November 25, 2013

The Free Market as the Origin of Money

By In Economics

Today when we think of money, most think of green slips of paper.  But for those that have been paying attention in recent years, it is becoming clear that this is not the best way to think of money at all.  Where does money come from and is there such a thing as money independent of the dollar?  The Everyday Joe has probably never considered such questions.  In the introduction to his book The Case Against the Fed, Rothbard answers this with eight examples.

“Many commodities have been used as money: iron hoes in Africa, salt in West Africa, sugar in the Caribbean, beaver skins in Canada, codfish in colonial New England, tobacco in colonial Maryland and Virginia… and cigarettes in German prisoner-of-war camps.  Throughout all these eras and societies, however, two commodities were easily able to out-compete the rest, and to establish themselves on the market as the only moneys.  These were gold and silver. 

In The Biggest Con, insurance broker and tax protester Irwin Schiff (father of Peter Schiff), explained why gold’s properties and versatility made it so desirable.

“First of all, it had a rich and warm color and was capable of being highly polished.  It was the only metal that neither tarnished nor rusted.  It could be extruded to the fineness of a hair and beaten to the thinness of tissue paper.  Since gold concentrated considerable value in a small area, it made transportation of one’s wealth relatively simple.  Since gold was malleable, it was easily divisible and could accommodate exchanges of lesser value.  Gold could be easily measured and its quality could be readily determined.”

Real money is the unit or medium of exchange which arises from the free exchange of goods in a market.  People who are making trades soon realize the benefits of having a common good that is in demand by many people in the market.  This “good” is money.  It must be understood that one of the most important parts of the definition of money is the emphasis on the naturally arising use of it.  Carl Menger, the founder of Austrian Economics, says it this way:

“Money is not an invention of the state.  It is not the product of a legislative act.  The sanction of political authority is not necessary for its existence.”

What the above writers are saying relates to their definition of money in that while the state can try to issue money, it is imperfect because it has not arisen out of the market place.  When the government tries to create something that the market does not ask for (US Dollars), it does damage to the market.  Free-market advocates can see this as accurate when they think of examples such as health care and government sponsored housing.  It is important that these advocates also see the principle as true for monies and currencies.

People argue against the gold standard for several reasons.  One thing that they say is:  “there is no real use for gold.  You can’t eat it or anything.”  First response: We shouldn’t want to eat money. Or consume it all.  We want it to be long lasting.  Second response:  Gold’s virtues are laid out by Irwin Schiff (see above).  Third response: Why the sudden want for gold be “useful” or “edible?”  It is not as if paper dollars are edible.

The huge recession we are now facing stems in part from a misunderstanding of the use and nature of money in a society.  The money that exists around the world, but more relevantly, in the United States is such that inflation is remarkably easy to pursue.  The paper money that has been forced on the American people is a dishonest money that is easily manipulated, in secret, by the banking cartel that has a monopoly on its creation.  Every increase in the money supply is, by definition, inflation.  This inflation rears its ugly head, not only in future increase in prices (both of consumer and capital goods), but also in the form of depression-causing bubbles.  For more on economic depressions, see my post here.

The type of money that comes from the free market is the only type of money that will be sound, honest, and capable of preventing the dangerous booms and busts.  In the words of Mises, as quoted by Joseph Salerno,

“[T]he sound money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.

 

Written by C.Jay Engel

Editor and creator of The Reformed Libertarian. Living in Northern California with his wife, he writes on everything from politics to theology and from culture to economic theory. You can send an email to reformedlibertarian@gmail.com