer, Social Statistics M
ost everyone associates the word “dollar” as referring to a Federal Reserve Note (i.e. the green piece of paper featuring the portrait of a past president). Let's briefly explore why this association of terms is not only incorrect - it is a dangerous mistake.
A pound refers to sixteen ounces of weight. A foot refers to twelve inches of length. These are standards of measure. Similarly, the word "dollar" refers to a specific coin of a specific mass; one containing 371.25 grains of pure silver. A dollar is not merely worth some ever changing quantity of silver or gold – a dollar is defined as
a specific amount of silver in the same way a foot is defined as twelve inches!
Today, the definition of “dollar” is frequently confused.This is largely based on the observable fact that one ounce of silver is exchanged on the market
for approximately eighteen Federal Reserve Notes. Mistakenly, we tend to think that one ounce of silver is worth about eighteen dollars. Dollars do not refer to the same thing as Federal Reserve Notes. To make this point clear, we must first understand the history of the dollar as a unit of monetary exchange in the US and how the inaccurate terms and definitions have been smuggled into our vocabulary.
Origin of the Dollar in the US D
uring the late 18th century in America, the word dollar
simply referred to the 371.25 grains of pure silver of the Spanish milled dollar coins
. Our founding fathers did not arbitrarily decide to fix the exchange rate of our first dollars to silver. Rather, “dollar” was the term for a universally understood standard of measure.
The Coinage Act of 1792
, establishing a Mint and regulating the coins of the United States, used this already universally accepted definition to officially designate a dollar (as referring to a measure of 371 4/16th grains of pure silver) as the monetary unit of the US:
- Section 9: “DOLLARS – each to be of the value of a Spanish milled dollar as the same is now current, and to contain three hundred and seventy one grains and four sixteenth parts of a grain of pure, or four hundred and sixteen grains of standard silver.”
Signed into law by President George Washington, the Coinage Act of 1792 established the dollar as the monetary unit of the United States of America. The Rise of the Gold Standard
old and silver came to be accepted as money throughout the world by a process of free exchange on the market. In fact, Carl Menger and Ludwig von Mises
have shown that not only does money originate in the market, it is impossible for it to have originated any other way. No government or king “created” money (but once money arises on the market, rulers have historically been quick to find means to expropriate it).
While the Coinage Act of 1792 defined one dollar as 371.25 grains of pure silver (.7734 troy ounce), the act also established a fixed exchange rate of fifteen units of silver for one unit of gold. The exchange ratio between gold and silver had historically tended to be around 15:1. However, as Larry Reed explains in an article about the events leading up to the Silver Panic in 1893
, the “....government decided it would "help out" the market by interfering to "simplify" matters. The result was another of the many well-intentioned blunders imposed on a populace by force of law."
Just like any other artificial price control, the pegging of gold to silver created a market imbalance that would prove to have significant economic consequences (1)
. Gresham’s Law
states that bad money tends to drive out good money when the government artificially fixes the exchange ratio between two monies ("bad money" referring to artificially overvalued money and "good money" referring to money which is artificially undervalued).
This is exactly what we observed with the artificial price fixing of gold and silver in the US. The market value of gold relative to dollars (dollars referring to a set quantity of silver) fluctuated even though the artificial exchange rate was fixed. Silver flowed into the mint and the quantity of gold in circulation decreased.
Instead of allowing gold values to be determined through a market of free exchange and repealing the artificial 15 to 1 ratio, Congress decided to remedy the imbalance by adjusting the fixed exchange ratio to 16 to 1. The Coinage Act of 1834
revised the ratio of gold to dollars, making the artificial ratio of dollars to gold an official $20.67/oz where it would remain for several decades. Only this time gold was overvalued and silver was undervalued. As Larry Reed noted
, “Gold flowed into the mint, silver disappeared, and the country found itself on a de facto gold standard.”
As we will see, this paved the way for the government to officially place the country on the gold standard at the end of the 19th century.
Although the artificial price controls instituted by the Coinage Acts of 1792 and 1834 created market imbalance between gold and dollars, the competition of foreign gold and silver monies in the US market proved to be an effective system for facilitating exchange and storing wealth. During this time it was quite common to find foreign coins of gold and silver being used as money in the US. Since the amount of precious metal contained in foreign coins was commonly known, monetary conversions were quite simple. Foreign coins from Europe circulated freely in America, and as Murray Rothbard notes, “...there is, indeed, no economic reason why they should not do so.” The competition of gold and silver monies facilitated the growth of an increasingly productive, industrialized economy. America enjoyed a period of unprecedented growth in production after the War of 1812. The purchasing power of the dollar doubled in 35 years (1815-1850). Free competition of stable money facilitates economic prosperity, but it also makes government manipulation of the money supply very difficult. “Perturbed at this slap to its sovereignty...”,
explains Murray Rothbard in The Mystery of Banking
, Congress passed the Coinage Act of 1857 outlawing the use of foreign coins in the US.
By outlawing the use of competing foreign monies in the market, Congress removed the first crucial obstacle that was preventing the State from taking monopolistic control of the nation's money supply. To eliminate the second obstacle, the domestic competition of bimetallism, Congress passed the Coinage Act of 1873
and later the Gold Standard Act of 1900
to demonetize silver and set gold as the official basis of US currency.
- Section 1 of the Gold Standard Act of 1900: “Be it enacted . ., That the dollar consisting of twenty-five and eight-tenths grains of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States...”
Conveniently, the Coinage Acts of 1857 and 1873 also corresponded with the panics of 1857 and 1873 (no good crisis should be wasted).Don't be surprised when the government uses the coming monetary crisis as an excuse to further centralize the control of money. They will.
From 'Good as Gold' to Increasingly Worthless IOUs “Whoever controls the volume of money in our country is absolute master of all industry and commerce... and when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation or depression originate.” - James A. Garfield
he year 1913 saw a tremendous leap toward our current system of government-granted special privilege
, creating giant political/corporate machines that benefit the few at the expense of the many.
The Federal Reserve Act of 1913
, also called the Glass-Owen Bill
, unconstitutionally delegated to the Federal Reserve, a private banking cartel, the power to “coin Money and regulate the Value thereof.” Despite what most Americans think, the Federal Reserve is NOT part of the US Government.
For the sake of brevity, below is a list of a few major turning points as the US economy went from using a sound money system to a fiat currency system backed by irredeemable IOUs:
- Prior to 1934, the Federal Reserve Notes carried the inscription "Redeemable in gold on demand at the United States Treasury, or in gold or lawful money at any Federal Reserve Bank.”
- In 1934 , citizens could no longer redeem dollars for gold. Furthermore, the dollar was redefined as 1/35 oz of gold redeemable only by foreign central banks.
- Until 1950, Federal Reserve Notes carried the obligation: "The United States of America will pay to the bearer on demand [some number of] dollars.”
- Starting in 1963, the words "will pay to the bearer on demand" no longer appeared on Federal Reserve Notes; each merely stated its denomination. Dollar bills were no longer redeemable for dollars.
- The Smithsonian Agreement (1971) repealed the Gold Exchange Standard and fixed foreign currency exchange rates without any gold backing.
- After 1973, the gold standard is completely abandoned in favor of inflationary fiat currency and floating exchange rates.
Under the Federal Reserve System of fiat currency, the absolute quantity of wealth expropriation and redistribution
that has occurred (wealth taken from the citizens of our nation by the government and the politically connected) is unmatched in the history of the world.
“Give me control of a nation's money and I care not who makes its laws."
- Mayer Amschel Bauer Rothschild (2) Additional Food for Thought:
In the Economics and Ethics of Private Property
, Hans-Hermann Hoppe outlines the four steps governments have historically used to monopolize the money supply in order to expropriate wealth from their citizens:
- Minting of money (silver and gold) must be monopolized by the state (√ - Coinage Acts)
- The use of money substitutes (other than silver and gold) must be systematically encouraged and backed up by the enactment of legal tender laws (√ - Coinage Acts)
- Gold must be nationalized, and the State must require all banks deposit their gold at the central bank and conduct business exclusively with money substitutes instead of gold (√ - Federal Reserve Act and Executive Order in 1934).
- The State must cut the last tie to money (gold) by reneging on its contractual obligations and declaring its notes irredeemable (√ - 1963, 1971, and 1973).
The Root of Money is Good, Coercive Control of the Money Supply is the Root of Evil"There are a thousand hacking at the branches of evil to one who is striking the root." - Henry David Thoreau J
ohn Maynard Keynes, an open supporter of Socialism, astutely noted in his book titled the The Economic Consequences of the Peace “...that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
Under the disguise of an institution created to “...furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes”
, the Federal Reserve has destroyed over 95%
of the purchasing power of the dollar bill since its inception in 1913. It has created cyclical boom and bust business cycles by artificially expanding the money supply (like the current financial crisis).
The dollar is the subject of the greatest counterfeiting scheme in the history of the world. Naturally the process of counterfeiting creates victims. As Hans-Hermann Hoppe points out in the Economics and Ethics of Private Property
, to be successful on such a scale, the counterfeiting power must be accompanied by social redistributive measures that generate the support necessary to overcome any resistance. The Federal Reserve is the engine that allows the government to play Santa Claus to certain privileged groups at the expense of everyone else.
The physical counterfeiting of dollars has cost the people of the United States 95% of their wealth in less than one hundred years (not to mention the unseen advances that could have been made).
What is all too often forgotten or over looked is that wealth has to be created and produced by someone before it can be looted and plundered by force. It is for this reason that “....the words 'to make money' hold the essence of human morality.”
Our current system of government-granted special privilege to exploit promotes a counterfeit morality that explicitly confuses the unearned with the earned. It replaces the moral virtues of integrity, honesty, productiveness, and justice with cries of entitlement to an ends without relation to a means; a misguided and false battle pitting poor against rich. The correct moral battle is not the seemingly virtuous defense of poor versus rich...it is, as it has been throughout human history, a battle of the exploited versus the exploiter.
- “He who controls the money supply of a nation controls the nation” - James A. Garfield
It is only through an understanding of the history and meaning the dollar can we begin to fight the State sanctioned exploiters and counterfeiters. The coercive monopolization of the money supply, accentuated by the Federal Reserve System, is the root of the exploitative power of the ruling class. It is for this reason that understanding the story of the dollar is essential.
An economy that does not have free choice of money is neither a free market nor a free society. For the same reasons the State should not control the type of shoes you buy, where you get your hair cut, or what kind of food you eat – the State, in a society that consistently respects human rights, should not control the money used in transactions of voluntary exchange. Any and all monetary intervention by the State is incompatible with human rights and should be eliminated.
- “It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” - Henry Ford
Perhaps it is time for that revolution. Perhaps it is time for the American people to learn the history of the dollar and understand the banking and monetary system. Perhaps it is time we learn that the Federal Reserve System and the government's redistributive social programs are enriching the richest of the rich while destroying the middle class and locking the poor into a state of dependent poverty. In the case of the dollar, ignorance is not not bliss. Ignorance is the essence of our self-destruction.
A $ A Additional Suggested Reading:What Has Government Done to Our Money – Murray Rothbard
In his essay A Constitutional Dollar
, Michael Rozeff explains how the term dollar bills “...obscures the actual and tangible meaning of "dollar" as a specific weight of silver.” Rozeff goes on to explain that this is more than merely a theft of terms:
“The dollar sign, "$," ...means 1 silver dollar of the official weight of 0.7734375 troy ounces of pure silver...the government has illegally and unconstitutionally removed silver as currency and replaced it with the Federal Reserve notes that we know as dollar bills.” Notes
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- “Unfortunately, governments invariably tried to force a fixed exchange rate between the two metals, a price control that always leads to unwelcome and even disastrous results”– Murray Rothbard, The Mystery of Banking, p. 9
- In 2005, Rothschild was ranked 7th on the Forbes magazine list of "The Twenty Most Influential Businessmen Of All Time"