Denationalisation of Money: The Argument Refined

IV. THE PERSISTENT ABUSE OF THE GOVERNMENT PREROGATIVE

When one studies the history of money one cannot help wondering why people should have put up for so long with governments exercising an exclusive power over 2,000 years that was regularly used to exploit and defraud them. This can be explained only by the myth (that the government prerogative was necessary) becoming so firmly established that it did not occur even to the professional students of these matters (for a long time including the present writer1) ever to question it. But once the validity of the established doctrine is doubted its foundation is rapidly seen to be fragile.

We cannot trace the details of the nefarious activities of rulers in monopolising money beyond the time of the Greek philosopher Diogenes who is reported, as early as the fourth century BC, to have called money the politicians’ game of dice. But from Roman times to the 17th century, when paper money in various forms begins to be significant, the history of coinage is an almost uninterrupted story of debasements or the continuous reduction of the metallic content of the coins and a corresponding increase in all commodity prices.

History is largely inflation engineered by government

Nobody has yet written a full history of these developments. It would indeed be all too monotonous and depressing a story, but I do not think it an exaggeration to say that history is largely a history of inflation, and usually of inflations engineered by governments and for the gain of governments—though the gold and silver discoveries in the 16th century had a similar effect. Historians have again and again attempted to justify inflation by claiming that it made possible the great periods of rapid economic progress. They have even produced a series of inflationist theories of history2 which have, however, been clearly refuted by the evidence: prices in England and the United States were at the end of the period of their most rapid development almost exactly at the same level as two hundred years earlier. But their recurring rediscoverers are usually ignorant of the earlier discussions.

Early Middle Ages’ deflation local or temporary

The early Middle Ages may have been a period of deflation that contributed to the economic decline of the whole of Europe. But even this is not certain. It would seem that on the whole the shrinking of trade led to the reduction of the amount of money in circulation, not the other way round. We find too many complaints about the dearness of commodities and the deterioration of the coin to accept deflation as more than a local phenomenon in regions where wars and migrations had destroyed the market and the money economy shrank as people buried their treasure. But where, as in Northern Italy, trade revived early, we find at once all the little princes vying with one another in diminishing the coin—a process which, in spite of some unsuccessful attempts of private merchants to provide a better medium of exchange, lasted throughout the following centuries until Italy came to be described as the country with the worst money and the best writers on money.

But though theologians and jurists joined in condemning these practices, they never ceased until the introduction of paper money provided governments with an even cheaper method of defrauding the people. Governments could not, of course, pursue the practices by which they forced bad money upon the people without the cruellest measures. As one legal treatise on the law of money sums up the history of punishment for merely refusing to accept the legal money:

‘From Marco Polo we learn that, in the 13th century, Chinese law made the rejection of imperial paper money punishable by death, and twenty years in chains or, in some cases death, was the penalty provided for the refusal to accept French assignats. Early English law punished repudiation as lese-majesty. At the time of the American revolution, non-acceptance of Continental notes was treated as an enemy act and sometimes worked a forfeiture of the debt.’3

Absolutism suppressed merchants’ attempts to create stable money

Some of the early foundations of banks at Amsterdam and elsewhere arose from attempts by merchants to secure for themselves a stable money, but rising absolutism soon suppressed all such efforts to create a non-governmental currency. Instead, it protected the rise of banks issuing notes in terms of the official government money. Even less than in the history of metallic money can we here sketch how this development opened the doors to new abuses of policy.

It is said that the Chinese had been driven by their experience with paper money to try to prohibit it for all time (of course unsuccessfully) before the Europeans ever invented it.4 Certainly European governments, once they knew about this possibility, began to exploit it ruthlessly, not to provide people with good money, but to gain as much as possible from it for their revenue. Ever since the British Government in 1694 sold the Bank of England a limited monopoly of the issue of bank notes, the chief concern of governments has been not to let slip from their hands the power over money, formerly based on the prerogative of coinage, to really independent banks. For a time the ascendancy of the gold standard and the consequent belief that to maintain it was an important matter of prestige, and to be driven off it a national disgrace, put an effective restraint on this power. It gave the world the one long period—200 years or more—of relative stability during which modern industrialism could develop, albeit suffering from periodic crises. But as soon as it was widely understood some 50 years ago that the convertibility into gold was merely a method of controlling the amount of a currency, which was the real factor determining its value, governments became only too anxious to escape that discipline, and money became more than ever before the plaything of politics. Only a few of the great powers preserved for a time tolerable monetary stability, and they brought it also to their colonial empires. But Eastern Europe and South America never knew a prolonged period of monetary stability.

But, while governments have never used their power to provide a decent money for any length of time, and have refrained from grossly abusing it only when they were under such a discipline as the gold standard imposed, the reason that should make us refuse any longer to tolerate this irresponsibility of government is that we know today that it is possible to control the quantity of a currency so as to prevent significant fluctuations in its purchasing power. Moreover, though there is every reason to mistrust government if not tied to the gold standard or the like, there is no reason to doubt that private enterprise whose business depended on succeeding in the attempt could keep stable the value of a money it issued.

Before we can proceed to show how such a system would work we must clear out of the way two prejudices that will probably give rise to unfounded objections against the proposal.

 

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5 F. A. Hayek [29], pp. 324 et seq.

6 Especially Werner Sombart [56] and before him Archibald Alison [1] and others. Cf. on them Paul Barth [4], who has a whole chapter on ‘History as a function of the value of money’, and Marianne von Herzfeld [32].

7 A. Nussbaum [50], p. 53.

8 On the Chinese events, see W. Vissering [61] and G. Tullock [58], who does not, however, allude to the often recounted story of the ‘final prohibition’.

• 1F. A. Hayek [29], pp. 324 et seq.
• 2Especially Werner Sombart [56] and before him Archibald Alison [1] and others. Cf. on them Paul Barth [4], who has a whole chapter on ‘History as a function of the value of money’, and Marianne von Herzfeld [32].
• 3A. Nussbaum [50], p. 53.
• 4On the Chinese events, see W. Vissering [61] and G. Tullock [58], who does not, however, allude to the often recounted story of the ‘final prohibition’.
• 5When one studies the history of money one cannot help wondering why people should have put up for so long with governments exercising an exclusive power over 2,000 years that was regularly used to exploit and defraud them. This can be explained only by the myth (that the government prerogative was necessary) becoming so firmly established that it did not occur even to the professional students of these matters (for a long time including the present writer) ever to question it. But once the validity of the established doctrine is doubted its foundation is rapidly seen to be fragile.
• 6Nobody has yet written a full history of these developments. It would indeed be all too monotonous and depressing a story, but I do not think it an exaggeration to say that history is largely a history of inflation, and usually of inflations engineered by governments and for the gain of governments—though the gold and silver discoveries in the 16th century had a similar effect. Historians have again and again attempted to justify inflation by claiming that it made possible the great periods of rapid economic progress. They have even produced a series of inflationist theories of history which have, however, been clearly refuted by the evidence: prices in England and the United States were at the end of the period of their most rapid development almost exactly at the same level as two hundred years earlier. But their recurring rediscoverers are usually ignorant of the earlier discussions.
• 7‘From Marco Polo we learn that, in the 13th century, Chinese law made the rejection of imperial paper money punishable by death, and twenty years in chains or, in some cases death, was the penalty provided for the refusal to accept French assignats. Early English law punished repudiation as lese-majesty. At the time of the American revolution, non-acceptance of Continental notes was treated as an enemy act and sometimes worked a forfeiture of the debt.’
• 8It is said that the Chinese had been driven by their experience with paper money to try to prohibit it for all time (of course unsuccessfully) before the Europeans ever invented it. Certainly European governments, once they knew about this possibility, began to exploit it ruthlessly, not to provide people with good money, but to gain as much as possible from it for their revenue. Ever since the British Government in 1694 sold the Bank of England a limited monopoly of the issue of bank notes, the chief concern of governments has been not to let slip from their hands the power over money, formerly based on the prerogative of coinage, to really independent banks. For a time the ascendancy of the gold standard and the consequent belief that to maintain it was an important matter of prestige, and to be driven off it a national disgrace, put an effective restraint on this power. It gave the world the one long period—200 years or more—of relative stability during which modern industrialism could develop, albeit suffering from periodic crises. But as soon as it was widely understood some 50 years ago that the convertibility into gold was merely a method of controlling the amount of a currency, which was the real factor determining its value, governments became only too anxious to escape that discipline, and money became more than ever before the plaything of politics. Only a few of the great powers preserved for a time tolerable monetary stability, and they brought it also to their colonial empires. But Eastern Europe and South America never knew a prolonged period of monetary stability.