When monetary matters are discussed, it is important to
specify that money originated and developed spontaneously in the market.
Money came into use because people accepted the advantages of indirect
exchange when compared with direct exchange or barter. One of the main
advantages obtained from the use of a money commodity in relation to
direct exchange is that it allows economic calculation. Only prices
expressed in a common means of exchange makes accounting operations and
project evaluations possible.
The main function of the price system consists in
guiding the productive structure. This market system requires the
enforcement of private property, since price becomes possible as an
expression of those interactions of individual valuations through the
use and disposal of what is owned. Individuals participating in the
market modify the relative price structure according to the changes that
take place in their individual valuations. At the same time, these
modifications in relative prices guide the always limited productive
factors toward those areas considered as more urgent by consumers.
However, when government money is involved, i.e., when
government decides the quantity of money, relative prices are influenced
by political decisions. Relative prices will become distorted or
misrepresented. Within this context, inflation can be seen as an
increase in the amount of currency due to external or political causes,
and deflation as the monetary contraction due to external or political
causes. The economy will not be responding to events that originate and
develop within the market but instead to political decisions-a
phenomenon that comes from outside the market.
The problem lies in the fact that one will never know
what the market wants if it is not allowed to operate.
Essentially three courses of action can be established
in the monetary field: to have a monetary authority, to establish a
monetary rule, or to adopt a market money system. Having a monetary
authority implies that it will be a political decision whether the money
stock expands, contracts or is left unchanged. Regardless of the
decision taken, relative prices will be altered as a consequence of that
decision. The establishment of a monetary rule will also affect relative
prices as a result of its application. It is true that this last
possibility will avoid erratic behavior in the quantity of money but the
essence of the monetary problem still remains.
It is only possible to remove the problem of inflation
and deflation when the political decision of not adopting more political
decisions in the monetary field is taken. In other words, the market
money proposal implies that money must be considered just like the rest
of the goods and services traded in the market.
This approach goes to the root of the problem, and thus
eliminates the causes of monetary corruption. This is the idea, proposed
by Hayek, of eliminating legal tender (that is, government's monopoly on
money). Other institutions can then mint, print, and convert the
currency or currencies accepted by the market. Another stipulation
should be the elimination of all laws regarding minimum banking
reserves. We should also remove all restrictions on the ways in which
each financial institution handles its business. Not only must the
government monopoly on money be eliminated, but government must
completely withdraw from monetary management. To this end, the central
bank and the printing institution must be sold, together with the
government money "brand."
Hayek's concept of market money obviously includes its
denationalization, separating it completely from the idea of
sovereignty. This means adopting (or rejecting) as money the good or
goods the market judges adequate. This is similar to the way in which
potatoes are sold in the international market, with no reference made to
"national potatoes." In this way, market money is separated from the
idea of nationality.
Of course, the idea of a free society does not just
mean a monetary reform. Its main goal is to limit government activities
to specific functions. Government spending must be reduced and, as a
consequence of that, taxes will also be reduced.
If public expenditure is not reduced, what is now an
implicit tax in the form of inflation will turn into taxes proper. The
state's share in the national income will be unchanged, but prices will
now reflect the real situation. A much more economic use of the
available resources will then result.
Of course, it is possible to conceive the adoption of
government money related to the market through a commodity whose volume
depends on market conditions, as in the case of the classical gold
standard prior to World War 1. If, furthermore, government money is not
of legal tender, possibilities appear for alternative currencies
selected by the market. However, in order to make money compatible with
the basic principles of a free society, it is necessary not only to
eliminate legal tender (i.e., the government's monopoly on money), but
to remove the government from the money business.
In relation to currency matters, we will have a truly
free society only when we understand that our personal ideas about what
money should be can be offered to the market and compete with other
ideas. But we cannot impose them on society any more than we impose our
personal feelings with respect to other goods and services in a free
society. The government's function is to resort to defensive force to
protect individual rights and not to get involved in banking, financial,
monetary, industrial or commercial activities in general.
At the time of the original publication, Dr, Benegas
Lynch, Jr., was Professor of Economics at the University of Buenos
Aires, and executive vice president of the Argentine Graduate School
of Economics and Business Administration. He is author of Fundamentos
de Analisis Economics, 1984.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
January 1986, Vol.36. No. 1.
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