• Mises on Money

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    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

    Mises offered
    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.

    Mises, by
    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.


    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).


    Where statist
    money is concerned, Mises had only one suggestion: do not add
    to the money supply. Enough is enough.

    Mises also
    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.

    This position
    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

    This position
    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
    ), 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).

    Mises suggested
    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).

    Mises opposed
    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.

    The gold
    reserves of the United States in December, 2001, totalled a little
    over $11
    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
    , 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.

    The money-stabilizing
    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.

    Mises wrote
    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.

    The political
    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
    . 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.

    By 1949,
    Mises had no illusions about the honesty of governments or their
    statutory creations, central banks. In Human
    , 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.

    The definition
    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.”

    How, then,
    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.


    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.

    All over
    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.

    The Fed’s
    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.

    How can
    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.”

    This return
    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,
    or SOB’s.

    The Treasury
    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!”

    Call the
    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.

    Want to
    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.

    The reason
    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

    The governments
    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

    This gold-transfer
    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.

    What is
    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.


    The public
    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.

    The banks’
    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.

    Expect it.


    Gold does
    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.

    The classical,
    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

    No defrauded
    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.

    There are
    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
    , 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
    voting behavior.

    Today, there
    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.


    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.

    Mises presented
    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.

    This theory
    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.

    When they
    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.

    If what
    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.

    Here is
    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
    own ends.

    This system
    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
    and meaning.

    The market
    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
    market society.

    The market
    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.

    The market
    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.

    If within
    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
    (pp. 257-58).



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