Denationalisation of Money: The Argument Refined

III. THE ORIGIN OF THE GOVERNMENT PREROGATIVE OF MAKING MONEY

For more than 2,000 years the government prerogative or exclusive right of supplying money amounted in practice merely to the monopoly of minting coins of gold, silver or copper. It was during this period that this prerogative came to be accepted without question as an essential attribute of sovereignty—clothed with all the mystery which the sacred powers of the prince used to inspire. Perhaps this conception goes back to even before King Croesus of Lydia struck the first coins in the sixth century BC, to the time when it was usual merely to punch marks on the bars of metal to certify its fineness.

At any rate, the minting prerogative of the ruler was firmly established under the Roman emperors.1 When, at the beginning of the modern era, Jean Bodin developed the concept of sovereignty, he treated the right of coinage as one of the most important and essential parts of it.2 The regalia, as these royal prerogatives were called in Latin, of which coinage, mining, and custom duties were the most important, were during the Middle Ages the chief sources of revenue of the princes and were viewed solely from this angle. It is evident that, as coinage spread, governments everywhere soon discovered that the exclusive right of coinage was a most important instrument of power as well as an attractive source of gain. From the beginning the prerogative was neither claimed nor conceded on the ground that it was for the general good but simply as an essential element of governmental power.3 The coins served, indeed, largely as the symbols of might, like the flag, through which the ruler asserted his sovereignty, and told his people who their master was whose image the coins carried to the remotest parts of his realm.

Government certificate of metal weight and purity

The task the government was understood to assume was of course initially not so much to make money as to certify the weight and fineness of the materials that universally served as money,4 which after the earliest times were only the three metals, gold, silver, and copper. It was supposed to be a task rather like that of establishing and certifying uniform weights and measures.

The pieces of metal were regarded as proper money only if they carried the stamp of the appropriate authority, whose duty was thought to be to assure that the coins had the proper weight and purity to give them their value.

During the Middle Ages, however, the superstition arose that it was the act of government that conferred the value upon the money. Although experience always proved otherwise, this doctrine of the valor impositus5 was largely taken over by legal doctrine and served to some extent as justification of the constant vain attempts of the princes to impose the same value on coins containing a smaller amount of the precious metal. (In the early years of this century the medieval doctrine was revived by the German Professor G. F. Knapp; his State Theory of Money still seems to exercise some influence on contemporary legal theory.)6

There is no reason to doubt that private enterprise would, if permitted, have been capable of providing as good and at least as trustworthy coins. Indeed occasionally it did, or was commissioned by government to do so. Yet so long as the technical task of providing uniform and recognisable coins still presented major difficulties, it was at least a useful task which government performed. Unfortunately, governments soon discovered that it was not only useful but could also be made very profitable, at least so long as people had no alternative but to use the money they provided. The seignorage, the fee charged to cover the cost of minting, proved a very attractive source of revenue, and was soon increased far beyond the cost of manufacturing the coin. And from retaining an excessive part of the metal brought to the government mint to be struck into new coins, it was only a step to the practice, increasingly common during the Middle Ages, of recalling the circulating coins in order to recoin the various denominations with a lower gold or silver content. We shall consider the effect of these debasements in the next Section. But since the function of government in issuing money is no longer one of merely certifying the weight and fineness of a certain piece of metal, but involves a deliberate determination of the quantity of money to be issued, governments have become wholly inadequate for the task and, it can be said without qualifications, have incessantly and everywhere abused their trust to defraud the people.

The appearance of paper money

The government prerogative, which had originally referred only to the issue of coins because they were the only kind of money then used, was promptly extended to other kinds of money when they appeared on the scene. They arose originally when governments wanted money which they tried to raise by compulsory loans, for which they gave receipts that they ordered people to accept as money. The significance of the gradual appearance of government paper money, and soon of bank notes, is for our purposes complicated because for a long time the problem was not the appearance of new kinds of money with a different denomination, but the use as money of paper claims on the established kind of metallic money issued by government monopoly.

It is probably impossible for pieces of paper or other tokens of a material itself of no significant market value to come to be gradually accepted and held as money unless they represent a claim on some valuable object. To be accepted as money they must at first derive their value from another source, such as their convertibility into another kind of money. In consequence, gold and silver, or claims for them, remained for a long time the only kinds of money between which there could be any competition; and, since the sharp fall in its value in the 19th century, even silver ceased to be a serious competitor to gold. (The possibilities of bimetallism7 are irrelevant for our present problems.)

Political and technical possibilities of controlling paper money

The position has become very different, however, since paper money established itself everywhere. The government monopoly of the issue of money was bad enough so long as metallic money predominated. But it became an unrelieved calamity since paper money (or other token money), which can provide the best and the worst money, came under political control. A money deliberately controlled in supply by an agency whose self-interest forced it to satisfy the wishes of the users might be the best. A money regulated to satisfy the demands of group interests is bound to be the worst possible (Section XVIII).

The value of paper money obviously can be regulated according to a variety of principles—even if it is more than doubtful that any democratic government with unlimited powers can ever manage it satisfactorily. Though historical experience would at first seem to justify the belief that only gold can provide a stable currency, and that all paper money is bound to depreciate sooner or later, all our insight into the processes determining the value of money tells us that this prejudice, though understandable, is unfounded. The political impossibility that governments will achieve it does not mean there is reason to doubt that it is technically possible to control the quantity of any kind of token money so that its value will behave in a desired manner, and that it will for this reason retain its acceptability and its value. It would therefore now be possible, if it were permitted, to have a variety of essentially different monies. They could represent not merely different quantities of the same metal, but also different abstract units fluctuating in their value relatively to one another. In the same way, we could have currencies circulating concurrently throughout many countries and offering the people a choice. This possibility appears, until recently, never to have been contemplated seriously. Even the most radical advocates of free enterprise, such as the philosopher Herbert Spencer8 or the French economist Joseph Garnier,9 seem to have advocated only private coinage, while the free banking movement of the mid-19th century agitated merely for the right to issue notes in terms of the standard currency.10

Monopoly of money has buttressed government power

While, as we shall see presently, government’s exclusive right to issue and regulate money has certainly not helped to give us a better money than we would otherwise have had, and probably a very much worse one, it has of course become a chief instrument for prevailing governmental policies and profoundly assisted the general growth of governmental power. Much of contemporary politics is based on the assumption that government has the power to create and make people accept any amount of additional money it wishes. Governments will for this reason strongly defend their traditional rights. But for the same reason it is also most important that they should be taken from them.

A government ought not, any more than a private person, to be able (at least in peace-time) to take whatever it wants, but be limited strictly to the use of the means placed at its disposal by the representatives of the people, and to be unable to extend its resources beyond what the people have agreed to let it have. The modern expansion of government was largely assisted by the possibility of covering deficits by issuing money—usually on the pretence that it was thereby creating employment. It is perhaps significant, however, that Adam Smith [54, p. 687] does not mention the control of the issue of money among the ‘only three duties [which] according to the system of natural liberty, the sovereign has to attend to’.

 

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11 W. Endemann [15], Vol. II, p. 171.

12 J. Bodin [5], p. 176. Bodin, who understood more about money than most of his contemporaries, may well have hoped that the governments of large states would be more responsible than the thousands of minor princelings and cities who, during the later part of the Middle Ages, had acquired the minting privilege and sometimes abused it even more than the richer princes of large territories.

13 The same applies to the postal monopoly which everywhere appears to provide a steadily deteriorating service and of which in Great Britain (according to The Times, 25 May, 1976) the General Secretary of the Union of Post Office Workers (!) said recently that ‘Governments of both political complexions have reduced a once great public service to the level of a music-hall joke’. Politically the broadcasting monopoly may be even more dangerous, but economically I doubt whether any other monopoly has done as much damage as that of issuing money.

14 Cf. Adam Smith [54, p. 40]: ’…those public offices called mints: institutions exactly of the same nature with those of the aulnagers and stampmasters of woollen and linen cloth’.

15 Endemann [15], p. 172.

16 Knapp [36], and compare Mann [41].

17 Section VII, below, pp. 43-45.

18 Herbert Spencer [57].

19 Joseph Gamier [21].

20 Vera C. Smith [55].

• 1W. Endemann [15], Vol. II, p. 171.
• 2J. Bodin [5], p. 176. Bodin, who understood more about money than most of his contemporaries, may well have hoped that the governments of large states would be more responsible than the thousands of minor princelings and cities who, during the later part of the Middle Ages, had acquired the minting privilege and sometimes abused it even more than the richer princes of large territories.
• 3The same applies to the postal monopoly which everywhere appears to provide a steadily deteriorating service and of which in Great Britain (according to The Times, 25 May, 1976) the General Secretary of the Union of Post Office Workers (!) said recently that ‘Governments of both political complexions have reduced a once great public service to the level of a music-hall joke’. Politically the broadcasting monopoly may be even more dangerous, but economically I doubt whether any other monopoly has done as much damage as that of issuing money.
• 4Cf. Adam Smith [54, p. 40]: ’…those public offices called mints: institutions exactly of the same nature with those of the aulnagers and stampmasters of woollen and linen cloth’.
• 5Endemann [15], p. 172.
• 6Knapp [36], and compare Mann [41].
• 7Section VII, below, pp. 43-45.
• 8Herbert Spencer [57].
• 9Joseph Gamier [21].
• 10Vera C. Smith [55].
• 11At any rate, the minting prerogative of the ruler was firmly established under the Roman emperors. When, at the beginning of the modern era, Jean Bodin developed the concept of sovereignty, he treated the right of coinage as one of the most important and essential parts of it. The regalia, as these royal prerogatives were called in Latin, of which coinage, mining, and custom duties were the most important, were during the Middle Ages the chief sources of revenue of the princes and were viewed solely from this angle. It is evident that, as coinage spread, governments everywhere soon discovered that the exclusive right of coinage was a most important instrument of power as well as an attractive source of gain. From the beginning the prerogative was neither claimed nor conceded on the ground that it was for the general good but simply as an essential element of governmental power. The coins served, indeed, largely as the symbols of might, like the flag, through which the ruler asserted his sovereignty, and told his people who their master was whose image the coins carried to the remotest parts of his realm.
• 12At any rate, the minting prerogative of the ruler was firmly established under the Roman emperors. When, at the beginning of the modern era, Jean Bodin developed the concept of sovereignty, he treated the right of coinage as one of the most important and essential parts of it. The regalia, as these royal prerogatives were called in Latin, of which coinage, mining, and custom duties were the most important, were during the Middle Ages the chief sources of revenue of the princes and were viewed solely from this angle. It is evident that, as coinage spread, governments everywhere soon discovered that the exclusive right of coinage was a most important instrument of power as well as an attractive source of gain. From the beginning the prerogative was neither claimed nor conceded on the ground that it was for the general good but simply as an essential element of governmental power. The coins served, indeed, largely as the symbols of might, like the flag, through which the ruler asserted his sovereignty, and told his people who their master was whose image the coins carried to the remotest parts of his realm.
• 13At any rate, the minting prerogative of the ruler was firmly established under the Roman emperors. When, at the beginning of the modern era, Jean Bodin developed the concept of sovereignty, he treated the right of coinage as one of the most important and essential parts of it. The regalia, as these royal prerogatives were called in Latin, of which coinage, mining, and custom duties were the most important, were during the Middle Ages the chief sources of revenue of the princes and were viewed solely from this angle. It is evident that, as coinage spread, governments everywhere soon discovered that the exclusive right of coinage was a most important instrument of power as well as an attractive source of gain. From the beginning the prerogative was neither claimed nor conceded on the ground that it was for the general good but simply as an essential element of governmental power. The coins served, indeed, largely as the symbols of might, like the flag, through which the ruler asserted his sovereignty, and told his people who their master was whose image the coins carried to the remotest parts of his realm.
• 14The task the government was understood to assume was of course initially not so much to make money as to certify the weight and fineness of the materials that universally served as money, which after the earliest times were only the three metals, gold, silver, and copper. It was supposed to be a task rather like that of establishing and certifying uniform weights and measures.
• 15During the Middle Ages, however, the superstition arose that it was the act of government that conferred the value upon the money. Although experience always proved otherwise, this doctrine of the valor impositus was largely taken over by legal doctrine and served to some extent as justification of the constant vain attempts of the princes to impose the same value on coins containing a smaller amount of the precious metal. (In the early years of this century the medieval doctrine was revived by the German Professor G. F. Knapp; his State Theory of Money still seems to exercise some influence on contemporary legal theory.)
• 16During the Middle Ages, however, the superstition arose that it was the act of government that conferred the value upon the money. Although experience always proved otherwise, this doctrine of the valor impositus was largely taken over by legal doctrine and served to some extent as justification of the constant vain attempts of the princes to impose the same value on coins containing a smaller amount of the precious metal. (In the early years of this century the medieval doctrine was revived by the German Professor G. F. Knapp; his State Theory of Money still seems to exercise some influence on contemporary legal theory.)
• 17It is probably impossible for pieces of paper or other tokens of a material itself of no significant market value to come to be gradually accepted and held as money unless they represent a claim on some valuable object. To be accepted as money they must at first derive their value from another source, such as their convertibility into another kind of money. In consequence, gold and silver, or claims for them, remained for a long time the only kinds of money between which there could be any competition; and, since the sharp fall in its value in the 19th century, even silver ceased to be a serious competitor to gold. (The possibilities of bimetallism are irrelevant for our present problems.)
• 18The value of paper money obviously can be regulated according to a variety of principles—even if it is more than doubtful that any democratic government with unlimited powers can ever manage it satisfactorily. Though historical experience would at first seem to justify the belief that only gold can provide a stable currency, and that all paper money is bound to depreciate sooner or later, all our insight into the processes determining the value of money tells us that this prejudice, though understandable, is unfounded. The political impossibility that governments will achieve it does not mean there is reason to doubt that it is technically possible to control the quantity of any kind of token money so that its value will behave in a desired manner, and that it will for this reason retain its acceptability and its value. It would therefore now be possible, if it were permitted, to have a variety of essentially different monies. They could represent not merely different quantities of the same metal, but also different abstract units fluctuating in their value relatively to one another. In the same way, we could have currencies circulating concurrently throughout many countries and offering the people a choice. This possibility appears, until recently, never to have been contemplated seriously. Even the most radical advocates of free enterprise, such as the philosopher Herbert Spencer or the French economist Joseph Garnier, seem to have advocated only private coinage, while the free banking movement of the mid-19th century agitated merely for the right to issue notes in terms of the standard currency.
• 19The value of paper money obviously can be regulated according to a variety of principles—even if it is more than doubtful that any democratic government with unlimited powers can ever manage it satisfactorily. Though historical experience would at first seem to justify the belief that only gold can provide a stable currency, and that all paper money is bound to depreciate sooner or later, all our insight into the processes determining the value of money tells us that this prejudice, though understandable, is unfounded. The political impossibility that governments will achieve it does not mean there is reason to doubt that it is technically possible to control the quantity of any kind of token money so that its value will behave in a desired manner, and that it will for this reason retain its acceptability and its value. It would therefore now be possible, if it were permitted, to have a variety of essentially different monies. They could represent not merely different quantities of the same metal, but also different abstract units fluctuating in their value relatively to one another. In the same way, we could have currencies circulating concurrently throughout many countries and offering the people a choice. This possibility appears, until recently, never to have been contemplated seriously. Even the most radical advocates of free enterprise, such as the philosopher Herbert Spencer or the French economist Joseph Garnier, seem to have advocated only private coinage, while the free banking movement of the mid-19th century agitated merely for the right to issue notes in terms of the standard currency.
• 20The value of paper money obviously can be regulated according to a variety of principles—even if it is more than doubtful that any democratic government with unlimited powers can ever manage it satisfactorily. Though historical experience would at first seem to justify the belief that only gold can provide a stable currency, and that all paper money is bound to depreciate sooner or later, all our insight into the processes determining the value of money tells us that this prejudice, though understandable, is unfounded. The political impossibility that governments will achieve it does not mean there is reason to doubt that it is technically possible to control the quantity of any kind of token money so that its value will behave in a desired manner, and that it will for this reason retain its acceptability and its value. It would therefore now be possible, if it were permitted, to have a variety of essentially different monies. They could represent not merely different quantities of the same metal, but also different abstract units fluctuating in their value relatively to one another. In the same way, we could have currencies circulating concurrently throughout many countries and offering the people a choice. This possibility appears, until recently, never to have been contemplated seriously. Even the most radical advocates of free enterprise, such as the philosopher Herbert Spencer or the French economist Joseph Garnier, seem to have advocated only private coinage, while the free banking movement of the mid-19th century agitated merely for the right to issue notes in terms of the standard currency.