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The story you are about to read is true. The names have not been changed to protect the innocent. But first, a little background material is called for.

The Federal Reserve System was granted a monopoly over monetary policy on December 23, 1913, when the Senate voted to pass the House’s bill, which had been passed on December 22. President Wilson signed the bill into law that evening.

Ever since that fateful day, economists have done their best to get their opinions on monetary policy accepted by the FED. The only exception to this generalization is the Austrian School of economics. Their members, who are few in number and are generally without influence, do not believe that a government-licensed monopoly is capable of setting monetary policy without distorting the free flow of capital, especially the most crucial form of capital: information. So, they do not attempt to influence staff economists at the FED. They know it is a waste of time.


There are several views of how monetary policy should be conducted. The most famous view is that of Milton Friedman. He argued for decades that the gold standard is a waste of gold, since governments must store gold in vaults. This valuable commodity could be used for productive purposes.

He wanted every nation’s central bank to produce money at all times at a constant rate. He never decided on a rate. He suggested a range: 3% to 5% per annum. This view was the conservative opinion when I was in graduate school.

Keynesian economists argue for monetary policy to accompany fiscal policy. It must be subservient to fiscal policy. The central bank should partially finance government deficits in times of economic recession, when governments are supposed to run massive deficits. The central bank should buy government debt with newly created money. Its staff economists should decide which rate of inflation is the best at any given time.

This is also pretty much the view of supply-side economists, who argue that government deficits don’t matter. They recommend reduced marginal income tax rates and corporate tax rates, but they almost never argue in public during a recession that the government should also cut spending to match reduced taxation. They also do not argue that the central bank is unwise to expand money in a recession. As long as marginal tax rates are cut, they don’t care much about monetary policy. A few of them call for a strange kind of gold standard, one which doesn’t issue money that allows everyone to demand payment in gold by the Federal government at a price fixed by law. Why, I don’t know. It is a pseudo-gold standard.

These groups agree on one thing: there should never be a central bank policy of monetary contraction. This means that the central bank should never sell government debt without purchasing an offsetting asset of some kind.

This is the monetary ratchet. The money supply never falls. Whenever it rises, due to central bank policy, this increase becomes permanent.

Austrian School economists are in fundamental opposition to all three majority schools of opinion. They believe that money should be private, that contracts promising to pay in a monetary unit of account should be enforced, that no bank should be given a monopoly by the government, and that the public should decide what constitutes money through their dealings, not through legislative fiat. The civil government should get out of money production altogether.

To illustrate the conflict between the Austrian School and the Chicago School, Mark Skousen designed a test. I was present when he conducted this test — or, as the case may be, sprang the trap. I reprint the following without alteration.

I sent this document to Skousen on the day I wrote it. He agreed with me at the time that this account is an accurate summary of what he did and why.


I am writing this on October 17, 1998

On the evening of October 15, I went out to dinner with Mark Skousen, Van Simmons, and Milton and Rose Friedman. It was at Mark’s invitation. We went to the Commander’s Palace in New Orleans. We were in town for the annual Blanchard Seminar.

Mark had arranged to have Van Simmons bring a U.S. gold coin, dated 1912, which was Milton Friedman’s year of birth. He is in the rare coin business. It had been hard to locate. The year is rare. He had it sent from Switzerland by Federal Express overnight that same day. The Swiss contact had only one such coin.

Before the evening had gone more than a few minutes, Friedman brought up the issue of our (the Austrians’) ideological commitment to the gold standard. The fact is, there is no ideological commitment to the gold standard among Austrian economists, since they don’t think the government should have any monetary standard except for tax payments. They do not think governments should be in the money-production business. Mises believed in free banking.

Rothbard believed in 100% reserve banking, as does Friedman’s economist brother-in-law, Aaron Director. As to which metal the free market adopts as its monetary standard, the Austrian doesn’t care, although he thinks gold is the most likely for international trade. Silver is second.

The important thing for the Austrian is that there be no legal tender laws and no price control schemes setting the exchange rate of one currency or metal in relation to another. There should be no legal compulsion over money, other than to enforce contracts. The Rothbardians do argue that the fractional reserve system is fraudulent and therefore should be prohibited. But their problem is: Prohibited by whom? They do not believe in the State.

Friedman had said at least twice that he did not understand why there is an ideological commitment to gold by us, meaning Mark and me. Perhaps 15 minutes later, Mark brought out an old $20 gold paper note, issued by the government (pre-1913). It was a written contact: to pay gold to the bearer. He asked Milton to pull out a $20 bill and read the contact. It makes no such promise.

Then Mark took Friedman’s bill and tore it up. Milton looked at the bill’s remains, lying on the table. He was silent at first. Mark then handed him the $20 gold piece. But Friedman pushed it away. “I don’t want it. I want the $20. I didn’t authorize you to tear it up.” This was of course true. But there had been compensation economically, at about 30 to one.

Mark was trying to make a point about broken contracts: the government’s abandonment of gold pre-1934 gold contracts. The point was lost on Friedman.

Friedman then said it was wrong to tear up a $20 bill, because doing so passed some appreciation to all other holders of paper money. In theory, this is correct. Empirically, it would be impossible to measure or prove.

After a few minutes, Friedman calmed down. Mark had to give him a replacement $20 bill to calm him down. Friedman did like the coin, with his birthdate on it. He decided to keep it.

What struck me after the dinner was over was Friedman’s ideological commitment to paper money. A $600 coin was nothing; that lost $20 bill was everything. The tearing up of that bill was almost like an act of sacrilege in his eyes. The coin did not compensate him. Only a replacement bill did. He has spent his career arguing for paper money and against a metallic standard. Before the coin incident, he had repeated several times his old argument that digging up metal is a waste of scarce resources. He has never understood that the costs of digging up metal — that portion of gold used for money rather then jewelry or industry — in the legal world of a gold standard is a very cheap way for society to restrict governments from inflating. If governments are in the money production business, then they should be limited by the costs of producing the money metals. These costs chain their lust for spending fiat money and avoiding direct taxation.

Men often do not see their own ideological commitments. They see only their opponents’ ideologies.

I shall not publish this report in Friedman’s lifetime. He has done yeoman service in battling price controls and taxation. No need to embarrass him. But in money matters, he was ideologically committed to the State as the final arbiter of money. He just wanted the bureaucrats to run the system by his recommended 3% to 5% increase in money per year. They refused.

— end of report —


The solution is freedom. I have outlined the solution in my 1987 book, Honest Money. You can download it here.

The free market can be trusted in monetary affairs. Anyone who defends the free market in most areas of the economy and then insists that the civil government can be trusted to conduct a fair and efficient monetary policy needs to explain his reasons. I have found that the economists who defend central banking do not explain why a cartel in banking is in the public interest but cartels in every other area of the economy are not in the public interest.

The most free market oriented of all first-year college economic textbooks is the one written by Gwartney and Stroup. This is the only one written by members of the “public choice” school of economics, which is famous for arguing that every government employee is governed by the same self-interest as anyone else, including capitalists. In the 4th edition (1987), we read:
Central banks are charged with the responsibility of carrying out monetary policy. The major purpose of the Federal Reserve System (and other central banks) is to regulate the money supply and provide a monetary climate that is in the interest of the entire economy (p. 281).
The authors then
devote ten pages of text to a description of the operations of the
FED, without one word of criticism, and openly denying the private
legal status of the system: “In reality, it would be more accurate
to think of the Fed and the executive branch as equal partners in
the determination of policies designed to promote full employment
and stable prices” (p. 283). Equal partners? I have a few questions.

What happened to Congress, which the Constitution assigns exclusive power over the purse?

What happened to the laws of economics?

What happened to self-interest?

What happened to the economic analysis of monopoly, which the authors apply to every other area of the economy?

The authors do
not even hint at the possibility that any of these issues is relevant.
They continue.
Public enterprises can thus be expected to use at least some of their monopoly power, not to benefit the wide cross-section of disorganized taxpayers and consumers, but as a cloak for inefficient operation and actions to advance the personal and political objectives of those who exercise control over the firm. Government ownership, like unregulated monopoly and government regulation, is a less ideal solution. It is not especially surprising that those who denounce monopoly in, for instance, the telephone industry seldom point to a government-operated monopoly — such as the Post Office — as an example of how an industry should be run (pp. 466—67).

The authors by this stage in their textbook had already pointed to just such a government monopoly (as they incorrectly and misleadingly defined it), the most powerful and profitable monopoly of all, the monopoly over money creation and monetary policy: central banking. They discussed the FED in Chapter 12, “Money and the Banking System” before they presented Chapter 19, “Monopoly and High Barriers to Entry.”

The authors expect the reader to fail to notice this theoretical discontinuity, as if there were some economic justification of the inapplicability of Chapter 19′s analysis to Chapter 12. This is a safe assumption. Most students do not notice. Neither does Congress.

If there is any area of the economy that cannot safely be trusted to the government or a government-licensed central bank it is monetary affairs. This is licensed counterfeiting. The authority to counterfeit money to increase government purchases — through the sale of government debt — will be misused.

The best book on this is by Jesus Huerta de Soto, Money, Bank Credit, and Economic Cycles (2006), published by the Mises Institute. You can download it for free here, but it’s wise to buy it in hardback.


The intellectual battle over monetary theory is ultimately a battle over the issue of sovereignty. Which agency possesses lawful sovereignty — a final say — over the operation of the monetary system?

The answer of the vast majority of economists is this: the state. They believe that sovereignty over money is an inherent aspect of civil government. But they never admit to their readers that sovereignty is the supreme issue, nor do they admit that they have taken a stand in favor of state sovereignty. They never discuss the reasons for their commitment to state sovereignty in monetary affairs.

They also do not use the argument for efficiency. Why not? Because in the rest of their writings, they have exposed the fallacy of the concept of government efficiency. It would be difficult for them to make the case for a cartel as the preferred engine of efficiency.

What remains? Ethics. They must show that, because of the issue of right and wrong, of good vs. evil, the state must have a monopoly over money, and not just a monopoly, but a transferable monopoly. They must show that the cartel of profit-seeking counterfeiters has a moral claim of this delegated sovereignty over money. They never do this. They never raise the issue of ethics in money.

There is one exception: Murray Rothbard. He placed ethics front and center in his discussion of monetary policy. His textbook on money and banking, The Mystery of Banking, is the only textbook by an economist that does this. This is one reason why no college or university has assigned it in over two decades. You can download it here.

Rothbard showed why the cartel over money is immoral. He also showed why it is inefficient, if by “efficient” we mean “not inflating, not creating recessions, and not redistributing wealth from the those who trust the government to skeptics who know the game is rigged against the common man.”


We do not have a free market in money. We have a self-interested cartel. This cartel will do whatever it can to protect its lucrative monopoly over money.

You would be wise to assume, as in all other areas of the economy, that the following offer is suspect:
“I’m from the government, and I’m here to help you.”

Gary North [send him mail] is the author of Mises on Money. Visit He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

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