Money, Credit and Banking

I thought of all the things I could now do because I had a million bucks. I would have the fanciest food money could buy. I would buy a fine house. Only the sportiest and most expensive automobile would suit me from now on. Clothing? Only the richest and finest would ever cover me again. Oh, I was in clover all right. My fondest wishes had come true.

In my dream I dressed and, being hungry, went to breakfast. There wasn’t any. My wife was in tears. The food she had ordered the day before hadn’t been delivered. Not even a bottle of milk or the morning newspaper greeted me when I opened the door. I tried to telephone the grocery but the line was dead. I said, “Oh, well, I’ll take a walk and bring back something for breakfast.”

The street was deserted. Not a bus, street car, or cab was in sight. I walked on and on. Nothing in sight. Thinking something had happened only to my neighborhood. I went to another. Not even a train was moving. Then people began to appear on the street—first, only a few, then many, then hundreds. I joined them and began asking questions: “What has happened? Where can I buy food?” Then I got the jolt. Somebody said, “Don’t you know? Everybody has a million dollars and nobody has to work any more.”

At first I was stunned. I thought that somehow a mistake, a ghastly mistake had been made—but there was no mistake. It was really true. Everybody had a million dollars and thought that work was over for him.

Then it dawned on me as never before that all of us are dependent upon all of the rest of us; that to a small extent at least my labor had a place, a part, in the total welfare of mankind. With an angry shout I tossed to the winds even the thought of a million dollars.

Then I woke up. My dream was over. The sun was shining, the birds singing, my wife rattling the breakfast things. I looked out the window and saw a world of people moving about their tasks, each contributing a little to my life and living, just as I contribute to theirs. I called to my wife, “Hurry up with that breakfast, sweetheart, I want to get to work.”

Editor’s Note: This fable, reproduced by permission of The Employers’ Association of Chicago, illustrates that money is not wealth. Nor has it exchange value except as the owners and producers of goods and services find that it facilitates their trading with one another.

A society of nothing but consumers is indeed a dream that no amount of money can bring to realization. Anyone who attempts to issue money with no provision for its redemption in goods or services is due the same rude awakening that is in store for every dreamer of something for nothing.

Pelatiah Webster

Editor’s Note:

“Not worth a continental” is a descriptive phrase born of an early American experiment in deficit financing. If its lessons are ignored or forgotten, that experience will have been as worthless as the Continental currency itself.

Pelatiah Webster, “an able though not conspicuous citizen” of Philadelphia (1726-1795), is credited by James Madison and others as having been the first advocate of a constitutional convention. Though he was not a delegate, many points in the Constitution conform to an outline he had proposed several years prior to the Convention.

The “fatal mistakes” of deficit financing, inflation, and price control were understood by men like Webster. Lessons learned the hard way during the period of revolutionary America had a determining influence on those who founded the republic.

The Continental Congress authorized the printing of paper money but depended upon enabling legislation by the respective states under the Tender Acts to give negotiability to the irredeemable paper and to keep it in circulation on a par with the “hard money” of those days. Webster considered it his duty as a citizen to criticize monetary enforcement legislation then being proposed by the Assembly of Pennsylvania. The proposal was offered by the Assembly for public consideration on November 29, and was enacted into law, despite Webster’s protest, on December 19, 1780.

It is too soon to tell the full impact of Websters observations, for they were written with the hope “that our fatal mistakes may be a caution and a warning to future financiers who may live and act in any country which may happen to be in circumstances similar to ours at that time.” Yet the circumstances in which we find ourselves today, the penalties of deficit financing and other uneconomic practices are the same as they were in 1780.

The text has been stripped of some archaisms of grammar and expression, but Webster’s ideas and lucid style are intact.

Not Worth A Continental

The fatal error—that the credit and currency of the Continental money could be kept up and supported by acts of compulsion—entered so deep into the minds of Congress and of all departments of administration through the states that no considerations of justice, religion, or policy, or even experience of its utter inefficacy, could eradicate it. It seemed to be a kind of obstinate delirium, totally deaf to every argument drawn from justice and right, from its natural tendency and mischief, from common sense, and even common safety.

Congress began, as early as January 11, 1776, to hold up and recommend this maxim of maniasm, when Continental money was but five months old. Congress then resolved that “whoever should refuse to receive in payment Continental bills, etc., should be deemed and treated as an enemy of his country, and be precluded from all trade and intercourse with the inhabitants . . .”—that is, should be outlawed, which is the severest penalty, except of life and limb, known in our laws.

These Fatal Measures

This ruinous principle was continued in practice for five successive years, and appeared in all shapes and forms—in tender acts, in limitations of prices, in awful and threatening declarations, in penal laws with dreadful and ruinous punishments, and in every other way that could be devised. And all were executed with a relentless severity by the highest authorities then in being, namely, by Congress, assemblies and conventions of the states, by committees of inspection (whose powers in those days were nearly sovereign) and even by military force. Men of all descriptions stood trembling before this monster of force without daring to lift a hand against it during all this period. Its unrestrained energy ever proved ineffectual to its purposes, but in every instance increased the evils it was designed to remedy, and destroyed the benefits it was intended to promote. At best its utmost effect was like that of water sprinkled on a blacksmith’s forge, which indeed deadens the flame for a moment, but never fails to increase the heat and force of the internal fire. Many thousand families of full and comfortable fortune were ruined by these fatal measures, and lie in ruins to this day, without the least benefit to the country or to the great and noble cause in which we were then engaged.

I do not mention these things from any pleasure I have in opening the wounds of my country or exposing its errors, but with a hope that our fatal mistakes may be a caution and warning to future financiers who may live and act in any country which may happen to be in circumstances similar to ours at that time.

A Standard of Value

The nature of a Tender-Act is no more or less than establishing by law the standard value of money, and has the same use with respect to the currency that the legal standard pound, bushel, yard, or gallon has to those goods, the quantities of which are usually ascertained by those weights and measures. Therefore, to call anything a pound or shilling, which really is not so, and make it a legal standard, is an error of the same nature as diminishing the standard bushel, yard, or gallon, or making a law that a foot shall be the legal yard, an ounce the legal pound, a peck the legal bushel, or a quart the legal gallon, and compelling everybody to receive all goods due to them by such deficient measures.

Further, to make anything the legal standard, which is not of fixed but variable nature, is an error of the same kind and mischief as the others— for example, to make a turnip the standard pound weight, which may dry up in the course of a year to a pith of not more than two or three ounces, or to make a flannel string the standard yard, which will shrink in using to half its length. The absurdity of this is too glaring to need anything further said on it.

But to come to the matter now in question. The first observation which occurs to me is that the bills, which are made a tender, contain a public promise of money to be paid in six years. On which I beg leave to remark that the best and most indubitable security of money to be paid in six years, or any future time, is not so good or valuable as ready cash.

Therefore, the law which obliges a man to accept these bills instead of ready cash obliges him to receive a less valuable thing in full payment of a more valuable one, and injures him to the amount of the difference. This is a direct violation of the laws of commutative justice—laws grounded in the nature of human rights, supported by the most necessary natural principles, and enjoined by the most express authority of God Almighty. No legislature on earth should have right to infringe or abrogate this freedom of choice in the exchange of goods for goods.

Again, the security arising from the public promise is not generally deemed certain. The public faith has been so often violated, and the sufferings of individuals thence arising have been so multiplied and extensive, that the general confidence of our people in that security is much lessened. Since a chance or uncertainty can never be so valuable as a certainty, those bills must and will be considered as less valuable than they would be if the security on which they depended were free of all doubt or uncertainty; and consequently, the discount of their value will always be estimated by, and of course be equal to, this difference. Therefore, the injustice of forcing them on the subject at full value of present cash is greatly increased.

These positions and reasonings are grounded on such notoriety of fact that any explanation or proof is needless; and I hope an objection against a law, drawn from the most manifest and acknowledged injustice of its operation and effect, will not be deemed trivial or be easily set aside or got over.

An Honest Man

Suppose a man of grave countenance and character should, in distress, apply to his neighbor for the loan of 1000 silver dollars, with solemn promise on his honor and truth to repay them in a month, and in the meantime the Tender-Act under consideration should pass into a law, and the borrower, at the month’s end, should tender 1000 of the new paper dollars in payment.

In whichever of the two characters they may choose to consider such a man, it may be proper to note that the act in question, if passed into a law, would protect him, and not only so, but would subject the lender to the loss of the whole money if he refused to receive it. This is a somewhat delicate matter which it is painful to dwell long upon. I will therefore close what I have to say on it with a few very serious remarks, the truth, justice, and propriety of which I humbly submit to the reader:

1. The worst kind of evil, and that which corrupts and endangers any community most, is that iniquity which is framed by a law; for this places the mischief in the very spot—on the very seat—to which every one ought to look and apply for a remedy.

2. It cannot be consistent with the honor, the policy, the interest, or character of an Assembly of Pennsylvania to make a law which, by its natural operation, shall afford protection to manifest injustice, deliberate knavery, and known wrong.

3. No cause or end can be so good—so heavenly in its origin, so excellent in its nature, so perfect in its principles, and so useful in its operation—as to require or justify infernal means to promote it. By infernal means I mean such as are most opposed to Heaven and its laws, most repugnant to natural principles of equity which are all derived from Heaven, and most destructive of the rights of human nature which are essential to the happiness of society. Such laws are engraven by Heaven on the heart of every man. Some wicked men have formerly said, “Let us do evil, that good may come,” whose damnation is just.

But perhaps this sort of argument may not have all the effect I could wish on the mind of every reader. I therefore proceed to another argument, which goes to the nature and principle of the act itself: The credit or value of money cannot, in the very nature of the thing, be supplied, preserved, or restored by penal laws or any coercive methods. The subject is incompatible to force; it is out of its reach, and never can be made susceptible of it or controllable by it.

The thing which makes money an object of desire—which gives it strength of motive on the hearts of all men—is the general confidence, the opinion which it gains as a sovereign means of obtaining everything needful. This confidence, this opinion, exists in the mind only, and is not compellable or assailable by force, but must be grounded on that evidence and reason which the mind can see and believe. And it is no more subject to the action of force than any other passion, sentiment, or affection of the mind; any more than faith, love, or esteem.

It is not more absurd to attempt to impel faith into the heart of an unbeliever by fire and faggot, or to whip love into your mistress with a cowskin, then to force value or credit into your money by penal laws.

Trial and Error

You may, indeed, by force compel a man to deliver his goods for money which he does not esteem, and the same force may compel him to deliver his goods without any money at all. But the credit or value of the money cannot be helped by all this, as appears by countless examples. Plain facts are stubborn and undeniable proof of this. Indeed, this has been tried among ourselves in such extent of places and variety of shapes—and in every instance been found ineffectual—that I am amazed to see any attempt to revive it under any devisable form whatsoever. Countless are the instances of flagrant oppression and wrong, and even ruin, which have been the sad effects of these dreadful experiments, with infinite detriment to the community in general, without effecting in any one instance the ends intended. The facts on which this argument depends are fresh in everyone’s memory.

I could wish, for the honor of my country, to draw a veil over what is past, and that wisdom might be derived from past errors sufficient to induce everyone to avoid them in the future. In conclusion, from the contemplation of the nature of the thing, and of the facts and experiments which have been made in every variety of mode and supported by every degree of power and exertion, it appears as plain and undeniable as intuitive proof that the credit or value of money is not in its nature controllable by force. Therefore, any attempt to reach it in that way must end in disappointment. The greater the efforts—and the higher the authority which may be exerted in that way—the greater must be the chagrin, shame, and mortification when the baseless fabric shall vanish into smoke.

Natural Value

The only possible method then of giving value or credit to money is to give it such qualities, and clothe it with such circumstances, as shall make it a sure means of procuring every needful thing; for money that will not answer all things is defective, and has not in it the full nature and qualities of money. In this way only it will grow fast enough into esteem, and become a sufficient object of desire, to answer every end and use of money. Therefore, when the question is proposed: “How shall we give credit or value to our money?” the answer, the only true answer, is: “Bring it into demand, make it necessary to everyone, make it a high means of happiness and a sure remedy of misery.” To attempt this in any other way is to go against nature, and of course into difficulty, only to obtain shameful disappointment in the end.

There is nothing better than to take things in their natural way. A great and difficult work may be accomplished by easy diligence if a good method and a wise choice of means are adopted; but a small work may be made difficult, very soon, if taken at the wrong end and pursued by unnatural means. There is a right and a wrong method of doing everything. You may lead with a thread what you cannot drive with whips and scorpions. The Britons have found this to their cost in the unnatural means they have pursued to preserve and recover their dominions in America. I wish we might be made wise by their errors. Happy is he who is made cautious by observing the dangers of others.

I would be willing to learn wisdom from Great Britain. It is right to be taught even by an enemy. Amidst all their madness, and in all their distresses for money, they never once thought of making their bank or exchequer bills a tender, or supporting their currency by penal laws. But these considerations may have little effect on some minds who are not very delicate in their choice of means, but seem resolved to carry their point, God willing or not.

I therefore hasten to another topic of argument. It appears to me the act is founded in mistaken and very bad policy, and by its natural operation must produce many effects extremely prejudicial to our great and most important interests.

It seems plain to me that the act has a fatal tendency to destroy the great motives of industry, and to dishearten and discourage men of every profession and occupation from pursuing their business on any large scale or to any great effect. Therefore, it will prevent the production of those supplies derived from husbandry and manufactures, which are essential to our safety, support, and comfort. Few men will bestow their labor, attention, and good money, with zeal, to procure goods and commodities for sale, which they know they must sell for money which they esteem bad, or at best doubtful.

The extent and dreadful effects of this are unavoidable and immense. If the industry of the farmer and tradesman is discouraged, and they cease to strive for large crops and fabrics, the consequence must be a universal diminution and scarcity of the produce of the country and of the most important articles of living, as well as commerce. The general industry of the country is of such vast importance—is an object of such magnitude—that to check it is to bring on ruin, poverty, famine, and distress, with idleness, vice, corruption of morals, and every species of evil. As money is the sinews of every business, the introducing of a doubtful medium—and forcing it into currency by penal laws—must weaken and lessen every branch of business in proportion to the diminution of inducement found in the money.

The same thing will render the procurement of supplies for the army difficult, if not utterly impracticable. Most men will hold back their goods from the market rather than sell them for money of a doubtful credit. There will be no possible way of collecting them but to send a superior force into the country and there take them by violence from the owner, which will occasion such an expense as will double the cost of the supplies by the time they get to the army, and be subject to a thousand frauds. This is the most obvious and natural operation of the act if we consider its own nature only, and it is confirmed by such ample experience, recent in the memory of every man, that it can leave no doubt but all this mischief must follow the act from its first operation.

Bad Money Corrupts Men

I apprehend the act will, by its natural operation, tend to corrupt the morality of the people, sap the support, if not the very foundation, of our independence, lessen the respect due to our legislature, and destroy that reverence for our laws which is absolutely necessary to their proper operation and the peace and protection of society. Many people will be so terrified with the apprehension of seeing their real substance—the fruit of their labor and anxious attention—converted into a bundle of paper bills of uncertain value, that to avoid this evil they will have strong inducements to rack their invention for all devisable ways and methods of avoiding it. This will give rise to countless frauds, ambiguities, lies, quibbles, and shams. It will introduce the habit and give a kind of facility to the practice of such guile and feats of art as will endanger the uprightness, plain honesty, and noble sincerity which ever mark the character of a happy and virtuous people.

Many, who wish well to our independence and have many necessaries for our army which they would wish to supply, yet will be held back from offering their goods because of the doubtful value of the bills in which those supplies must be paid for. Instances of this sort I conceive will be so numerous as greatly to affect the supplies of our army and, of course, the support of our independence. The injuries and sufferings of people who are compelled to take said bills in satisfaction of contracts for real money will induce them in their rage to use the legislature, who formed the act, with great liberty and, perhaps, gross disrespect. The habit of reproaching the legislature and eluding the injurious act will become general, and pave the way to an habitual and universal abhorrence of our legislature and contempt of our laws, with a kind of facility and artful dexterity in eluding the force of the whole code.

I freely submit it to my readers as to whether these consequences are at all unnatural or ill-drawn, if the surmises are at all groundless, or the painting a whit too strong. No art of government is more necessary than that of keeping up the dignity and respectability of the legislatures and all courts and officers of government, and exciting and preserving in the hearts of the people a high reverence for the laws. And anything which endangers these great supports of the state ought to be avoided as a deadly evil.

Bad Money Destroys Foreign Respect

The act, I apprehend, will give a bad appearance to our credit, honor, and respectability in the eyes of our neighbors on this continent, and the nations of Europe, and other more distant parts of the world. For when they learn that our own people must be compelled by the loss of half their estates and imprisonment of their persons to trust the public faith, they will at once conclude there must be some great danger, some shocking mischief dormant there, which the people nearest to and best acquainted with it abhor so much. And of course, as they are out of the reach of our confiscations and imprisonments, they will have little inducement to trust or esteem us.

Finally, the act will give great exultation and encouragement to our enemies, and induce them to prolong the war, and thereby increase the horrid penalty of imprisonment which is to last during the war. When they see that our money has become so detestable that it requires such an act as this to compel our own people to take it, they must at least be convinced that its nature is greatly corrupted and its efficacy and use nearly at an end. When we see the passionate admirers of a great beauty forced by lashes and tortures into her embraces, we at once conclude that she has lost her charms and has become dangerous and loathsome.

It cannot be fairly objected to these strictures that they suppose the bills funded by this act are of less value than hard money. The act itself implies this. The Assembly never thought of wasting time in framing an act to compel people to take English guineas, Portuguese joes, and Spanish dollars under penalty of confiscation and imprisonment.

I dare think that there is not a man to be found, either in the Assembly or out of it, that would esteem himself so rich and safe in the possession of 1000 of these dollars as of 1000 Spanish ones. The most effectual way to impress a sense of the deficiency of the act on the minds of all men, and even discover the idea which the Assembly themselves have of it, is to enforce it by penalties of extreme severity. For if there were no deficiency in the act it could not possibly require such penalties to give it all necessary effect, nor is it likely that the Assembly would add the sanction of horrid penalties to any of their acts unless they thought there was need of them.

The enormity of the penalty deserves remark. The penalty for refusing a dollar of these bills is greater than for stealing ten times the sum.

Destroys Contracts and Credit

Further, the act alters, and of course destroys, the nature and value of public and private contracts, and this strikes at the root of all public and private credit. Who can lend money with any security, and of course, who can borrow, let his necessity and distress be ever so great? Who can purchase on credit or make any contract for future payment? Indeed, all confidence of our fellow-citizens in one another is hereby destroyed, as well as all faith of individuals in the public credit.

Upon the whole matter, the bills must rest on the credit of their funds, their quantity, and other circumstances. If these are sufficient to give them a currency at full value, they will pass readily enough without the help of penal laws. If these are not sufficient, they must and will depreciate and thereby destroy the end of their own creation. This will proceed from such strong natural principles, such physical causes, as cannot, in the nature of the thing, be checked or controlled by penal laws or any other application of force.

These strictures are humbly offered to public consideration. The facts alleged are all open to view and well understood. If the remarks and reasonings are just, they will carry conviction; if they are not so, they are liable to anyone’s correction.

Hans F. Sennholz

Most economists are in agreement that the inflation in the United States during the past three years has been the worst since the early 1940s, taking account of both severity and duration. But they cannot agree on the nature of the inflation that is engulfing the American economy. To some, inflation denotes a spectacular rise in consumer prices; to others, an excessive aggregate demand; and to at least one economist, it is the creation of new money by our monetary authorities.

This disagreement among economists is more than an academic difference on the meaning of a popular term. It reflects professional confusion as to the cause of the inflation problem and the policies that might help to correct it.

A review of some basic principles of economics that are applicable to money may shed light on the problem.

Two basic questions need to be answered: (1) What are the factors that originally afforded value to money, and (2) What are the factors that effect changes in the “objective exchange value of money” or its purchasing power?

Money is a medium of exchange that facilitates trade in goods and services. Wherever people progressed beyond simple barter, they began to use their most marketable goods as media of exchange. In primitive societies they used cattle, or measures of grain, salt, or fish. In early civilizations where the division of labor extended to larger areas, gold or silver emerged as the most marketable good and finally as the only medium of exchange, called money. It is obvious that the chieftains, kings, and heads of state did not invent the use of money. But they frequently usurped control over it whenever they suffered budget deficits and could gain revenue from currency debasement.

When an economic good is sought and wanted, not only for its use in consumption or production but also for purposes of exchange, to be held in reserve for later exchanges, the demand for it obviously increases. We may then speak of two partial demands which combine to raise its value in exchange—its purchasing power.

The Origin of Money Value

People seek money because it has purchasing power; and part of this purchasing power is generated by the people’s demand for money. But is this not reasoning in a vicious circle?

It is not! According to Ludwig von Mises’ “regression theory,” we must be mindful of the time factor. Our quest for cash holdings is conditioned by money purchasing power in the immediate past, which in turn was affected by earlier purchasing power, and so on until we arrive at the very inception of the monetary demand. At that particular moment, the purchasing power of a certain quantity of gold or silver was determined by its nonmonetary uses only.

This leads to the interesting conclusion that the universal use of paper monies today would be inconceivable without their prior use as “substitutes” for real money, such as gold and silver, for which there was a nonmonetary demand. Only when man grew accustomed to these substitutes, and governments deprived him of his freedom to employ gold and silver as media of exchange, did government tender paper emerge as the legal or “fiat money.” It has value and purchasing power, although it lacks any nonmonetary demand, because the people now direct their monetary demand toward government tender paper. If for any reason this public demand should cease or be redirected toward real goods as media of exchange, the fiat money would lose its entire value. The Continental Dollar and various foreign currencies over the years illustrate the point.

On Demand and Supply

The purchasing power of money is determined by the demand for and supply of money, like the prices of all other economic goods and services. The particular relation between this demand and supply determines its particular purchasing power. So, let us first look at those factors that exert an influence on individual demand for money.

As money is a medium of exchange, our demand for it may be influenced by considerations of facts and circumstances either on the goods side of the exchange or on the money side. Therefore, we may speak of goods-induced factors and money-induced factors.

A simple example may illustrate the former. Let us assume we live in a medieval town that is cut off from all fresh supplies by an enemy army. There is great want and starvation. Although the quantity of money did not change—no gold or silver has left our beleaguered town—its purchasing power must decline. For everyone seeks to reduce his cash holdings in exchange for some scarce food in order to assure survival.

The situation is similar in all cases where the supply of available goods is decreased although the quantity of money in the people’s cash holdings remains unchanged. In a war, when the channels of supply are cut off by the enemy or economic output is reduced for lack of labor power, the value of money tends to decline and goods prices rise even though the quantity of money may remain unchanged. A bad harvest in an agricultural economy may visibly weaken the currency. Similarly, a general strike that paralyzes an economy and greatly reduces the supply of goods and services raises goods prices and simultaneously lowers the purchasing power of money. In fact, every strike or sabotage of economic production tends to affect prices and money value even though this may not be visible to many observers.

Some economists also cite the level of taxation as an important factor in the determination of the exchange value of money. According to Colin Clark, whenever governments consume more than 25 per cent of national product, the reduction in productive capacity as a result of such an oppressive tax burden causes goods prices to rise and the purchasing power of money to fall. According to that view, with which one may disagree, high rates of taxation are the main cause of “inflation.” At any rate, there can be no doubt that the American dollar has suffered severely from the burdens of Federal, state, and local government spending and taxing that exceed 35 per cent of American national product.

Yet, this purchasing power loss of the dollar would have been greater by far if a remarkable rise in industrial productivity had not worked in the opposite direction. In spite of the ever-growing burden of government and despite the phenomenal increase in the supply of money (to be further discussed below), both of which would reduce the value of the dollar, American commerce and industry managed to increase the supply of marketable goods, thus bolstering the dollars purchasing power. Under most difficult circumstances, businessmen managed to form more capital and improve production technology, and thus made available more and better economic goods which in turn helped to stabilize the dollar. Without this remarkable achievement by American entrepreneurs and capitalists, the U.S. dollar surely would have followed the way of many other national currencies to radical depreciation and devaluation.

There also are a number of factors that affect the demand for money on the money side of an exchange. A growing population, for instance, with millions of maturing individuals eager to establish cash holdings, generates new demand, which in turn tends to raise the purchasing power of money and to reduce goods prices. On the other hand, a declining population would generate the opposite effect.

Changes in the division of labor bring about changes in the exchange value of money. Increased specialization and trade raises the demand and exchange value of money. The nineteenth century frontier farmer who tamed the West with plow and gun was largely self-sufficient. His demand for money was small when compared with that of his great grandson who raises only com and buys all his foodstuff in the supermarket. Under a modern and a highly advanced division of labor, one needs money for the satisfaction of all his wants through exchange. It is obvious that such demand tends to raise the exchange value of money. On the other hand, deterioration of this division of labor and return to self-sufficient production, which we can observe in many parts of Asia, Africa, and South America, generates the opposite effect.

Development and improvement of a monetary clearing system also exert an influence toward lower money value. Clearing means offsetting payments by banks or brokers. It reduces the demand for money, as only net balances are settled by cash payments.

The American clearing system which gradually developed over more than 130 years from local to regional and national clearing, slowly reduced the need and demand for cash and thus its purchasing power. Of course, this reduction of the dollar’s exchange value was negligible when compared with that caused by other factors, especially the huge increase in money supply.

Business practices, too, may influence the demand for money and therefore its value. It is customary for business to settle its obligations on the first of the month. Tax payments are due on certain dates. The growing popularity of credit cards reduces the need for money holdings throughout the month, but concentrates it at the beginning of the month when payments fall due. All such variations in demand affect the objective exchange value of money.

The Desires of Individuals for Larger or Smaller Holdings

The most important determinant of purchasing power of money under this heading of “money-induced factors” is the very attitude of the people toward money and their possession of certain cash holdings. They may decide for one reason or another to increase or reduce their holdings. An increase of cash holdings by many individuals tends to raise the exchange value of money, reduction of cash holdings tends to lower it.

This is so well understood that even the mathematical economists emphasize the money “velocity” in their equations and calculations of money value. Velocity of circulation is defined as the average number of times in a year which a dollar serves as income (the income velocity) or as an expenditure (the transaction’s velocity). Of course, this economic use of a term borrowed from physics ignores acting man who increases or reduces his cash holdings. Even when it is in transport, money is under the control of its owners who choose to spend it or hold it, make or delay payment, lend or borrow. The mathematical economist who weighs and measures, and thereby ignores the choices and preferences of acting individuals, is tempted to control and manipulate this “velocity” in order to influence the value of money. He may even blame individuals (who refuse to act in accordance with his model) for monetary depreciation or appreciation. And governments are only too eager to echo this blame; while they are creating ever new quantities of printing press money, they will restrain individuals in order to control money velocity.

It is true, the propensity to increase or reduce cash holdings by many people exerts an important influence on the purchasing power of money. But in order to radically change their holdings, individuals must have cogent reasons. They endeavor to raise their holdings whenever they foresee depressions ahead. And they usually lower their holdings whenever they anticipate more inflation and declining money value. In short, they tend to react rationally and naturally to certain trends and policies. Government cannot change or prevent this reaction; it can merely change its own policies that brought forth the reaction.

The Supply of Money

No determinant of demand, whether it affects the goods side of an exchange or the money side, is subject to such wide variations as is the supply of money. During the age of the gold coin standard when gold coins were circulating freely, the supply of money was narrowly circumscribed by the supply of gold. But today when governments have complete control over money and banking, when central banks can create or withdraw money at will, the quantity of money changes significantly from year to year, even from week to week. The student of money and banking now must carefully watch the official statistics of money supply in order to understand current economic trends.

Of course, the ever-changing supply of money must not be viewed as a factor that evenly and uniformly changes the level of goods prices. The total supply of money in a given economy does not confront the total supply of goods. Changes in money supply always act through the cash holdings of individuals, who react to changes in their personal incomes and to changing interest rates in the loan market. It is through acting individuals that supply changes exert their influences on various goods prices.

In the United States, we have two monetary authorities that continually change the money supply: the U.S. Treasury and the Federal Reserve System. As of February 28, 1969, the U.S. Treasury had issued some $6.7 billion of money, of which $5.1 billion were fractional coins. The Federal Reserve System had issued $46.3 billion in notes and, in addition, was holding some $22 billion of bank reserves. Commercial banks were holding approximately $150 billion in demand deposits and some $201 billion in time deposits, all of which are payable on demand in “legal money,” which is Federal Reserve and Treasury money.

How Government Creates Money

The vast power of money creation held by the Federal Reserve System, which is our central bank and monetary arm of the U.S. Government, becomes visible only when we compare today’s supply of money with that in the past. Let us, therefore, look at the volume of Federal Reserve Bank credit on various dates since 1929:

Date		Total in Billions
1929	June	$ 1.3
1939	Dec.	2.6
1949	Dec.	22.5
1959	Dec.	29.4
1969	Aug. 20	58.2
Source: Federal Reserve Bulletins.

These figures clearly reveal the nature and extent of the inflation that has engulfed us since the early 1930’s. The 1940’s and again the 1960’s stand out as the periods of most rapid inflation and credit expansion.

Why and how do our “monetary authorities” create such massive quantities of money that inevitably lead to lower money value? During the 1940’s, the emergency argument was cited to justify the printing of any quantity the government wanted for the war effort. During the 1960’s, the Federal government through its Federal Reserve System was printing feverishly in order to achieve full employment and a more desirable rate of economic growth. Furthermore, the ever-growing public demand for economic redistribution inflicted budgetary deficits, the financing of which was facilitated by money creation.

How was it done? The Federal Reserve has at its disposal three different instruments of control which can be used singly or jointly to change the money supply. It may conduct “open-market purchases,” i.e., it buys U.S. Treasury obligations in the capital market and pays for them with newly-created cash or credit. Nearly all the money issued since 1929 was created by this method. Or, the Federal Reserve may lower its discount rate, which is the rate it charges commercial banks for accommodation. If it lowers its rate below that of the market, demand will exceed supply, which the Federal Reserve then stands ready to provide. Or finally, the Federal Reserve may reduce the reserve requirements of commercial banks. Such a reduction will set Federal Reserve money free for loans or investments by commercial banks.

It does not matter how the new money supply is created. The essential fact is the creation by the monetary authorities. You and I cannot print money, for this would be counterfeiting and punishable by law. But our monetary authorities are creating new quantities every day of the week at thef discretion of our government leaders. This fact alone explains why ours is an age of inflation and monetary destruction.

Variable Responses

The Quantity Theory, which offers one of the oldest explanations in economic literature, demonstrates the connection between variations in the value of money and the supply of money. Of course, it is erroneous to assume, as some earlier economists have done, that changes in the value of money must be proportionate to changes in the quantity of money, so that doubling the money supply would double goods prices and reduce by one-half the value of money.

As was pointed out above, changes in supply always work through the cash holdings of the people. When the government resorts to a policy of inflation, some people may react by delaying their purchases of certain goods and services in the hope that prices will soon decline again. In other words, they may increase their cash holdings and thereby counteract the price-raising effect of the government policy. From the inflators’ point of view, this reaction is ideal, for they may continue to inflate while these people through their reaction may prevent the worst effects of inflation. This is probably the reason why the U.S. Government, through post office posters, billboards, and other propaganda, endeavors to persuade the American people to save more money whenever the government itself resorts to inflation.

When more and more individuals begin to realize that the inflation is a willful policy and that it will not end very soon, they may react by reducing their cash holdings. Why should they hold cash that depreciates, and why should they not purchase more goods and services right now before prices rise again? This reaction intensifies the price-raising effects of the inflation. While government inflates and people reduce their money demand, goods prices will rise rapidly and the purchasing power of money decline accordingly.

It may happen that the government may temporarily halt its inflation, and yet the people continue to reduce their cash demand. The central bank inflators may then point to the stability of the money supply, and blame the people for “irrational” behavior and reaction. The government thus exculpates itself and condemns the spending habits of the people for the inflation. But in reality, the people merely react to past experiences and therefore anticipate an early return of inflationary policies. The monetary development during most of 1969 reflected this situation.

Finally, the people may totally and irrevocably distrust the official fiat money. When in desperation they finally conclude that the inflation will not end before their money is essentially destroyed, they may rush to liquidate their remaining cash holdings. When any purchase of goods and services is more advantageous than holding rapidly depreciating cash, the value of money approaches zero. The money then ceases to be money, the sole medium of exchange.

When government takes control over money, it not only takes possession of an important command post over the economic lives of the people but also acquires a lucrative source of revenue. Under the ever-growing pressures for government services and functions, this source of revenue— which can be made to flow quietly without much notice by the public—constitutes a great temptation for weak administrators who like to spend money without raising it through unpopular taxation. The supply of money not only is the best indicator as to the value of money, but reflects the state of the nation and the thinking of the people.

Ludwig von Mises

Why gold?

Because, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money’s purchasing power independent of the ambitions and machinations of dictators, political parties, and pressure groups. The gold standard alone is what the nineteenth century liberals, the champions of representative government, civil liberties, and prosperity for all, called sound money.

The eminence and usefulness of the gold standard consists in the fact that it makes the supply of money depend on the profitability of mining gold, and thus checks large-scale inflationary ventures on the part of governments. The gold standard did not fail. The governments sabotaged it and still go on sabotaging it. But no government is powerful enough to destroy the gold standard as long as the market economy is not entirely suppressed by the establishment of socialism in every part of the world.

Governments believe that it is the gold standard’s fault alone that their inflationary schemes not only fail to produce the expected benefits but unavoidably bring about conditions that also in the eyes of the rulers themselves and of all of the people are considered as much worse than the alleged or real evils they were designed to eliminate. But for the gold standard, they are told by hosts of pseudo-economists, they could make everybody perfectly prosperous.

Let us test the three doctrines advanced for the support of this fable of government omnipotence.

The Santa Claus Power of the State

The state is God, said Ferdinand Lassalle, the founder of the German socialist movement. As such the state has the power to “create” unlimited quantities of money and thus to make everybody happy. Irreverent people branded such a policy of “creating” money as inflation. The official terminology calls it nowadays “deficit spending.”

But whatever the name used in dealing with this phenomenon may be, its meaning is obvious. The government increases the quantity of money in circulation. Then a greater quantity of money “chases,” as a rather silly but popular way of talking about these problems says, a quantity of goods and services that has not increased. The government’s action did not add anything to the available amount of useful things and services. It merely makes the prices paid for them soar.

If the government wants to raise the income of some people—e.g., government employees—it has to confiscate by taxation a part of some other people’s incomes and to distribute the amount collected among its employees. Then the taxpayers are forced to restrict their spending, while the recipients of the higher salaries are increasing their spending to the same amount. There does not result a conspicuous change in the purchasing power of the monetary unit.

But if the government provides the money it wants for the payment of higher salaries by printing it, the new money in the hands of the beneficiaries of the higher salaries constitutes on the market an additional demand for the not increased quantity of goods and services offered for sale. The unavoidable result is a general tendency of prices to rise.

Any attempts the governments and their propaganda offices make to conceal this concatenation of events are vain. Deficit spending means increasing the quantity of money in circulation. That the official terminology avoids calling it inflation, is of no avail whatever.

The government and its chiefs do not have the powers of the mythical Santa Claus. They cannot spend but by taking out of the pockets of some people.

The “Cheap Money” Fallacy

Interest is the difference in the valuation of present goods and future goods. It is the discount in the valuation of future goods as against that of present goods. It cannot be “abolished” as long as people prefer an apple available today to an apple available only in a year, in ten years, or in a hundred years. The height of the originary rate of interest, which is the main component of the market rate of interest as determined on the loan market, reflects the difference in people’s valuation of present and future satisfaction of needs. The disappearance of interest, that is an interest rate of zero, would mean that people do not care a whit about satisfying any of their present wants and are exclusively intent upon satisfying their future wants, their wants of the later years, decades, and centuries to come. People would only save and invest and never consume. On the other hand, if people were to stop making any provision for the future, be it even the future of the tomorrow, would not save at all and consume all capital goods accumulated by previous generations, the rate of interest would rise beyond any limits.

It is thus obvious that the height of the market rate of interest ultimately does not depend on the whims, fancies, and the pecuniary interests of the personnel operating the government apparatus of coercion and compulsion, the much referred to “public sector” of the economy. But the government has the power to push the Federal Reserve System and the banks subject to it into a policy of cheap money. Then the banks are expanding credit. Underbidding the rate of interest as established on the not-manipulated loan market, they offer additional credit created out of nothing. Thus they are intentionally falsifying the businessmen’s estimation of market conditions. Although the supply of capital goods (that can only be increased by additional saving) remained unchanged, the illusion of a richer supply of capital is conjured up.

Business is induced to embark upon projects which a sober calculation, not misled by the cheap-money ventures, would have disclosed as malinvestments. The additional quantities of credit inundating the market make prices and wages soar. An artificial boom, a boom built entirely upon the illusions of easy money, develops. But such a boom cannot last. Sooner or later it must become clear that, under the illusions created by the credit expansion, business has embarked upon projects for the execution of which it is not rich enough. When this malinvestment becomes visible, the boom collapses. The depression that follows is the process of liquidating the errors committed in the ecstasies of the artificial boom, is the return to calm reasoning and a reasonable conduct of affairs within the limits of the available supply of capital goods. It is a painful process, but it is a process of recovery.

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle.

If it were possible to substitute credit expansion (cheap money) for the accumulation of capital goods by saving, there would not be any poverty in the world. The economically backward nations would not have to complain about the insufficiency of their capital equipment. All they would have to do for the improvement of their conditions would be to expand credit more and more. No “foreign aid” schemes would have emerged. In granting foreign aid to the backward nations, the American government implicitly acknowledges that credit expansion is no substitute for capital accumulation through saving.

The Failure of Minimum Wage Legislation and of Labor Unionism

The height of wage rates is determined by the consumers’ appraisal of the value the workers labor adds to the value of the article available for sale. As the immense majority of the consumers are themselves earners of wages and salaries, this means that the determination of the compensation for work and services rendered is made by the same kind of people who are receiving these wages and salaries. The fat earnings of the movie star and the boxing champion are provided by the welders, street sweepers, and charwomen who attend the performances and matches.

An entrepreneur who would try to pay a hired man less than the amount this man’s work adds to the value of the product would be priced out of the labor market by the competition of other entrepreneurs eager to earn money. On the other hand, no entrepreneur can pay more to his helpers than the amount the consumers are prepared to refund to him in buying the product. If he were to pay higher wages, he would suffer losses and would be ejected from the ranks of the businessmen.

But governments and unions are impotent against economic law. Violence can prevent the employers from hiring help at potential market rates, but it cannot force them to employ all those who are anxious to get jobs. The result of the governments’ and the unions’ meddling with the height of wage rates cannot be anything else than an incessant increase in the number of unemployed.

To prevent this outcome the government-manipulated banking systems of all Western nations are resorting to inflation. Increasing the quantity of money in circulation and thereby lowering the purchasing power of the monetary unit, they are cutting down the oversized payrolls to a height consonant with the state of the market. This is today called Keynesian full-employment policy. It is in fact a method to perpetuate by continued inflation the futile attempts of governments and labor unions to meddle with the conditions of the labor market. As soon as the progress of inflation has adjusted wage rates so far as to avoid a spread of unemployment, government and unions resume with renewed zeal their ventures to raise wage rates above the level at which every job-seeker can find a Job.

The experience of this age of the New Deal, the Fair Deal, the New Frontier, and the Great Society confirms the fundamental thesis of British nineteenth-century liberalism: there is but one means to improve the material conditions of all of the wage earners, viz., to increase the per-head quota of capital invested. This result can only be brought about by additional saving and capital accumulation, never by government decrees, labor union violence and intimidation, and inflation. The foes of the gold standard are wrong also in this regard.

U. S. Cold Holdings Shrinking

In many parts of the earth an increasing number of people realize that the U. S. and most of the other nations are firmly committed to a policy of progressing inflation. They have learned enough from the experience of the last decades to conclude that on account of these inflationary policies the ounce of gold will one day become more expensive in terms both of the currency of the U. S. and of their own country. They are alarmed and would like to avoid being victimized by this outcome.

Americans are forbidden to own gold coins and gold ingots. Their attempts to protect their financial assets consist in the methods that the Germans in the most spectacular inflation that history knows called “Flucht in die Sachwerte.” They are investing in common stock and real estate and prefer to have debts payable in legal tender money to having claims payable in it.

Even in the countries in which people are free to buy gold there are up to now no conspicuous purchases of gold on the part of financially potent individuals and institutions. Up to the moment at which French agencies began to buy gold, the buyers of gold were mostly people with modest incomes anxious to keep a few gold coins as a reserve for rainy days. It was the purchases on the part of such people that via the London gold market reduced the gold holdings of the United States.

There is only one method available to prevent a farther reduction of the American gold reserve: radical abandonment of deficit spending as well as of any kind of “easy money” policy.

Percy L. Greaves, Jr.

Most people want more money. So do I. But I wouldn’t keep it long. I would soon spend it for the things I need or want. So would most people. In other words, for most of us, more money is merely a means for buying what we really want. Only misers want more money for the sake of holding onto it permanently.

However, if more money is to be given out, most of us would like to get some of it. If we can’t get any for ourselves, the next best thing, from our viewpoint, would be for it to be given to those who might buy our goods or services. For then it is likely their increased spending would make us richer.

From such reasoning, many have come to believe that spreading more money around is a good thing—not only for their personal needs, but also for solving most all of the nation’s problems. For them, more money becomes the source of prosperity. So they approve all sorts of government programs for pumping more money into the economy.

If such programs are helpful, why not have more money for everyone? Why not have the government create and give everyone $100 or $200 or, better yet, $1,000? Why not have the government do it every year or every month or, better yet, every week?

Of course, such a system would not work. But why not? When we understand why not, we will know why every attempt to create prosperity by creating more money will not work. When we have learned the answer, we shall have taken a long step toward eliminating the greatest cause of both human misery and the decay of great civilizations.

One way to find the answer is to analyze the logic which seemingly supports the idea that more money in a nation’s economy means more prosperity for all. If we can spot an error in the chain of reasoning, we should be able to make it clear to others. Once such an error is generally recognized, the popularity of government money-cre-ation programs will soon disappear. Neither moral leaders nor voting majorities will long endorse ideas they know to be false.

Perhaps the basic thought that supports an ever-increasing money supply is the popular idea that more business requires more money: if we produce more goods and services, customers must have more money with which to buy the additional goods and services. From this, it is assumed that the need for prosperity and “economic growth” makes it the government’s duty to pump out more purchasing power to the politically worthy in the form of more money or subsidies paid for by the creation of more money.

Support for such reasoning is found in an idea that goes back at least to medieval days. In the thirteenth and fourteenth centuries some of the world’s best minds believed there was a “just price” for everything. The “just price” was then thought to be determined by a fixed cost of production. Actual prices might fluctuate slightly from day to day or season to season, but they were always expected to return to the basic “just price,” reflecting the supposedly never-changing number of man-hours required for production.

From such thinking, it naturally follows that increased production can only be sold when consumers have more money. More goods might be needed for any of several reasons, let us say for an increased population. However, no matter how much they were needed, they would remain unsold and unused unless buyers were supplied additional funds with which to buy them at, or near, the “just price.”

What is the situation in real life? What do businessmen do when they have more goods to sell than customers will buy at their asking price?

They reduce prices. They advertise sales at mark-down prices. If that doesn’t work, they reduce their prices again and again until all their surplus goods are sold. Any economic good can always be sold, if the price is right.

The way to move increased production into consumption is to adjust prices downward. Businessmen, who have made mistakes in judging consumer wants, will suffer losses. Those who provide what consumers prefer will earn profits. Lower prices will benefit all consumers and mean lower costs for future business operations. Under such a flexible price system, there is no need for more money. Businessmen soon learn to convert available supplies of labor and raw materials into those goods for which consumers will willingly pay the highest prices.

What Are Prices?

Prices are quantities of money. They reflect a complex of interrelated market conditions and individual value judgments at any one time and place. Each price reflects not only the available supply of that good in relation to the supply of all other available goods and services, but also the demand of individuals for that good in relation to their demand for all other available goods and services.

But even this is only one side of price-determining factors. The money side must also be taken into consideration. Every price also reflects not only the supply of money held by each market participant, but also—since very few people ever spend their last cent—how much money each participant decides to keep for his future needs and unknown contingencies.

Prices thus depend on many things besides the cost of production. They depend primarily on the relative values that consumers place on the satisfactions they expect to get from owning the particular mixture of goods and services that they select. However, prices also depend on the amount of money available both to each individual and to all individuals. In a free market economy, unhampered prices easily adjust to reflect consumer demand no matter what the total supply of money or who owns how much of it.

What is This Thing Called Money?

Money is a commodity that is used for facilitating indirect exchange. Money first appeared when individuals recognized the advantages of the division of labor and saw that indirect exchange was easier and more efficient than the clumsy, timeconsuming direct exchange of barter.

In the earliest days of specialized production, those who made shoes or caught fish soon found that if they wanted to buy a house, it was easier to buy it with a quantity of a universally desired commodity than with quantities of shoes or fresh fish.

So, they first exchanged their shoes or fish for a quantity of that commodity which they knew was most in demand. Such a commodity would keep and not spoil. It could be divided without loss. And most important, all people would value it no matter what the size of their feet or their desire for fish. The commodity which best meets these qualifications soon becomes a community’s medium of exchange, or money.

Many things have been used as money. In this country we once used the wampum beads of Indians and the shells found on our shores. As time passed, reason and experience indicated that the commodities best suited for use as money were the precious metals, silver and gold. By the beginning of this century, the prime money of the world had become gold. And so it is today. Gold is the commodity most in demand in world markets.

Money is always that commodity which all sellers are most happy to accept for their goods or services, if the quantity or price offered is considered sufficient. Money is thus the most marketable commodity of a market society. It is also the most important single commodity of a market society. This is so because it forms a part of every market transaction and whatever affects its value affects every transaction and every contemplated transaction.

Kinds of Goods

There are three types of economic goods:

1. Consumers’ goods.

2. Producers’ goods.

3. Money.

Consumers’ goods are those goods which are valued because they supply satisfaction to those who use or consume them. Producers’ goods are goods which are valued because they can be used to make or produce consumers’ goods. They include raw materials, tools, machines, factories, railroads, and the like. Money is that good which is valued because it can be used as a medium of exchange. It is the only type of economic good that is not consumed by its normal usage.

In the case of consumers’ goods and producers’ goods, every additional unit that is produced and offered for sale increases the wealth not only of the owner but of everyone else. Every additional automobile that is produced not only makes the manufacturer richer but it also makes every member of the market society richer.

How?

The more useful things there are in this world, the larger the numbers of human needs or wants that can be satisfied. The market system is a process for distributing a part of every increase in production to every participant in that market economy. When there is no increase in the money supply, the more goods that are offered for sale, the lower prices will be—and, consequently, the more each person can buy with the limited amount of money he has to spend. So every increase in production for a market economy normally means more for every member of that economy.

On the other hand, when any consumers’ goods or producers’ goods are lost or destroyed, not only the owner but all members of the market community suffer losses. With fewer goods available in the market place, and assuming no increase in the money supply, prices must tend to rise. Everybody’s limited supply of money will thus buy less.

Recently, a Montreal apartment house was destroyed by an explosion. The loss to the occupants and the owners or insurance companies is obvious. The loss to all of us may be less obvious, but nevertheless it is a fact.

The market society has lost forever the services and contributions of all those who were killed. It has also lost for a time the contributions of all those whose injuries temporarily incapacitated them. There is also a loss for all of us in the fact that human services and producers’ goods must be used to clear away the wreckage and rebuild what was destroyed. This diversion of labor and producers’ goods means the market will never be able to offer the things that such labor and producers’ goods could otherwise have been used to produce. With fewer things available in the market, prices will tend to be higher. Such higher prices will force each one of us to get along with a little less than would have been the case if there had been no explosion.

Thus, we are all sufferers from every catastrophe. Be it an airplane crash, a tornado, or a fire in some distant community, we all lose a little bit. And all these little bits often add up to a significant sum.

This is particularly true of war losses. Every American killed in Vietnam hurts every one of us not only in the heart but also in the pocketbook. Our government must supply some monetary compensation to his family and an income, however little, to his dependents. In such cases, the loss may continue for years. The killed man’s services are lost for his normal life span and his dependents become a long-term burden on the nation’s taxpayers and consumers. Such losses can never be measured or calculated, but they are real nonetheless.

So, in a market society every increase in consumers’ goods or producers’ goods permits us to buy more with whatever money we have, and every decrease in consumers’ goods or producers’ goods means ultimately higher prices and less for our money. Increased supplies of such economic goods help both the producers and everyone else who owns one or more units of money.

Limited Goods Available

With money, the situation is quite different. Any increase in the supply of money helps those who receive some of the new supply, but it hurts all those who do not. Those who receive some of the new supply can rush out and buy a larger share of the goods and services in the market place. Those who receive none of the new money supply will then find less available for them to buy. Prices will rise and they will get less for their money.

Pumping more money into a nation’s economy merely helps some people at the expense of others. It must, by its very nature, send prices up higher than they would have been, if the money supply had not been increased. Those with no part of the new money supply must be satisfied with less. It does not and cannot increase the quantity of goods and services available.

Those who create and slip new supplies of money into the economy are silently transferring wealth which rightfully belongs to savers and producers to those who, without contributing to society, are the first to spend the new money in the market place. When this is done by private persons, they are called counterfeiters. Their attempts to help themselves at the expense of others are easily recognized. When caught, they are soon placed where they can add no more to the money supply.

In recent generations our major problem has not been private counterfeiters. It has been governments. Over the years, governments have found ways to increase the money supply that not more than one or two persons in a million can detect. This is particularly true when production is increasing and when more and more of the monetary units are held off the market. Nonetheless, whether prices go up or not, every time a government increases the money supply, it is taking wealth from some and giving it to others.

This semi-hidden increase in the money supply occurs in two ways:

One, by the creation and issuance of money against government securities. This is a favorite way to finance government deficits. Government securities that private investors will not buy, because they pay lower-than-free-market interest rates, are sold to commercial banks. The banks pay for such securities by merely adding the price of the securities to government bank accounts. The government can then draw checks to pay suppliers, employees, and subsidy recipients. (This process is encouraged and increased by technical actions and direct purchases of the nation’s central bank. In the United States, these powers reside in the Federal Reserve Board, which has not been hesitant about using them.)

The government thus receives purchasing power without contributing anything to the goods and services offered in the market place. It thus gets something for nothing. As a result, there is less available for those spending and investing dollars they have received for their contributions to society. The consequence of such government spending is that prices are higher than they would otherwise have been.

Two, the other major semi-hidden means of increasing the money supply is for banks to lend money to private individuals or organizations by merely creating or adding a credit to the borrowers’ checking accounts. In such cases, they are not lending the savings of depositors. They are merely creating dollars, in the form of bank accounts, by simple bookkeeping entries. The borrowers are thereby enabled to draw checks or ask for newly created money with which to buy a part of the goods and services available in the market place. This means that those responsible for the production of these goods and services must be satisfied with less than the share they would have received if the money supply had not been so increased.

All these new dollars provided the first recipients with wealth which, had there been no artificial additions to the money supply, would have gone to those spenders and investors who received their dollars in return for contributions to society. Last year alone, political favorites were helped to the tune of $21 billion, at the expense of all the nation’s producers and savers of real wealth.

These money-increasing policies remain hidden from most people, particularly when prices do not rise rapidly. It is now popular to say there is no inflation unless official price indexes rise appreciably. This popular corruption of the term inflation, originally defined as an increase in the money supply, makes it seem safe for the government to increase the money supply so long as the government’s own price indexes do not rise noticeably. So, if these price indexes can somehow be kept down, the government can continue buying or allocating wealth which has been created by private individuals who must be satisfied with less than the free market value of their contributions.

Price Rise Kept Down

Since World War II, there have been two continuing situations which have helped to keep official price indexes from reflecting the full effect of this huge increase in the money supply. The first such situation is that throughout this period American production of wealth has continued to increase. The second is that during these years foreigners and their banks and governments have taken and held off the market increasing supplies of dollars.

If there had been no upward manipulation of the money supply, the increased production of wealth would have resulted in lower prices. This would have provided more for everyone who earned or saved a dollar. It would also have reduced costs and increased the amount of goods and services that would have been sold at home and abroad.

As it was, with prices rising slowly over the 1945-64 period, the Federal government and our government-controlled banking system have been able to allocate the benefits of increased production, and a little bit more, to favored bank borrowers who pay lower than free market interest rates and those who received Federal funds over and above the sums collected in taxes or borrowed from private individuals or corporations.

Untold billions of dollars have also gone into the hands or bank accounts of international organizations, foreigners, their banks, and governments. Many of these dollar holders consider $35 to be worth more than an ounce of gold. Such dollar holders have felt they could always get the gold and, meanwhile, they can get interest by leaving their dollars on deposit with American banks. Foreign governments could even count such deposits as part of their reserves against their own currencies. For example, the more dollars held by the Bank of France, the more it can expand the supply of French francs. So the inflations of many European governments are built on top of the great increase in their holdings of dollars.

This whole process of increasing the money supply by semi-hidden manipulations is not only highly questionable from the viewpoint of morality and economic incentives, but it also has a highly disorganizing effect on the production pattern of our economy. Over the years, as these newly created dollars have found their way into the market, they have forced profit-seeking enterprises to allocate a growing part of production to the spenders of the newly created dollars, leaving less production available for the spenders of dollars which represent contributions to society. Once this artificial creation of dollars comes to an end, as it must eventually, those businesses whose sales have become dependent upon the spending of the newly created dollars will lose their customers.

This will call for a reorganization of the nation’s production facilities. Such reorganizations of business have become known as depressions. The depression can be short, with a minimum of human misery, if prices, wage rates, and interest rates are left free to reflect a true picture of the ever-changing demands of consumers and supplies of labor, raw materials, and savings. Private business will then move promptly and efficiently to employ what is available to produce the highest valued mixture of goods and services. Any interference with the free market indicators will not only slow down recovery but also misdirect some efforts and reduce the ability of business to satisfy as much human need as a completely free economy would.

The day of reckoning can only be put off so long. Once the nation’s workers and savers realize that such semi-hidden increases in the money supply are appropriating a part of their purchasing power, they may take their dollars out of government bonds, savings banks, life insurance policies, and the like in order to buy goods or invest in real estate or common stocks, and even borrow at the banks to do so. If this trend should develop, the government would soon be forced to adopt sound fiscal and monetary policies.

The same effect might be produced by a rush of foreign dollar holders to spend the dollars they now consider as good as one thirty-fifth of an ounce of gold. In any case, an ever-increasing supply of dollars and ever-increasing prices will eventually bring on a “runaway inflation,” unless the government stops its present practices before the situation gets completely out of hand.

The important thing to remember is that increases in the nation’s money supply can never benefit the nation’s economy. Such increases in the money supply do not and cannot increase the supply of goods and services that a free economy would produce. Such inflations of the money supply can only help some at the expense of others. Even such help for the politically favored is at best only temporary. As prices rise, it takes ever bigger doses of new money to have the same effect, and this in turn means still higher prices.

The fact is that no matter what the volume of business may be, any given supply of money is sufficient to perform all the services money can perform for an economy. All that is needed for continued prosperity is for the government to let prices, wage rates, and interest rates fluctuate so that they reveal rather than hide the true state of market conditions.

Under the paper money standard, politicians are easily tempted to keep voting for just a little more spending than last year, and just a little less taxing than last year. The gap can be covered by a semihidden increase in the money supply—just a little more than last year. Then, too, the illusions of prosperity are often helped along by an easy money policy—holding interest rates below those of a free market. This tends to increase the demand for loans above the amount of real savings available for lending. The banks then meet the demand for more credit by the bookkeeping device of increasing the bank accounts of borrowers.

Clever financial officials must then find ways to put off the day of reckoning. If gold continues to flow out, private travel, imports, and investments can be blamed and controls instituted. When the first controls do not succeed, more and more controls can be added.

When these fail, public attention can always be diverted by a war. War is now generally considered a sufficient excuse for more inflation and a completely controlled economy of the type Hitler established in Germany.

No man or government should ever be trusted with the legal power to increase a nations money supply at will

The great advantage of the gold standard is that gold cannot be created by printing presses or by bookkeeping entries. When a country is on the gold standard, politicians who want to vote for spending measures must also vote for increased taxes or sanction the issuance of government securities paying free market interest rates that will attract the funds of private savers and investors. Under a true gold standard, men remain free, the quantity of money is determined by market forces, and both the manipulated inflations and the resulting depressions are eliminated, along with all the poverty and human misery that they cause.

Henry Hazlitt

In February of this year President de Gaulle of France startled the financial world by calling for a return to an international gold standard. American and British monetary managers replied that he was asking for the restoration of a world lost forever. But some eminent economists strongly endorsed his proposal. They argued that only a return to national currencies directly convertible into gold could bring an end to the chronic monetary inflation of the last twenty years in nearly every country in the world.

What is the gold standard? How did it come about? When and why was it abandoned? And why is there now in many quarters a strong demand for its restoration?

We can best understand the answers to these questions by a glance into history. In primitive societies exchange was conducted by barter. But as labor and production became more divided and specialized, a man found it hard to find someone who happened to have just what he wanted and happened to want just what he had. So people tried to exchange their goods first for some article that nearly everybody wanted so that they could exchange this article in turn for the exact things they happened to want.

This common commodity became a medium of exchange—money.

All sorts of things have been used in human history as such a common medium of exchange— cattle, tobacco, precious stones, the precious metals, particularly silver and gold. Finally gold became dominant, the “standard” money.

Gold had tremendous advantages. It could be fashioned into beautiful ornaments and jewelry. Because it was both beautiful and scarce, gold combined very high value with comparatively little weight and bulk; it could therefore be easily held and stored. Gold “kept” indefinitely; it did not spoil or rust; it was not only durable but practically indestructible. Gold could be hammered or stamped into almost any shape or precisely divided into any desired size or unit of weight. There were chemical and other tests that could establish whether it was genuine. And as it could be stamped into coins of a precise weight, the values of all other goods could be exactly expressed in units of gold. It therefore became not only the medium of exchange but the “standard of value.” Records show that gold was being used as a form of money as long ago as 3,000 B.C. Gold coins were struck as early as 800 or 700 B.C.

One of gold’s very advantages, however, also presented a problem. Its high value compared with its weight and bulk increased the risks of its being stolen. In the sixteenth and even into the nineteenth centuries (as one will find from the plays of Ben Jonson and Molière and the novels of George Eliot and Balzac) some people kept almost their entire fortunes in gold in their own houses. But most people came more and more into the habit of leaving their gold for safekeeping in the vaults of goldsmiths. The goldsmiths gave them a receipt for it.

The Origin of Banks

Then came a development that probably no one had originally foreseen. The people who had left their gold in a goldsmith’s vault found, when they wanted to make a purchase or pay a debt, that they did not have to go to the vaults themselves for their gold. They could simply issue an order to the goldsmith to pay over the gold to the person from whom they had purchased something. This second man might find in turn that he did not want the actual gold; he was content to leave it for safekeeping at the goldsmith’s, and in turn issue orders to the goldsmith to pay specified amounts of gold to still a third person. And so on.

This was the origin of banks, and of both bank notes and checks. If the receipts were made out by the goldsmith or banker himself, for round sums payable to bearer, they were bank notes. If they were orders to pay made out by the legal owners of the gold themselves, for varying specified amounts to be paid to particular persons, they were checks. In either case, though the ownership of the gold constantly changed and the bank notes circulated, the gold itself almost never left the vault!

When the goldsmiths and banks made the discovery that their customers rarely demanded the actual gold, they came to feel that it was safe to issue more notes promising to pay gold than the actual amount of gold they had on hand. They counted on the high unlikelihood that everybody would demand his gold at once.

This practice seemed safe and even prudent for another reason. An honest bank did not simply issue more notes, more IOU’s, than the amount of actual gold it had in its vaults. It would make loans to borrowers secured by salable assets of the borrowers. The bank notes issued in excess of the gold held by the bank were also secured by these assets. An honest bank’s assets therefore continued to remain at least equal to its liabilities.

There was one catch. The bank’s liabilities, which were in gold, were all payable on demand, without prior notice. But its assets, consisting mainly of its loans to customers, were most of them payable only on some date in the future. The bank might be “solvent” (in the sense that the value of its assets equaled the value of its liabilities) but it would be at least partly “illiquid.” If all its depositors demanded their gold at once, it could not possibly pay them all.

Yet such a situation might not develop in a lifetime. So in nearly every country the banks went on expanding their credit until the amount of banknote and demand-deposit liabilities (that is, the amount of “money”) was several times the amount of gold held in the banks’ vaults.

The Fractional Reserve

In the United States today there are $11 of Federal Reserve notes and demand-deposit liabilities— i.e., $11 of money—for every $1 of gold.

Up until 1929, this situation—a gold standard with only a “fractional” gold reserve—was accepted as sound by the great body of monetary economists, and even as the best system attainable. There were two things about it, however, that were commonly overlooked. First, if there was, say, four, five, or ten times as much note and deposit “money” in circulation as the amount of gold against which this money had been issued, it meant that prices were far higher as a result of this more abundant money, perhaps four, five, or ten times higher, then if there had been no more money than the amount of gold. And business was built upon, and had become dependent upon, this amount of money and this level of wages and prices.

Now if, in this situation, some big bank or company failed, or the prices of stocks tumbled, or some other event precipitated a collapse of confidence, prices of commodities might begin to fall; more failures would be touched off; banks would refuse to renew loans; they would start calling old loans; goods would be dumped on the market. As the amount of loans was contracted, the amount of bank notes and deposits against them would also shrink. In short, the supply of money itself would begin to fall. This would touch off a still further decline of prices and buying and a further decline of confidence.

That is the story of every major depression. It is the story of the Great Depression from 1929 to 1933.

From Room to Slump

What happened in 1929 and after, some economists argue, is that the gold standard “collapsed.” They say we should never go back to it or depend upon it again. But other economists argue that it was not the gold standard that “collapsed” but unsound political and economic policies that destroyed it. Excessive expansion of credit, they say, is bound to lead in the end to a violent contraction of credit. A boom stimulated by easy credit and cheap money must be followed by a crisis and a slump.

In 1944, however, at a conference in Bretton Woods, New Hampshire, the official representatives of 44 nations decided—mainly under the influence of John Maynard Keynes of Great Britain and Harry Dexter White of the United States—to set up a new international currency system in which the central banks of the leading countries would cooperate with each other and coordinate their currency systems through an International Monetary Fund. They would all deposit “quotas” in the Fund, only one-quarter of which need be in gold, and the rest in their own currencies. They would all be entitled to draw on this Fund quickly for credits and other currencies.

The United States alone explicitly undertook to keep its currency convertible at all times into gold. This privilege of converting their dollars was not given to its own citizens, who were forbidden to hold gold (except in the form of jewelry or teeth fillings); the privilege was given only to foreign central banks and official international institutions. Our government pledged itself to convert these foreign holdings of dollars into-gold on demand at the fixed rate of $35 an ounce. Two-way convertibility at this rate meant that a dollar was the equivalent of one-thirty-fifth of an ounce of gold.

The other currencies were not tied to gold in this direct way. They were simply tied to the dollar by the commitment of the various countries not to let their currencies fluctuate (in terms of the dollar) by more than 1 per cent either way from their adopted par values. The other countries could hold and count dollars as part of their reserves on the same basis as if dollars were gold.

International Monetary Fund Promotes Inflation

The system has not worked well. There is no evidence that it has “shortened the duration and lessened the degree of disequilibrium in the international balances of payments of members,” which was one of its six principal declared purposes. It has not maintained a stable value and purchasing power of the currencies of individual members. This vital need was not even a declared purpose.

In fact, under it inflation and depreciation of currencies have been rampant. Of the 48 or so national members of the Fund in 1949, practically all except the United States devalued their currencies (i.e., reduced their value) that year following devaluation of the British pound from $4.03 to $2.80. Of the 102 present members of the Fund, the great majority have either formally devalued since they joined, or allowed their currencies to fall in value since then as compared with the dollar.

The dollar itself, since 1945, has lost 43 per cent of its purchasing power. In the last ten years alone the German mark has lost 19 per cent of its purchasing power, the British pound 26 per cent, the Italian lira 27 per cent, the French franc 36 per cent, and leading South American currencies from 92 to 95 per cent.

In addition, the two “key” currencies, the currencies that can be used as reserves by other countries—the British pound sterling and the U.S. dollar—have been plagued by special problems. In the last twelve months the pound has had to be repeatedly rescued by huge loans, totaling more than $4 billion, from the Fund and from a group of other countries.

Balance of Payments

The United States has been harassed since the end of 1957 by a serious and apparently chronic “deficit in the balance of payments.” This is the name given to the excess in the amount of dollars going abroad (for foreign aid, for investments, for tourist expenditures, for imports, and for other payments) over the amount of dollars coming in (in payment for our exports to foreign countries, etc.). This deficit in the balance of payments has been running since the end of 1957 at a rate of more than $3 billion a year. In the seven-year period to the end of 1964, the total deficit in our balance of payments came to $24.6 billion.

This had led, among other things, to a fall in the amount of gold holdings of the United States from $22.9 billion at the end of 1957 to $13.9 billion now—a loss of $9 billion gold to foreign countries.

Other changes have taken place. As a result of the chronic deficit in the balance of payments, foreigners have short-term claims on the United States of $27.8 billion. And $19 billion of these are held by foreign central banks and international organizations that have a legal right to demand gold for them. This is $5 billion more gold than we hold altogether. Even of the $13.9 billion gold that we do hold, the Treasury is still legally obliged to keep some $8.8 billion against outstanding Federal Reserve notes.

This is why officials and economists not only in the United States but all over the Western world are now discussing a world monetary reform. Most of them are putting forward proposals to increase “reserves” and to increase “liquidity.” They argue that there isn’t enough “liquidity”—that is, that there isn’t enough money and credit, or soon won’t be—to conduct the constantly growing volume of world trade. Most of them tell us that the gold standard is outmoded. In any case, they say, there isn’t enough gold in the world to serve as the basis for national currencies and international settlements.

But the advocates of a return to a full gold standard, who though now in a minority include some of the world’s most distinguished economists, are not impressed by these arguments for still further monetary expansion. They say these are merely arguments for still further inflation. And they contend that this further monetary expansion or inflation, apart from its positive dangers, would be a futile means even of achieving the ends that the expansionists themselves have in mind.

Suppose, say the gold-standard advocates, we were to double the amount of money now in the world. We could not, in the long run, conduct any greater volume of business and trade than we could before. For the result of increasing the amount of money would be merely to increase correspondingly the wages and prices at which business and trade were conducted. In other words, the result of doubling the supply of money, other things remaining unchanged, would be roughly to cut in half the purchasing power of the currency unit. The process would be as ridiculous as it would be futile. This is the sad lesson that inflating countries soon or late learn to their sorrow.

The Great Merit of Gold

The detractors of gold complain that it is difficult and costly to increase the supply of the metal, and that this depends upon the “accidents” of discovery of new mines or the invention of better processes of extraction. But the advocates of a gold standard argue that this is precisely gold’s great merit. The supply of gold is governed by nature; it is not, like the supply of paper money, subject merely to the schemes of demagogues or the whims of politicians. Nobody ever thinks he has quite enough money. Once the idea is accepted that money is something whose supply is determined simply by the printing press, it becomes impossible for the politicians in power to resist the constant demands for further inflation. Gold may not be a theoretically perfect basis for money; but it has the merit of making the money supply, and therefore the value of the monetary unit, independent of governmental manipulation and political pressure.

And this is a tremendous merit. When a country is not on a gold standard, when its citizens are not even permitted to own gold, when they are told that irredeemable paper money is just as good, when they are compelled to accept payment in such paper of debts or pensions that are owed to them, when what they have put aside, for retirement or old-age, in savings banks or insurance policies, consists of this irredeemable paper money, then they are left without protection as the issue of this paper money is increased and the purchasing power of each unit falls; then they can be completely impoverished by the political decisions of the “monetary managers.”

I have just said that the dollar itself, “the best currency in the world,” has lost 43 per cent of its purchasing power of twenty years ago. This means that a man who retired with $10,000 of savings in 1945 now finds that that capital will buy less than three-fifths as much as it did then.

But Americans, so far, have been the very lucky ones. The situation is much worse in England, and still worse in France. In some South American countries practically the whole value of people’s savings—92 to 95 cents in every dollar—has been wiped out in the last ten years.

Not a Managed Money

The tremendous merit of gold is, if we want to put it that way, a negative one: It is not a managed paper money that can ruin everyone who is legally forced to accept it or who puts his confidence in it. The technical criticisms of the gold standard become utterly trivial when compared with this single merit. The experience of the last twenty years in practically every country proves that the monetary managers are the pawns of the politicians, and cannot be trusted.

Many people, including economists who ought to know better, talk as if the world had already abandoned the gold standard. They are mistaken. The world’s currencies are still tied to gold, though in a loose, indirect, and precarious way. Other currencies are tied to the American dollar, and convertible into it, at definite “official” rates (unfortunately subject to sudden change) through the International Monetary Fund. And the dollar is still, though in an increasingly restricted way, convertible into gold at $35 an ounce.

Indeed, the American problem today, and the world problem today, is precisely how to maintain this limited convertibility of the dollar (and hence indirectly of other currencies) into a fixed quantity of gold. This is why the American loss of gold, and the growing claims against our gold supply, are being viewed with such concern.

The crucial question that the world has now to answer is this: As the present system and present policies are rapidly becoming untenable, shall the world’s currencies abandon all links to gold, and leave the supply of each nation’s money to be determined by political management, or shall the world’s leading currencies return to a gold standard—that is, shall each leading currency be made once again fully convertible into gold on demand at a fixed rate?

Whatever may have been the shortcomings of the old gold standard, as it operated in the nineteenth and the early twentieth century, it gave the world, in fact, an international money. When all leading currencies were directly convertible into a fixed amount of gold on demand, they were of course at all times convertible into each other at the equivalent fixed cross rates. Businessmen in every country could have confidence in the currencies of other countries. In final settlement, gold was the one universally acceptable currency everywhere. It is still the one universally acceptable commodity to those who are still legally allowed to get it.

Instead of ignoring or deploring or combating this fact, the world’s governments might start building on it once more.

Lawrence Noonan

You are a member of the jury in this fictional court case

The courtroom was hushed as the judge entered the chamber. It was crowded and many people could find standing room only. The trial, of course, had attracted nationwide interest and you could almost reach out and feel the expectancy.

The defendant, Charles Akins, was a rather small and timid looking man. Perhaps the timidity was a matter of fear—surely the somber courtroom and the overpowering majesty of the law were enough to inspire fear in a defendant. Mr. Akins certainly did not look like a criminal. As a matter of fact, he really looked quite respectable. But he did look frightened. And yet, there was determination there. And just a gleam of courage shining through, too.

Perhaps we should tell you now that the year was 1984. Not that there was anything so special about ’84. Children went to school, grew up, worked, got married, and reared their own children. People went to church, voted, talked politics, argued, and endeavored to understand the subtleties of economics. But, all of it was just a little bit different. Especially in the way that people looked at things.

The Judge, the Honorable Warren Faber, having completed the preliminary ceremonies, was looking rather curiously, we thought, at the defendant.

“Mr. Akins,” he said, “it is my understanding that you have retained no counsel and that you wish to defend yourself. Considering the gravity of the charge against you, I feel that you might like to reconsider.”

“No, your honor,” Akins replied, “I am going to defend myself.”

“Mr. Akins, you are charged with a federal offense and are being tried in a federal court. You are charged with usurping the function of the government, of undermining and attempting to replace the monetary system of this country. With serious charges of this nature why will you not avail yourself of counsel?”

Mr. Akins seemed to be shivering slightly.

“Your honor, the facts have already been more or less determined. This is a matter of right or wrong. There isn’t any legal thing involved here. I’m not guilty of anything. I simply want to tell what happened. I want to tell my story. I don’t need any lawyer to do that.”

The Prosecuting Attorney, Arnold Spear, leaped to his feet.

“Your honor, I object. The defendant is attempting to tell the court what is right and wrong. Further, I object to the statement that all of the facts are known.”

“Objection overruled. This court will make its findings when the time comes. The defendant does have the right to represent himself. Mr. Akins, you have been sworn in. Now tell us what you consider to be your story.”

“Well, this is the way it was. Back in 1957 my company, Trans-World Mining, became interested in increasing the market for our principal product—platinum. We had expanded our mining considerably and we needed more in the way of sales. We believed that platinum could be used far more extensively in jewelry and we bought a well-known jewelry manufacturing firm. We experimented with combining platinum with another metal, and we came up with something very beautiful and practical.”

Judge Faber interrupted. “Mr. Akins, let me interrupt a minute. Up to this point you have simply told us that you were a mining company and had turned to the manufacture of jewelry from platinum?”

“Yes sir, that is correct. We had considerable success with the manufacture of jewelry, but as the years went by we began to notice a very unusual thing.”

The Judge leaned forward intently. There was absolute quiet in the courtroom.

“We had manufactured small disk-like pieces of jewelry with some fine detail work on each side. Each piece had a small hole near one edge and we had intended them as pieces suitable for pendants. They sold for fifty, a hundred, and two hundred dollars apiece. Frankly, we had not expected to sell too many of them. But as time passed, we began to experience something unusual. As I said, in the beginning, we didn’t know how much to expect in the way of sales from a simple little piece like this. But as the years went by, the sales on this one small piece of adornment jewelry exceeded the sale of everything else the company was making! We couldn’t understand it. These small pieces— originally priced at $50 to $200, and later at higher figures as the dollar price of platinum rose along with prices of everything else—were going like hot cakes. This went on and on. Finally, I had a market research outfit do a survey to find out why we were selling so many of these.”

Charles Akins paused and licked his lips. The audience in the room was quiet but tense. Although they didn’t have a doubt about the outcome of the trial, it was fascinating to hear this story from the man himself. After all, you didn’t defy the government these days and get away with it!

Akins went on. “We discovered that people were buying these as an investment. People had become terribly afraid of the government’s solvency. The government had issued barrels full of paper money. It wasn’t even backed by gold any more. You couldn’t even get gold.”

Arnold Spear had jumped to his feet again. There was contempt in his eyes as he looked toward the defendant.

“Your honor, the defendant is beating about the bush. These things about paper money and gold are ridiculous! He’s completely dodging the main issue—what was written on those coins?”

Little Mr. Akins was growing bolder.

“Your honor, it is my turn now to object. This was not a coin. We did not make these as coins. We did put an inscription on this piece of jewelry which conveyed—in a foreign tongue—Eternal Love. We had expected that this piece would be used for gift purposes. However, many people also interpreted this quotation to mean Eternal Value. Later on, this piece of jewelry began to be used by people in trade. They recognized and trusted the purity of its alloy. It had real value to them not only as an ornament but also as a medium of exchange. And as it came more and more into use in trade, this new use gave it still added value. People began saving them, hoarding them. We increased our production many times. We almost eliminated the manufacture of all other platinum items. The people wanted these. They were demanding them.”

Akins paused again. He seemed to be either waiting to be challenged by the Prosecuting Attorney or for a request for clarification from the Judge. Nothing happened. Both the Judge and Arnold Spear had become absorbed in the story.

Akins proceeded now with growing confidence. He was on familiar ground. Regardless of the outcome, he had only one course and he followed it.

“Naturally, we were in business to make a profit. However, we, too, had become very apprehensive about the monetary situation and the government’s policy. We finally decided that in addition to selling the platinum pieces, we would also make them the basis of our accounting and billing system—our private monetary unit. Thus, we began to use them as a medium of exchange. Of course, we were soon threatened by the Treasury Department. But they couldn’t really do anything about it. Anyway, they didn’t try. But later the value of the paper money in the country became almost worthless and they tried to blame Trans-World Mining for it. There was wild inflation. But the platinum pieces kept their value. People kept these whereas they would have kept gold if they could have gotten it. The government’s paper money became almost worthless.”

There was now both triumph and despair in Akins’ voice.

“Well, it was almost incredible what had happened. The chaos became almost indescribable. People became frantic to get more of these platinum pieces. Where the value of paper money was going down and down, the value of the platinum piece was going up. It became the only sound means of exchange in the country.”

Sadly he continued. “People came to realize that sound money was just as important as liberty itself. They found that there wasn’t any honest freedom without honest money.”

Another pause. “But now the government needs a scapegoat and they’ve got me. They want to put their own blame on someone else.”

We won’t bore you with the cross examination by Arnold Spear, the Prosecuting Attorney. He was eager for a conviction and the rhetoric thundered in the court. He likened Akins to one guilty of treason, of plotting the downfall of his own country. Akins was morally a leach and legally far worse. The thunder rolled on and on.

We don’t know yet what the verdict is. The jury is still out.

Footnotes

1 From The Freeman, March 1957. Reproduced by permission of The Employers’ Association of Chicago

2 First published December 13, 1780 in Philadelphia under the title “Strictures On Tender Acts”

3 On March 18, 1780, the Continental Congress officially had recognized the debauchery of its currency, allowing it to exchange for specie at the rate of 40:1. By the time this piece was written, the unofficial exchange rate had further widened to 100:1. This probably explains Webster’s illustration—“two-fifths of the debt.”

4 From The Freeman, November 1969

5 From The Freeman, June 1965

6 Cf. Roscoe Pound, Legal Immunities of Labor Unions, Washington, D. C., 1957, p. 21.

7 From The Freeman, May 1965

8 See “Jobs for All” by Percy L. Greaves, Jr., (Reading No. 38)

9 Figures from the Federal Reserve Bulletin, February 1965. Figures for the money supply include those for currency outside of banks, demand deposits, and time deposits of commercial banks which in practice may be withdrawn on demand.

10 Federal Reserve Board “Supplement” to Banking and Monetary Statistics, Sec. 15. International Finance.

11 Federal Reserve Bulletin, February, 1965.

12 From The Freeman, October 1965

13 From The Freeman, May 1960

1MILLION DOLLAR DREAM42.*
2NOT WORTH A CONTINENTAL43.*
3I beg leave here to ask of every member of the Assembly who voted for that law, and every other man who is a member of this state, what their sentiments of that action would be, and in what light they would view the borrower who tendered the paper dollars—that is, two-fifths of the debt43.1— in payment of the silver ones he had received: Would they consider him as an upright, honest man, or a shameless rascal?
4THE VALUE OF MONEY44.*
5THE GOLD PROBLEM45.*
6Governments decreeing minimum wage laws above the level of the market wage rates restrict the number of hands that can find jobs. They are producing unemployment of a part of the labor force. The same is true for what is euphemistically called “collective bargaining.” The only difference between the two methods concerns the apparatus enforcing the minimum wage. The government enforces its orders in resorting to policemen and prison guards. The unions “picket.” They and their members and officials have acquired the power and the right to commit wrongs to person and property, to deprive individuals of the means of earning a livelihood, and to commit many other acts which no one can do with impunity.45.1 Nobody is today in a position to disobey an order issued by a union. To the employers no other choice is left than either to surrender to the dictates of the unions or to go out of business.
7HOW MUCH MONEY?46.*
8There are some who claim that increasing the money supply puts more men to work. This can only be so when there is unemployment resulting from pushing wage rates above those of a free market by such political measures as minimum wage laws and legally sanctioned labor union pressures. Under such conditions, increasing the money supply reduces the value of each monetary unit and thus reduces the real value of all wages. By doing this, it brings the higher-than-free-market wage rates nearer to what they would be in a free market. This in turn brings employment nearer to what it would be in a free market, where there is a job for all who want to work.46.1
9By such systems of money creation, our government and our government-controlled banking system have, from the end of 1945, increased the nation s money supply from $132.5 billion to an estimated $289.9 billion by the end of 1964. This is an increase of $157.4 billion. During the same period, the gold stock, held as a reserve against this money and valued at $35 an ounce, fell from $20.1 billion to $15.4 billion. The increase in the money supply for 1964 amounted to $21.0 billion.46.2
10Short term liabilities of American banks to foreigners at the end of 1945 were only $6.9 billion.46.3 By the end of last year, they had risen to an estimated $28.8 billion, an increase of $20.9 billion.46.4 How many more dollars rest in foreign billfolds or under foreign mattresses cannot even be guessed. Should such foreign dollar holders lose confidence in the ability of their central banks to get an ounce of gold for every $35 presented to our government, more and more of these dollars will return to our shores where their presence will bid up American prices.
11Short term liabilities of American banks to foreigners at the end of 1945 were only $6.9 billion.46.3 By the end of last year, they had risen to an estimated $28.8 billion, an increase of $20.9 billion.46.4 How many more dollars rest in foreign billfolds or under foreign mattresses cannot even be guessed. Should such foreign dollar holders lose confidence in the ability of their central banks to get an ounce of gold for every $35 presented to our government, more and more of these dollars will return to our shores where their presence will bid up American prices.
12BACK TO GOLD?47.*
13ETERNAL LOVE48.*

Free Market Economics: A Basic Reader