von Mises made several important contributions to the theory
of money: the regression theorem, which explains why money originally
developed from non-monetary commodities; the refutation of any
concept of neutral money that somehow does not redistribute income
when the money supply changes; the idea of every existing money
supply as maximizing benefits to participants in an indirect-exchange
economy; changes in the money supply as conferring no identifiable
increase in social value; and the monetary theory of the business
cycle. In my opinion, these were peripheral to his major contribution
to monetary theory. His most important and unique contribution
was a single idea, which is denied by all other schools of economic
State’s coercive interference in either money or banking, including
its licensing of a monopolistic central bank, reduces all men’s
freedom and most men’s wealth.
a theory of money and credit that is “market endogenous,” i.e.,
a theory of money that affirms the free market’s ability, through
men’s voluntary transactions, to establish market-clearing prices,
day after day, year after year, apart from any government agency’s
decree. All other schools of monetary thought deny the ability
of an autonomous, self-regulating free market to maximize efficiency,
freedom, and productivity. Every other school of opinion calls
for State intervention into the money supply: always increasing
it, never decreasing it. All other schools of thought favor the
creation of a central bank, legally independent of the government,
yet the offspring of the government, possessing a lawful monopoly
over the control of the money supply. In short, all other schools
of economics are statist in their theory of money and credit.
establishing his theory of money on the conceptual foundation
of the free market, alone offered a completely free market theory
of money and credit. He called on civil governments to enforce
banking contracts that establish both money certificates and credit
money, just as governments should enforce all other private contracts.
Mises offered a theory of money and credit in which civil governments
have no monetary policies at all.
FREEZE ON ADDITIONAL GOVERNMENT MONEY
A free market
money system does not exist today. Every national government,
through its licensed monopoly, the fractionally reserved central
bank, and its licensed oligopolies, fractionally reserved commercial
banks, is deeply involved in setting monetary policy. For national
governments in general and the U.S. government in particular,
Mises had a single policy recommendation: create no new money.
He made this point in his 1951 essay, “The Return to Sound Money.”
first step must be a radical and unconditional abandonment of
any further inflation. The total amount of dollar bills, whatever
their name or legal characteristic may be, must not be increased
by further issuance. No bank must be permitted to expand the total
amount of its deposits subject to check or the balance of such
deposits of any individual customer, be he a private citizen or
the U.S. Treasury, otherwise than by receiving cash deposits in
legal-tender banknotes from the public or by receiving a check
payable by another domestic bank subject to the same limitations.
This means a rigid 100 percent reserve for all future deposits;
that is, all deposits not already in existence on the first day
of the reform (p. 448).
money is concerned, Mises had only one suggestion: do not add
to the money supply. Enough is enough.
opposed deflation as a policy, just as he opposed inflation. But,
most important and most adamantly, he opposed any further intervention
by the State or its central bank to increase the money supply.
He wanted government out of the money-creation business. Every
anti-inflation policy must begin with the policy-makers’ refusal
to add to the central bank’s monetary base.
has a corollary, which Mises stated explicitly: the State and
the central bank must not interfere with bank runs. There should
be no State intervention of any kind in saving over-extended banks
that are being bankrupted by their depositors. It is the State’s
attempt to undermine contracts that is the root cause of credit-money
inflation. No bank should be too small to fail or too big to fail.
The threat of bankruptcy must be on the mind of every banker at
all times, in order to offset his temptation to issue fiduciary
leads to a policy conclusion: The deflation of the money supply
is valid if this deflationary process is the result of depositors’
withdrawal of their funds and the conversion of these funds into
currency, which is not fractionally reserved. To the degree
that the existing money supply is the result of fractional reserve
banking, the State and its central bank should accept any deflation
that results from the reduction of fractional reserves by the
decisions of depositors to exchange deposits for currency and
not redeposit their money in another member bank in the fractional
reserve banking system. A bank run is the depositors’ negative
sanction that provides them with their sovereignty over their
own property, i.e., their money.
As a defender
of the ideal of free banking (see Part
IV), Mises again and again warned the State not to intervene
in banking affairs, except to enforce contracts. The depositors’
decision to withdraw their funds by converting their deposits
into currency is the essence of the original contract between
banks and depositors. So, while Mises was not an advocate of the
State’s deliberate policy of deflation, he was a strong advocate
of the legal right of depositors to withdraw their money out of
their banks on demand. The State should not intervene in order
to save over-extended commercial banks. But over-extended banks,
by becoming insolvent, reduce the supply of credit money. Thus,
Mises was not an opponent of deflation in general, for thus would
have made him an opponent of depositor-induced deflation. He was
an opponent of State-induced deflation. Nowhere in his writings
did he recommend that the State or the central bank create new
monetary reserves in order to offset a reduction in the money
supply caused by depositors’ withdrawal of their funds. On the
contrary, in “The Return to Sound Money,” he told us that what
is required is a complete freeze on the central bank’s creation
of additional money, for any reason.
money still means today what it meant in the nineteenth century:
the gold standard. The eminence of the gold standard consists
in the fact that it makes the determination of the monetary unit’s
purchasing power independent of the measures of governments. It
wrests from the hands of the “economic tsars” their most redoubtable
instrument. It makes it impossible for them to inflate. This is
why the gold standard is furiously attacked by all those who expect
that they will be benefited by bounties from the seemingly inexhaustible
government purse. What is needed first of all is to force the
rulers to spend only what, by virtue of duly promulgated laws,
they have collected as taxes. Whether governments should borrow
from the public at all and, if so, to what extent are questions
that are irrelevant to the treatment of monetary problems. The
main thing is that the government should no longer be in a position
to increase the quantity of money in circulation and the amount
of checkbook money not fully — that is, 100 percent —
covered by deposits paid in by the public. No backdoor must be
left open where inflation can slip in. No emergency can justify
a return to inflation. Inflation can provide neither the weapons
a nation needs to defend its independence nor the capital goods
required for any project. It does not cure unsatisfactory conditions.
It merely helps the rulers whose policies brought about the catastrophe
to exculpate themselves. One of the goals of the reform suggested
is to explode and to kill forever the superstitious belief that
governments and banks have the power to make the nation or individual
citizens richer, out of nothing and without making anybody poorer.
The short-sighted observer sees only the things the government
has accomplished by spending the newly created money. He does
not see the things the non-performance of which provided the means
for the government’s success. He fails to realize that inflation
does not create additional goods but merely shifts wealth and
income from some groups of people to others. He neglects, moreover,
to take notice of the secondary effects of inflation: malinvestment
and decumulation of capital (pp. 438-39).
a reform: the re-establishment of a traditional, government-guaranteed
gold standard. The likelihood of implementing this reform rested
on an assumption: “Keynesianism is losing face even at the universities”
(p. 439). His timing was way off. Keynesianism had only just begun
to exercise control over every area of American economic opinion.
When, in the mid-1960’s, monetarism visibly raised its anti-gold
standard head, the case against the gold standard and in favor
of fiat money grew even more academically acceptable. Thus, his
statement in 1951 seems utopian today: “The political chances
for a return to sound money are slim, but they are certainly better
than they have been in any period after 1914” (p. 439).
a State-imposed policy of deflation. To re-establish a traditional
gold standard, the national civil government must guarantee to
buy and sell gold at an official price. For a national government
to re-establish the official price of gold at the price that had
prevailed before the expansion of credit money would require a
policy of deflation leading to economic contraction. This is what
Great Britain had done after the Napoleonic Wars in 1815 and after
World War I in 1925. Mises regarded both decisions as unwise (p.
455). So, Mises said, the official price of gold should be restored
at something close to the free market price. He said that the
Treasury must sell gold at the fixed price for what we call M-1:
currency, token coins, and checks drawn upon a member bank (p.
He did not
say, but obviously believed, that the monetary reserves of the
central bank must not increase as the result of a hike in gold’s
official price. The official price today is $42.22 per ounce.
It was $35 in 1951. He thought that it might have to be raised
to somewhere between $36 and $38 (p. 449) — perhaps 10 percent.
If gold’s official price were raised to the free market’s price
today, the Federal Reserve System’s Open Market Committee (FOMC)
would be required to sell Treasury debt to offset the gold price
revision’s increase in the monetary base. Alternatively, the Fed’s
Board of Governors would have to raise the reserve requirements
for commercial banks. Either policy would raise interest rates.
reserves of the United States in December, 2001, totalled a little
billion at the official price of $42.22. This would have to
be multiplied by about seven, or about $77 billion, an increase
of $66 billion. The FOMC would then have to sell $66 billion of
Treasury debt. With the adjusted monetary base at about $655
billion, this would be a 10% decrease in the monetary base.
This would raise short-term interest rates. If the Federal Reserve
System then refused to interfere by adding to reserves —
which Mises’s reform proposal mandated — a deflation of the
money supply would take place when bank runs toppled insolvent
banks. There would be a recession, or worse.
proposal was to restore the traditional government-guaranteed
gold standard, in which every national government’s central bank
would still keep on deposit the bulk of the national economy’s
gold. If the public were to begin to redeem gold, the central
bank would then sell Treasury debt, thereby deflating the money
supply, thereby raising interest rates, thereby halting the gold
outflow. “Keep your money in the bank at high interest rates.
Don’t withdraw non-interest-paying gold.” Deflation with rising
interest rates create recessions.
strategy of the traditional gold standard always assumed that
most people would always leave most of their gold on deposit with
the commercial banks (pre-1914) or with the central bank (post-1914).
Put another way, the logic of the traditional State-run gold standard
assumes that the public must always be kept from reclaiming most
of its gold by having banks call in loans, shrink the money supply,
and raise interest rates. But there is always the other option
for the banks: default. The political popularity of default eventually
wins out over the pain of recession. At that point, advocates
of the gold standard are back to square one: blamed for the recession
and rejected as obsolete voices of the past. They are dismissed
by politicians and economists as barbarous relics.
gold in the possession of fractional reserve bankers is like issuing
a license for them to steal the gold whenever some emergency appears
that supposedly justifies the State’s suspension of gold convertibility,
i.e., another violation of contract. Once people’s gold is in
the possession of fractional reserve banks, it will not be returned
to them. Initially, banks will raise interest rates by reducing
credit money in order to persuade depositors not to reclaim their
gold. When this fails to persuade them, the banks will steal their
gold by defaulting on their contracts to redeem gold on demand,
and the State will authorize this. Once a nation’s gold supply
goes into a fractional reserved banking system, most of it never
comes out. This is the golden rule of fractional reserve banking:
Do unto depositors before the depositors do it unto you.
Mises did not formulate this rule; I did. He merely described
its operation. I learned how it operates from him.
in 1951: “The Classical or orthodox gold standard alone is a truly
effective check on the power of the government to inflate the
currency. Without such a check all other constitutional safeguards
can be rendered vain” (p. 452). Mises in this passage implicitly
accepted the fact that the United States government, through its
monopolistic central bank, controlled the money supply in his
day. The United States government had confiscated the public’s
gold in 1933. Mises in 1951 affirmed the classical gold standard
as the only way to keep the civil government from inflating the
money supply. This does not mean that he believed that only the
civil government should control the money supply. He
did not believe this. On the contrary, he believed that the free
market should be the sole source of money. He defended this position
when no other economist was willing to. His followers still are
the only economists who defend this proposition. The classical
gold standard was his recommended policy for an undesirable condition:
control over money by civil government.
theory of judicial sovereignty rests on a presupposition: there
is no higher earthly court of appeal beyond a sovereign State.
This is an updated version of early modern Europe’s doctrine of
the divine right of kings. This doctrine was popular with King
James I. It was rejected by his contemporary, the English constitutional
law jurist, Sir Edward Coke [“Cook”]: Petition of Right
(1628). The theory of the classical gold standard assumes
the legal sovereignty of the State over money. In terms of this
theory, there is no judicial authority to preserve the classical
gold standard from the government’s desire to escape its restrictions.
The classical gold standard, by definition, is self-imposed by
the civil government. So, when incumbent politicians in search
of new money to buy votes tire of this self-imposed limitation,
they abandon it. Who can stop them? Not depositors, who are the
default’s immediate victims. Not voters, who do not understand
monetary theory. Not Keynesian or monetarist economists, who hate
the gold standard. Not supply-side economists, who are of two
opinions during recessions: the need to defend the gold standard
and the need for the central bank to create more money, after
tax cuts have failed to revive the sagging economy.
Mises had no illusions about the honesty of governments or their
statutory creations, central banks. In Human
Action, he wrote derisively of the Bretton Woods gold-exchange
standard: “In dealing with the problems of the gold exchange standard
all economists — including the author of this book —
failed to realize the fact that it places in the hands of governments
the power to manipulate their nations’ currency easily. Economists
blithely assumed that no government of a civilized nation would
use the gold exchange standard intentionally as an instrument
of inflationary policy” (p. 786).
A gold standard
that the public can safely rely on must not have anything to do
with a government’s guarantee to redeem gold on demand. Such a
guarantee is unenforceable in any government court after the government
revokes it. Governments eventually cheat on their promise to redeem
money-certificates for gold. They either devalue the currency
(lower the quantity of gold redeemable per currency unit) or else
they default: cease redeeming IOU’s for any quantity of gold.
There have been no exceptions in history.
of a crazy person is someone who keeps doing something, over and
over, even though it fails to achieve his goal. It is time for
defenders of sound money to cease being crazy. It is time to stop
promoting the traditional gold standard. The traditional gold
standard is a game for suckers. The government or its licensed
agents announce: “Bring us your gold, and we will store it for
you free of charge, and you can get it back at any time at the
price at which you sold it us.” To which I reply: “There ain’t
no such thing as a free government-guaranteed gold standard.”
can a nation return to a gold standard that is the product of
the free market rather than the State? I offer the following suggestion
in the spirit of Mises, though not the letter.
GREENSPAN, TEAR DOWN THESE WALLS!”
In the underground
vault at 33 Liberty Street, New York City, the Federal Reserve
Bank of New York stores most of the world’s gold. This gold belongs
to central banks. It used to belong to private citizens. The vault’s
walls protect the Federal Reserve’s gold and foreign central banks’
gold from the public. There are walls for the vault at Fort Knox
that perform the same restrictive function.
the world during the twentieth century, the State, in conjunction
with State-created central banks, deliberately stole the public’s
gold. In Europe, this was done in two steps. At the beginning
of World War I, every government passed laws allowing its commercial
banks to refuse to redeem gold on demand. (Step one.) Governments
thereby escaped a future vote of monetary no confidence by depositors
who had unwisely trusted the State to enforce laws of contract.
The depositors’ IOU’s to gold became “IOU-nothings.” The national
central banks then created additional fiat money and bought the
newly confiscated gold. (Step two.) The gold wound up in the vaults
of the national central banks or their main fiduciary agents,
the Bank of England and the newly created Federal Reserve System.
gold, which was bought and paid for with its very own fiat money,
along with foreign central banks’ gold that is held for safekeeping
and convenient inter-bank swapping, has always been stored at
the Federal Reserve Bank of New York.
the day that this gold begins to be shipped to Basle, Switzerland,
to be held for safekeeping by the Bank for International Settlements,
is that day that American sovereignty gets unofficially transferred.
In the United
States, the theft was more blatant: in 1933, the government made
it illegal for American citizens to own non-numismatic gold coins
or non-jewelry gold. The government openly stole the gold from
the public, and then sold it to the Federal Reserve System in
exchange for the Fed’s newly issued money. Then the Treasury spent
the newly created money. (See Part
banks have demonetized gold by stealing it. This has enabled them
to monetize government debt with far less restriction: no threat
of any withdrawals of gold by the previous private owners of gold.
This demonetization of gold took place three generations ago in
Europe, two generations ago in the United States. It is “old news.”
This happened so long ago that it was never on anyone’s radar
screen. It happened prior to the invention of radar.
the public re-monetize its gold? By demanding the return of the
gold. Central banks must be compelled by law to return the stolen
goods. The stolen gold surely will not be returned by the thieves
voluntarily. (Here, let me imitate a Chicago School economist:
“Let us assume that there are two people, a thief and his victim’s
grandson. The thief has on his side the police, the media, and
every economics department on earth, including mine. If transaction
costs were zero, the victim’s grandson could suggest a mutually
beneficial exchange.” And so forth.)
I am unaware
of any non-Austrian school of economic opinion that has seriously
suggested the return of central banks’ gold to the public. The
operating assumption of all rival schools of monetary opinion
is this: “Stealers, keepers; losers, weepers.” Also, “Possession
is ten-tenths of the law.”
of the public’s gold need not be deflationary. Each government
could issue non-interest-bearing, 100-year bonds to its central
bank. The bonds should be equal in value to the officially listed
value of the central bank’s gold supply. In the United States,
this would be $42.22 per ounce times the ounces held, or $11 billion.
This gold presently earns no interest; therefore, neither should
the bonds. The bonds will replace the gold as the central bank’s
legal reserve for the nation’s money supply. No muss, no fuss:
call these bonds a gold tranche or whatever fancy-Dan word that
economists choose. I would call them Solvency Operating Bonds,
Departments of the world would then possess the gold that they
sold decades ago to their central banks. But not for long. All
of this gold — every ounce — would be sold to the public
in the form of coins, preferably one-tenth of a troy ounce of
gold, 99.9% fine, but with additional copper or some other hardening
metal, so that the coins can circulate without much wear. The
time limit on the sake of this gold would depend on the output
of the mint on a 24×6 schedule. (Give them Sundays off.) The government
will then use the income generated from the sale of the coins
to reduce the government’s debt. (This debt-reduction procedure
is not necessary to make the transition to a full gold coin standard,
but since I’m dreaming of that which is politically remote, why
not dream big?)
If the sale
of gold is politically unacceptable, then the government can hold
a national lottery, with all of the proceeds going to the two
dominant political parties, or to whatever other boondoggle is
acceptable to Congress. I do not care who gets the lottery money.
I care who gets ownership of the gold coins: the public. I think
a national lottery would generate more public interest in the
coins than a series of auctions. There is already an existing
distribution system: local convenience stores. Let local banks
get involved, too. “Come one, come all: get your tickets here!”
lottery “Golden Opportunity,” or “El Dorado,” or “Streets of Gold,”
or “End of the Rainbow.” Call it “Return of Stolen Goods.” Whatever
some New York ad agency thinks will work, use.
bought from the government or won from the government, the coins
will enjoy income-tax-free status for five years. The deal would
be this: unless the recipient sells the coins for currency or
bank credit money, he can keep them or trade them, income-tax-free,
for five years. So can the people who receive them in exchange.
Each coin will be income tax-free money for 60 months after the
release date of the coin, which will be stamped accordingly.
replace the fiat money standard? Want alternative markets in which
gold coins are recognized and sought-after? Just grant income-tax-free
status to each coin for five years. The “good” coins — tax-free
time remaining — will drive the “bad” coins out of circulation
after five years. This is the opposite of Gresham’s Law. The “defunct”
coins will then be used mainly in what I prefer to call unofficial
markets, which will have several years to develop.
why the coins should be tenth-ounce coins is simple: no one will
want to receive change in paper money, because this change would
constitute taxable income: selling for paper money part of the
value of a tax-exempt coin. No one will want to receive taxable
money for tax-free money. The coins must therefore be small-weight
of the world are not about to give up their control over bank
credit money. The world is dependent on the existing structure
of credit-money prices. What I am proposing is the creation of
a parallel standard. Mises argued that parallel standards for
gold and silver existed for millennia. This is what I am proposing:
a free market gold coin standard side by side with a fiat money
standard for the government’s bank money, which we have anyway.
All that my proposal would change is this: the return of the stolen
program would be opposed by “gold bugs,” who are invested in gold.
The price of gold would fall if all governments started selling
all of the gold they have repurchased from the central banks.
Gold bugs are like condominium owners in New York City who are
opposed to price controls in general, but opposed to the abolition
of rent controls in New York City. Such an abolition would produce
windfall profits for the owners of rent-controlled buildings,
and capital losses for owners of condos. The available supply
of condo-competing rental property would increase. There would
be fewer cheap middle-class apartments, but the market for condos
would go down.
good for the world would not be good in the short run for gold
bugs, of whom I am chief. That is the price of liberty.
Is my suggested
reform politically possible because it is conceptually possible?
No. I have described this reform only as an exercise to demonstrate
that a top-down, non-deflationary, political reform of the banking
system is conceivable. The public might respond favorably to the
offer of economic liberty, if given the opportunity. But this
opportunity will not be given — surely not by the present
system’s beneficiaries, central bankers, who long ago established
the terms of debate regarding central banking. The debate is this:
politically independent national central banks vs. a single politically
independent international central bank. Other debaters need not
there will be a reform, one that undermines central banking.
will at some point break the banks by abandoning today’s officially
sanctioned money system. The central banks will inflate to keep
the inflation-induced economic boom alive. The public, through
the free market, will eventually abandon the official money system
and substitute an alternative monetary unit on its own authority.
Mises spelled this out in 1912: “It would be a mistake to assume
that the modern organization of exchange is bound to continue
to exist. It carries within itself the germ of its own destruction;
the development of the fiduciary medium must necessarily lead
to its breakdown” (TM&C,
p. 409). The defenders of central banking have persuaded the public
that the great advantage of central banking is “flexible money.”
The public is going to get flexible money, good and hard.
self-destruction could also go the other way: mass deflation.
Banks at the end of some future trading day may not be able to
clear their accounts with each other because of an unforeseen
breakdown in the international payments system. They may cease
operating because of what Greenspan has called a cascading chain
reaction of cross-defaults.
be sure, we should recognize that if we choose to have the advantages
of a leveraged system of financial intermediaries, the burden
of managing risk in the financial system will not lie with the
private sector alone. As I noted, with leveraging there will always
exist a possibility, however remote, of a chain reaction, a cascading
sequence of defaults that will culminate in financial implosion
if it proceeds unchecked. Only a central bank, with its unlimited
power to create money, can with a high probability thwart such
a process before it becomes destructive. Hence, central banks
will of necessity be drawn into becoming lenders of last resort.
But implicit in the existence of such a role is that there will
be some form of allocation between the public and private sectors
of the burden of risk, with central banks responsible for managing
the most extreme, that is the most systemically sensitive, outcomes.
Thus, central banks have been led to provide what essentially
amounts to catastrophic financial insurance coverage. Such a public
subsidy should be reserved for only the rarest of disasters. If
the owners or managers of private financial institutions were
to anticipate being propped up frequently by government support,
it would only encourage reckless and irresponsible practices.
(Speech, “Understanding today’s international financial system,”
May 7, 1998)
Like a juggler
with too many oranges in the air at one time, fractional reserve
banking looks impressive for a while. Then it fails, taking the
division of labor with it. This is the ultimate price of fractional
reserve banking: the universally unexpected reduction in the
division of labor.
OFFICIAL PRICE OF GOLD
not need an official price because no price needs to be official.
An official price is set by government officials. That is the
problem with every official price. The great advantage of a free
market, gold coin standard is that no government official possesses
the legal authority to set an official price for gold.
government-guaranteed gold standard was never any better than
a government’s promise to allow the public to redeem gold at an
officially fixed price. In every case, governments eventually
citizen can successfully sue a national government for its having
defaulted on its promise to redeem gold at a fixed price, for
the courts of the national government regard the national government
as legally sovereign, therefore enjoying sovereign
immunity from lawsuits that either the politicians or the
courts choose not to hear. When an official IOU for gold is issued
by a civil government or its licensed agent, the central bank,
it is worth the now-used paper that it is printed on. Any value
greater than this is the free market’s imputed value to the government’s
promise. In every case, this promise has been broken.
a handful of people — only rarely are they academically certified
economists — who still call for a restoration of some version
of the classical gold standard, or even some version of the central
banks’ gold-exchange standard. These people are well-intentioned
but naive. They look at a system that defaulted in 100% of the
cases during the twentieth century, yet they still call for its
restoration. They honestly expect to gain a permanent monetary
system settlement on their terms from the well-organized enemies
of every gold standard, whose power and wealth would be restricted
by any gold standard. Mises wrote in 1944, “The gold standard
did not collapse. The governments destroyed it” (Omnipotent
Government, p. 251). In the face of this historical reality,
today’s tiny army of true believers who defend a government-guaranteed
gold standard tell us, “Next time, it will be different.” These
people are slow learners.
central banks now own the people’s gold. They are unlikely to
surrender this stolen gold until they have to. This “have to”
will be imposed, if at all, by some market crisis, not by conventional,
pre-crisis politics. Politically, there will be no change that
significantly restricts central banks’ power over money until
the voting public imposes a change. This will not happen until
voters not only understand the logic of the free market gold standard
but are also ready to make this reform a single issue in their
is no understanding of the gold standard, classical or free market,
especially among economists. The public has forgotten all about
a gold coin standard. People have no awareness that the world’s
central banks stole their grandparents’ and great-grandparents’
gold coins. There will be no groundswell of political opinion
in favor of a free market gold coin standard until there is an
economic crisis that forces a reconsideration of monetary policy
on the politicians.
economic policy is preceded by economic theory. Today, the anti-gold
bias of monetary theorists is overwhelming. Every school of economic
opinion except the Austrian School believes that a national government
should enforce the decisions of its central bank, which establishes
and enforces national monetary policy. The only exceptions to
this rule are a few internationalists who believe that a world
central bank should establish monetary policy for every nation.
TO WOULD-BE REFORMERS
E. Read, the founder in 1946 of the Foundation for Economic Education,
used to say that we should postpone our attempts to implement
our grand schemes until we have made major progress in our own
personal programs of self-education and self-reform. Our reforms
should begin at home. I agree.
I have written
this little book on Mises’s view of money in order to help readers
begin to think about the issue of money — in both senses
— and help them begin their own programs of intellectual
and financial self-improvement. Mises offered a theory of money
that was self-consciously based on a theory of individual decision-making.
He offered no grand scheme for political reform. He offered only
one policy: shrink the State.
a comprehensive theory of money which rested on only two legal
pillars, both of which have been undermined by modern law: (1)
the enforcement of contracts by the civil government; (2) the
right of peaceful, non-fraudulent voluntary exchange. His monetary
theory was a consistent extension of his theory of the free market.
He did not rely on a theory of State regulation of the monetary
system, any more than he relied on a theory of State regulation
of any other sphere of the economy. He denied the need for such
regulation. He showed why such regulation is counter-productive
for a society. He recommended only one monetary policy: the State’s
enforcement of voluntary contracts. That was his recommended economic
policy in general. This minimalist theory of civil government
makes his theory of money unique in the history of academic economic
answer to the question, “What kind of money should we have?” was
simple: “whatever individuals voluntarily choose to use.” He wanted
the State to get out of the money business. This included the
State’s monopolistic agent, the central bank. He offered a comprehensive
theory of money that demonstrated that the State does not need
to be in the money business in order for a free market social
order to prosper. The money system, as is true of the other subdivisions
in a free market economy, is part of a self-adjusting, self-correcting
system of dual sanctions. These dual sanctions are profit and
loss. Money is market-generated. It is also market-regulated.
It is a product of consumer sovereignty, not State sovereignty.
The State is always an interloper in monetary affairs. The State
reduces market freedom and efficiency. The State makes things
worse from the point of view of long-term economic stability.
So does the State’s now-independent step-child, central banking.
of endogenous money is unique to Mises and his followers. No other
school of economic opinion accepts it. Every other school appeals
to the State, as an exogenous coercive power, to regulate the
money supply and create enough new fiat or credit money to keep
the free market operational at nearly full employment with nearly
stable prices. Every other theory of money invokes the use of
the State’s monopolistic power to supply the optimum quantity
of money. No matter how often some non-Austrian School economist
says that he is in favor of the free market, when it comes to
his theory of money, he always says, “I believe in the free market,
but. . . .” As Leonard Read wrote in 1970, we are sinking
in a sea of buts.
are not outright collectivists, non-Austrian School economists
are defenders of the so-called mixed economy: economic direction
to the free market provided by State officials, on pain of punishment.
This position is clearest in their universal promotion of non-market,
State-regulated, central-bank money. Mises denied that there can
be a mixed economy. There are only State directives that affect
market operations, in most cases negatively. (Rothbard substituted,
“in all cases negatively.”)
theory of money offers hope. The public is in charge, not central
bankers. The public will decide what money it prefers and how
it will be used. The free market is economically sovereign, not
the State. Monetary reform, when it comes, will be imposed from
the bottom up.
he wrote is true, then we need not waste our time by building
reformist sand castles in the air by designing sophisticated,
top-down monetary reforms that voters do not understand, politicians
do not have time to consider, and central bankers will successfully
thwart for not being in their personal self-interest. The free
market will triumph without the implementation of our well-intentioned
but politically amateurish monetary reform schemes. Mises’s theory
of money and credit shows us why the central bankers cannot win,
just as his theory of economic calculation showed us why Marxist
central planners could not win. Unfortunately, it took seven decades
of economic losses and about a hundred million needless deaths
to confirm his theory.
my advice: do not adopt a theory of money and banking until you
understand the free market. Money and banking are not independent
of the free market. They are extensions of the free market. When
searching for a consistent theory of money, begin with a consistent
theory of the free market. Begin here: Human Action, Chapter
15: “The Market,” Part 1, “The Characteristics of the Market Economy.”
market economy is the social system of the division of labor under
private ownership of the means of production. Everybody acts on
his own behalf; but everybody’s actions aim at the satisfaction
of other people’s needs as well as at the satisfaction of his
own. Everybody in acting serves his fellow citizens. Everybody,
on the other hand, is served by his fellow citizens. Everybody
is both a means and an end in himself, an ultimate end for himself
and a means to other people in their endeavors to attain their
is steered by the market. The market directs the individual’s
activities into those channels in which he best serves the wants
of his fellow men. There is in the operation of the market no
compulsion and coercion. The state, the social apparatus of
coercion and compulsion, does not interfere with the market
and with the citizens’ activities directed by the market. It
employs its power to beat people into submission solely for
the prevention of actions destructive to the preservation and
the smooth operation of the market economy. It protects the
individual’s life, health, and property against violent or fraudulent
aggression on the part of domestic gangsters and external foes.
Thus the state creates and preserves the environment in which
the market economy can safely operate. The Marxian slogan “anarchic
production” pertinently characterizes this social structure
as an economic system which is not directed by a dictator, a
production tsar who assigns to each a task and compels him to
obey this command. Each man is free; nobody is subject to a
despot. Of his own accord the individual integrates himself
into the cooperative system. The market directs him and reveals
to him in what way he can best promote his own welfare as well
as that of other people. The market is supreme. The market alone
puts the whole social system in order and provides it with sense
is not a place, a thing, or a collective entity. The market
is a process, actuated by the interplay of the actions of the
various individuals cooperating under the division of labor.
The forces determining the — continually changing —
state of the market are the value judgments of these individuals
and their actions as directed by these value judgments. The
state of the market at any instant is the price structure, i.e.,
the totality of the exchange ratios as established by the interaction
of those eager to buy and those eager to sell. There is nothing
inhuman or mystical with regard to the market. The market process
is entirely a resultant of human actions. Every market phenomenon
can be traced back to definite choices of the members of the
process is the adjustment of the individual actions of the various
members of the market society to the requirements of mutual
cooperation. The market prices tell the producers what to produce,
how to produce, and in what quantity. The market is the focal
point to which the activities of the individuals converge. It
is the center from which the activities of the individuals radiate.
economy must be strictly differentiated from the second thinkable
— although not realizable — system of social cooperation
under the division of labor; the system of social or governmental
ownership of the means of production. This second system is
commonly called socialism, communism, planned economy, or state
capitalism. The market economy or capitalism, as it is usually
called, and the socialist economy preclude one another. There
is no mixture of the two systems possible or thinkable; there
is no such thing as a mixed economy, a system that would be
in part capitalist and in part socialist. Production is directed
by the market or by the decrees of a production tsar or a committee
of production tsars.
a society based on private ownership by the means of production
some of these means are publicly owned and operated — that
is, owned and operated by the government or one of its agencies
— this does not make for a mixed system which would combine
socialism and capitalism. The fact that the state or municipalities
own and operate some plants does not alter the characteristic
features of the market economy. The publicly owned and operated
enterprises are subject to the sovereignty of the market. They
must fit themselves, as buyers of raw materials, equipment,
and labor, and as sellers of goods and services, into the scheme
of the market economy. They are subject to the laws of the market
and thereby depend on the consumers who may or may not patronize
them. They must strive for profits or, at least, to avoid losses.
The government may cover losses of its plants or shops by drawing
on public funds. But this neither eliminates nor mitigates the
supremacy of the market; it merely shifts it to another sector
on Money: Part 1
on Money: Part 2
on Money: Part 3
on Money: Part 4
on Money: Part 5
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