It is widely believed that the coining of money is a
proper function of government. In reality, however, state control of the
money supply leads to a destructive inflationary spiral. All those who
hold cash, especially those on fixed incomes, ultimately bear the
economic burden of state-sponsored inflation. Inflation reduces real
wages, diminishes living standards, and destroys investment
opportunities.
The state can offer no solution to these problems. Only
by allowing the market to operate unfettered with regard to money can
there be an assurance of a stable, non-inflationary currency. Only
freely acting individuals can provide the consumer with an alternative
to the inflation and uncertainty of the present government monopoly over
money.
Inflation is caused by a government-sponsored expansion
of the money supply. Only fiat currencies - backed by nothing more than
a government decree, and not by a fixed resource such as gold-can be
rapidly expanded, and thus produce high rates of inflation. Due to the
limited availability of gold, currencies fully backed by gold are
susceptible to only a negligible rate of inflation. As long as the state
possesses control over the money supply, however, the potential for
rampant inflation remains.
Even a "gold standard" is no guarantee against
government-sponsored inflation. Adam Smith recognized this as early as
1776, and wrote in the Wealth of Nations. " . . the avarice and
injustice of princes and sovereign states, abusing the confidence of
their subjects, have, by degrees, diminished the real quantity of metal,
which had been originally contained in their coins."1
Economic distress, coupled with political opportunism, will lure the
state and its agents to abandon the gold standard and institute fiat
paper in its place.
Governments have shown time and again that they are
unable to maintain the political discipline needed to avoid fiat money
inflation. Even the institution of legal barriers to monetary growth
have had little effect. During the French Revolution of the 1790s, legal
limits on the amount of currency in circulation were repeatedly made by
the French Assembly with little success.2 The limits on
inflation were consistently broken, which led to new legislated limits,
which in time were also ignored. Short term political benefits such as
re-election or national prestige usually take priority over monetary
sanity.
Indeed, even the economic knowledge and experience
available in our time have not prevented modern politicians from
following the siren call of fiat paper. While some measure of monetary
stability was attained prior to World War II, when most nations
maintained a token adherence to the gold standard, the gold standard was
abandoned by almost all countries after the war. The resulting age of
floating exchange rates, rampant inflation, and general economic
uncertainty offers evidence that politicians are unable, or unwilling,
to follow a path of long-term monetary discipline in the face of
short-term political gains.
Inflation can be a seductive tool for politicians
facing a political or economic crisis. For the politician facing a large
public debt, for example, state control of fiat paper makes inflation
seem like a practical alternative to reducing spending. Inflating the
money supply increases the nominal value of an individual's wages and
assets, while reducing their purchasing power. If progressive tax rates
are left unadjusted for inflation, the increased face value of the wage
earner's income and assets will place him in a higher tax bracket, where
the state receives a greater portion of his income and assets. Thus,
while the individual is actually earning less, the state demands a
higher share, and uses the additional revenue to pay its debts.
Inflation, in this case, amounts to a subtle form of taxation.
Inflation has other political uses. The politician
facing re-election, or otherwise seeking popular support, often uses
inflation to bring temporary economic prosperity. Rapidly inflating the
money supply may induce increased economic activity, which results in
greater employment and more consumer goods. It should be emphasized,
however, that these politically desirable effects of inflation are
temporary, often lasting just long enough to overcome the current
political crisis.
Effect on Savings
Inflation is a subtle form of thievery. Even while
assets sit seemingly safe in a bank vault, their purchasing power is
steadily eroded, no less so than if one's pocket had been picked. The
difference in the two crimes, however, is that the state is committing
the crime in the former case, and a single criminal commits the crime in
the latter.
Inflation makes long-term saving nearly impossible. An
individual may watch his life's savings be inflated away through no
fault of his own. The solution soon becomes apparent: spend one's money
on real estate, gold, and other hard assets because they possess lasting
value in comparison with a depreciating currency. In fact, inflation in
our time can be traced in the price of gold. Since the complete
abandonment of the gold standard in 1971, the price of gold has risen
from $35 an ounce to over $320 an ounce - an 800 per cent
increase.3 The purchase of gold and other assets is often
made by going into debt, which is desirable in an inflationary period
because payment will be made with currency worth less then it was when
the debt was assumed. Inflation favors debtors at the expense of
creditors.
A society preoccupied with obtaining as much debt as
possible, and purchasing goods and services for immediate gratification,
leaves little capital for business investment. Eventually, business
becomes unable to find the necessary capital for further expansion or
increased production. The production of consumer goods falls, and an
afterburner is ignited on already soaring prices. As prices rise, people
save even less and spend even more, which only accelerates the spiral.
For example, during the post-World War I German inflation, workers
eventually demanded that their wages be paid in cash so they could
immediately purchase any available goods.4
The State may try to stop the inflationary spiral by
introducing more currency into the economy or passing legislation
designed to control prices. This also fails. The infusion of more
currency only accelerates the inflation while price controls drive goods
off the market.
The inflationary spiral during the French Revolution
provides a striking example. On September 29, 1793, the French Assembly
introduced the Law of the Maximum, which was designed to limit rising
prices.5 It failed miserably, and businesses closed their
doors in droves. The French Assembly chose to ignore the laws of
economics, and legislated more restrictions on the market. When these
also failed, the Assembly imposed the death penalty for committing
economic crimes, such as raising prices or asking what currency one was
to receive. The economic chaos in France shows the final fate of the
individual in a state-sponsored inflationary spiral.
Prevention of inflation and the economic trauma it
brings can be accomplished only by removing the money supply from state
control -abolishing the state monopoly on the coining of money. As
Ludwig von Mises made clear, money is a commodity, the value of which
lies in its utility as a medium of exchange.6 There is no
reason to believe that the market would handle the production of money
in a fundamentally different way than it handles the production of any
other commodity-the coinage of money simply would be another business.
As with any other business, the private coiners' goal will be to best
satisfy the consumers' desires in order to achieve the maximum profit.
Private Coinage
The private coiner will provide the type of money in
greatest demand. Since most individuals desire a stable currency with
lasting value, this is what the coiner will provide; there will be no
demand for inflationary fiat money. While a stable currency can be
backed by almost any resource, history has shown gold to be the metal of
choice. Coiners will provide coins stamped with a guarantee of their
weight and fineness.
While the possibility of fraud in the coin industry
will always exist, it will be held in check by the forces of
competition.7 We find examples of this when we study the
history of private mints. Before private coinage was completely
prohibited by the United States government in 1864, there were competing
private mints in Georgia, North Carolina, and the gold-producing Western
territories. These private mints provided honest and reliable service.
The chronicler of one such mint operating in the early 1860s, Clark,
Gruber and Company in Denver, Colorado, wrote that "Their business
transactions were honest and above any reproach; they always dealt
fairly with their customers, giving them full value for all their gold."
8
It is, however, very inconvenient to carry gold coins
when one wants to make a purchase. Undoubtedly, the market would also
provide a solution to this problem. A warehouse system might develop
where one could store his gold and then be issued a receipt.9
Instead of carrying gold coins, one could simply carry the warehouse
receipts and make purchases with them. These receipts would be the
equivalent of paper money; they would represent a certain amount of gold
held in reserve.
Indeed, some consumers might even find this method of
purchasing items too cumbersome. The use of debit cards would allow one
to transfer gold from one account to another without ever seeing the
gold or warehouse receipts. Computer and communications technology
offers almost unlimited possibilities for money services. A merchant
could check the quality of a currency before accepting it by using a
computer network much like those used today to clear checks and credit
cards. Warehouse receipts could be electronically transferred across the
globe by computer.
A multitude of consumer choices is the beauty of the
free market. Where people are free to choose, they select a
non-inflationary currency. Private enterprise must be free to coin money
if inflation and its accompanying ills are to be stopped.
At the time of the original publication, Jay Habegger
was a sophomore at the University of Colorado at Boulder. He was an
intern at FEE this past summer, preparing research materials for the
1986-87 high school debate topic.
This essay was a runner-up in
The Foundation for Economic Education's 1985-1986 Freedom Essay
Contest.
1. Adam Smith, An Inquiry into the Nature and Causes of
the Wealth of Nations (The University of Chicago Press, 1976).
2. Andrew Dickson White, Fiat Money Inflation in France
(Foundation for Economic Education, 1959).
3. Susan Lee, "Gold: the Ultimate Burglar Alarm,"
Forbes, September 23, 1985.
4. Ringer, Fritz K., "The German Inflation of 1923"
(Oxford University Press, 1969).
5. White, op. cit.
6. Mises, Ludwig von, The Theory of Money and Credit
(Foundation for Economic Education, 197 1).
7. Murray N. Rothbard, What Has Government Done to Our
Money? (Libertarian Publishers).
8. Nolie Mumey, Clark, Gruber and Company (1860-1865):
A Pioneer Denver Mint (Artcraft Press, 1950).
9. Rothbard, op. cit.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
September 1986, Vol. 36, No. 9.
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