In the United States we currently have a stated policy by the Federal Reserve to create higher levels of inflation while artificially lowering interest rates. This is a policy devastating to savers and those attempting to live off of the proceeds of their capital. How did we arrive at the point where a government created agency can arbitrarily opt to destroy the value of people’s savings?
Murray Rothbard’s What Has Government Done to Our Money? lays out the step by step process by which the commodity based monies of the free market are slowly and deliberately usurped by governments and their central banks. The end result of this control is the ability of government to take purchasing power from the savings of its citizens through inflation.
Understanding money and its creation are essential to understanding how inflation originates. Rothbard assumes no prior knowledge of the subject and begins with first principles to derive what money is and how it is used in a free market. He then covers the manipulations used by government to wrestle control of money away from the free market. Finally he finishes with a two hundred year history of money and currencies in the Western world. It is through this history he demonstrates how government abuse has resulted in a series of breakdowns of the dollar with respect to gold that have inevitably led to our current global monetary crisis.
Throughout history, free markets have chosen commodities as money. Of those commodities, gold and silver have most often been used as a result of their superior properties as a medium of exchange. A critical property of real money is that is it a commodity whose value is proportional to its weight. The shape is irrelevant, although some forms carry a higher premium proportional to the cost of their production. In the case of gold, privately minted coins, bars, nuggets and dust all exist side by side as money in a free market.
The first step of government control of money is to monopolize the minting process. It is declared that only coins produced by the government may serve as legal tender. Historically governments have used this control to continually debase the coin through melting and reissuing with smaller and smaller metal contents. In several examples from history, coins literally disappeared over the years as eventually too little metal remained to even produce a usable coin.
In more modern times the key to government control of money has been to create money substitutes in the form of unbacked paper currencies. Note again that real money is a commodity whose value is proportional to its weight. Paper currency, or its equivalent digital credits, have no such property. These are artificial constructs that once fully implemented and separated from any original underlying commodity, may be manipulated at will – and without limit.
The book introduces the topic of fractional reserve banking and its ability to create credit out of thin air. This coupled with the backstop of a central bank are shown to be primary components in the inflation process. For those seeking a better understanding of the banking system, a complete description is provided by Rothbard in his book The Mystery of Banking.
Inflation is big government’s best friend. It is the means by which the savings of productive citizens are quietly raided. Politicians have always preferred this method of payment as it avoids many of the past unpleasantries associated with levying onerous taxes, namely social unrest and political revolution.
Inflation is not something that just happens. It is a deliberate increase in the money supply. It is the right to produce counterfeit money that the government reserves for itself. The creation of new money does not produce additional wealth for society. Real wealth is represented by the underlying goods and services which may be exchanged for money. When new money is created, a proportional amount of real goods and services do not suddenly appear as if by magic. The creation of new money only dilutes the purchasing power of all existing money, but it does so over time.
Those who have first access to the newly created money benefit greatly as they can control more underlying real goods via the original prices. As the money moves through the economy, prices rise due to the additional demand. Those who receive the new money last experience a reduction in their standard of living. They suffer from a loss of purchasing power through higher prices before receiving additional money via higher wages. The net effect of inflation then is merely a transfer of existing wealth from those who receive the new money last to those who receive it first.
It is through an understanding of the true nature of money and inflation that the value of gold becomes more apparent. Gold is real money that forms the foundation of the world’s monetary system regardless of any explicit backing. It is a commodity based money that markets have always recognized. It does not require the credit of government and has no counterparty risk. It is the ultimate means by which individuals can protect their wealth from the actions of fiscally reckless governments that seek to continually debase their currencies.