by Paul Carter CMI Gold and Silver
In the United States we currently have a stated policy by the Federal Reserve to create higher levels of inflation while artificially lowering interest rates. This is a policy devastating to savers and those attempting to live off of the proceeds of their capital. How did we arrive at the point where a government created agency can arbitrarily opt to destroy the value of people’s savings?
Murray Rothbard’s What Has Government Done to Our Money? lays out the step by step process by which the commodity based monies of the free market are slowly and deliberately usurped by governments and their central banks. The end result of this control is the ability of government to take purchasing power from the savings of its citizens through inflation.
Understanding money and its creation are essential to understanding how inflation originates. Rothbard assumes no prior knowledge of the subject and begins with first principles to derive what money is and how it is used in a free market. He then covers the manipulations used by government to wrestle control of money away from the free market. Finally he finishes with a two hundred year history of money and currencies in the Western world. It is through this history he demonstrates how government abuse has resulted in a series of breakdowns of the dollar with respect to gold that have inevitably led to our current global monetary crisis.
Throughout history, free markets have chosen commodities as money. Of those commodities, gold and silver have most often been used as a result of their superior properties as a medium of exchange. A critical property of real money is that is it a commodity whose value is proportional to its weight. The shape is irrelevant, although some forms carry a higher premium proportional to the cost of their production. In the case of gold, privately minted coins, bars, nuggets and dust all exist side by side as money in a free market.
The first step of government control of money is to monopolize the minting process. It is declared that only coins produced by the government may serve as legal tender. Historically governments have used this control to continually debase the coin through melting and reissuing with smaller and smaller metal contents. In several examples from history, coins literally disappeared over the years as eventually too little metal remained to even produce a usable coin.
In more modern times the key to government control of money has been to create money substitutes in the form of unbacked paper currencies. Note again that real money is a commodity whose value is proportional to its weight. Paper currency, or its equivalent digital credits, have no such property. These are artificial constructs that once fully implemented and separated from any original underlying commodity, may be manipulated at will – and without limit.