is my great pleasure to see this little essay in print. Written
and presented more than five years ago, it was welcomed at the time
by scholars with a background in Austrian economics. However, it
was not understood and was rejected by those who did not have this
background. In order to reach a broader audience, a short essay
would simply not do. I therefore decided not to publish Deflation
and Liberty and started to work on The
Ethics of Money Production, a book-length presentation of
the argument, which has just become available from the Mises Institute.
In the present crisis, the citizens of the United States have to
make an important choice. They can support a policy designed to
perpetuate our current fiat-money system and the sorry state of
banking and of financial markets that it logically entails. Or
they can support a policy designed to reintroduce a free market
in money and finance. This latter policy requires the government
to keep its hands off. It should not produce money, nor should it
appoint a special agency to produce money. It should not force the
citizens to use fiat money by imposing legal-tender laws. It should
not regulate banking and should not regulate the financial markets.
It should not try to fix the interest rate, the prices of financial
titles, or commodity prices.
Clearly, these measures are radical by present-day standards, and
they are not likely to find sufficient support. But they lack support
out of ignorance and fear.
We are told by virtually all the experts on money and finance –
the central bankers and most university professors – that the
crisis hits us despite the best efforts of the Fed; that money,
banking, and financial markets are not meant to be free, because
they end up in disarray despite the massive presence of the government
as a financial agent, as a regulator, and as money producer; that
our monetary system provides us with great benefits that we would
be foolish not to preserve. Those same experts therefore urge us
to give the government an even greater presence in the financial
markets, to increase its regulatory powers, and to encourage
even more money production to be used for bailouts.
However, all of these contentions are wrong, as economists have
demonstrated again and again since the times of Adam Smith and David
Ricardo. A paper-money system is not beneficial from an overall
point of view. It does not create real resources on which our welfare
depends. It merely distributes the existing resources in a different
manner; some people gain, others lose. It is a system that makes
banks and financial markets vulnerable, because it induces them
to economize on the essential safety valves of business: cash and
equity. Why hold any substantial cash balances if the central bank
stands ready to lend you any amount that might be needed, at a moment’s
notice? Why use your own money if you can finance your investments
with cheap credit from the printing press?