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WHAT HAS GOVERNMENT DONE TO OUR MONEY ?

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WHAT

HAS

GOVERNMENT

DONE

O UR

M ONEY

MURRAY N. ROTHBARD

Ludwig von Mises Institute

Auburn, Alabama

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lisher to use or reproduce any part of this book, except for brief quota-

tions in critical reviews or articles.

Published by Ludwig von Mises Institute, 518 West Magnolia Avenue,

Auburn, Alabama 36832.

ISBN: 978-1-933550-34-3

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Contents

I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7

II. Money in a Free Society . . . . . . . . . . . . . . . . . . . . . . . . .11

1. The Value of Exchange . . . . . . . . . . . . . . . . . . . . .11

2. Barter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

3. Indirect Exchange . . . . . . . . . . . . . . . . . . . . . . . . .13

4. Benefits of Money . . . . . . . . . . . . . . . . . . . . . . . . .16

5. The Monetary Unit . . . . . . . . . . . . . . . . . . . . . . .18

6. The Shape of Money . . . . . . . . . . . . . . . . . . . . . .20

7. Private Coinage . . . . . . . . . . . . . . . . . . . . . . . . . . .22

8. The “Proper” Supply of Money . . . . . . . . . . . . .26

9. The Problem of “Hoarding” . . . . . . . . . . . . . . . .30

10. Stabilize the Price Level? . . . . . . . . . . . . . . . . . . .34

11. Coexisting Moneys . . . . . . . . . . . . . . . . . . . . . . . .36

12. Money Warehouses . . . . . . . . . . . . . . . . . . . . . . . .39

13. Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .48

III. Government Meddling With Money . . . . . . . . . . . . . .51

1. The Revenue of Government . . . . . . . . . . . . . . .51

2. The Economic Effects of Inflation . . . . . . . . . . .52

3. Compulsory Monopoly of the Mint . . . . . . . . . .57

4. Debasement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59

5. Gresham’s Law and Coinage . . . . . . . . . . . . . . .60

a. Bimetallism . . . . . . . . . . . . . . . . . . . . . . . . . . . .60

b. Legal Tender . . . . . . . . . . . . . . . . . . . . . . . . . . .63

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6. Summary: Government and Coinage . . . . . . . .64

7. Permitting Banks to Refuse Payment . . . . . . . . .65

8. Central Banking: Removing the Checks

on Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .68

9. Central Banking: Directing the Inflation . . . . . .72

10. Going Off the Gold Standard . . . . . . . . . . . . . . .74

11. Fiat Money and the Gold Problem . . . . . . . . . . .77

12. Fiat Money and Gresham’s Law . . . . . . . . . . . . .79

13. Government and Money . . . . . . . . . . . . . . . . . . .83

IV. The Monetary Breakdown of the West . . . . . . . . . . . .85

1. Phase I: The Classical Gold Standard,

1815–1914 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .86

2. Phase II: World War I and After . . . . . . . . . . . . .89

3. Phase III: The Gold Exchange Standard

(Britain and the United States) 1926–1931 . . . .90

4. Phase IV: Fluctuating Fiat Currencies,

1931–1945 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .93

5. Phase V: Bretton Woods and the New Gold

Exchange Standard (the United States)

1945–1968 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95

6. Phase VI: The Unraveling of Bretton Woods,

1968–1971 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .98

7. Phase VII: The End of Bretton Woods:

Fluctuating Fiat Currencies,

August–December, 1971 . . . . . . . . . . . . . . . . . .101

8. Phase VIII: The Smithsonian Agreement,

December 1971–February 1973 . . . . . . . . . . . . .102

9. Phase IX: Fluctuating Fiat Currencies,

March 1973–? . . . . . . . . . . . . . . . . . . . . . . . . . . .103

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .109

About the Author . . . . . . . . . . . . . . . . . . . . . . . . . . . .112

What Has Government Done to Our Money?

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INTRODUCTION

FEW ECONOMIC SUBJECTS ARE

more tangled, more confused

than money. Wrangles abound over “tight money” vs. “easy

money,” over the roles of the Federal Reserve System and

the Treasury, over various versions of the gold standard, etc.

Should the government pump money into the economy or

siphon it out? Which branch of the government? Should it

encourage credit or restrain it? Should it return to the gold

standard? If so, at what rate? These and countless other

questions multiply, seemingly without end.

Perhaps the Babel of views on the money question

stems from man’s propensity to be “realistic,” i.e., to study

only immediate political and economic problems. If we

immerse ourselves wholly in day-to-day affairs, we cease

making fundamental distinctions, or asking the really basic

questions. Soon, basic issues are forgotten, and aimless drift

is substituted for firm adherence to principle. Often we

need to gain perspective, to stand aside from our everyday

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affairs in order to understand them more fully. This is par-

ticularly true in our economy, where interrelations are so

intricate that we must isolate a few important factors, ana-

lyze them, and then trace their operations in the complex

world. This was the point of “Crusoe economics,” a favorite

device of classical economic theory. Analysis of Crusoe and

Friday on a desert island, much abused by critics as irrele-

vant to today’s world, actually performed the very useful

function of spotlighting the basic axioms of human action.

Of all the economic problems, money is possibly the

most tangled, and perhaps where we most need perspective.

Money, moreover, is the economic area most encrusted and

entangled with centuries of government meddling. Many

people—many economists—usually devoted to the free

market stop short at money. Money, they insist, is different;

it must be supplied by government and regulated by gov-

ernment. They never think of state control of money as

interference in the free market; a free market in money is

unthinkable to them. Governments must mint coins, issue

paper, define “legal tender,” create central banks, pump

money in and out, “stabilize the price level,” etc.

Historically, money was one of the first things con-

trolled by government, and the free market “revolution” of

the eighteenth and nineteenth centuries made very little

dent in the monetary sphere. So it is high time that we turn

fundamental attention to the life-blood of our economy—

money.

Let us first ask ourselves the question: Can money be

organized under the freedom principle? Can we have a free

market in money as well as in other goods and services?

What would be the shape of such a market? And what are

the effects of various governmental controls? If we favor

the free market in other directions, if we wish to eliminate

What Has Government Done to Our Money?

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government invasion of person and property, we have no

more important task than to explore the ways and means of

a free market in money.

Murray N. Rothbard

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II.

MONEY IN A FREE SOCIETY

The Value of Exchange

HOW DID MONEY BEGIN ?

Clearly, Robinson Crusoe had no

need for money. He could not have eaten gold coins. Nei-

ther would Crusoe and Friday, perhaps exchanging fish for

lumber, need to bother about money. But when society

expands beyond a few families, the stage is already set for

the emergence of money.

To explain the role of money, we must go even further

back, and ask: why do men exchange at all? Exchange is the

prime basis of our economic life. Without exchanges, there

would be no real economy and, practically, no society.

Clearly, a voluntary exchange occurs because both parties

expect to benefit. An exchange is an agreement between A

and B to transfer the goods or services of one man for the

goods and services of the other. Obviously, both benefit

because each values what he receives in exchange more

than what he gives up. When Crusoe, say, exchanges some

fish for lumber, he values the lumber he “buys” more than

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the fish he “sells,” while Friday, on the contrary, values the

fish more than the lumber. From Aristotle to Marx, men

have mistakenly believed that an exchange records some

sort of equality of value—that if one barrel of fish is

exchanged for ten logs, there is some sort of underlying

equality between them. Actually, the exchange was made

only because each party valued the two products in different

order.

Why should exchange be so universal among mankind?

Fundamentally, because of the great variety in nature: the

variety in man, and the diversity of location of natural

resources. Every man has a different set of skills and apti-

tudes, and every plot of ground has its own unique features,

its own distinctive resources. From this external natural fact

of variety come exchanges; wheat in Kansas for iron in

Minnesota; one man’s medical services for another’s play-

ing of the violin. Specialization permits each man to

develop his best skill, and allows each region to develop its

own particular resources. If no one could exchange, if every

man were forced to be completely self-sufficient, it is obvi-

ous that most of us would starve to death, and the rest

would barely remain alive. Exchange is the lifeblood, not

only of our economy, but of civilization itself.

Barter

Yet, direct exchange of useful goods and services would

barely suffice to keep an economy going above the primitive

level. Such direct exchange—or barter—is hardly better

than pure self-sufficiency. Why is this? For one thing, it is

clear that very little production could be carried on. If Jones

hires some laborers to build a house, with what will he pay

What Has Government Done to Our Money?

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them? With parts of the house, or with building materials

they could not use? The two basic problems are “indivisibil-

ity” and “lack of coincidence of wants.” Thus, if Smith has

a plow, which he would like to exchange for several differ-

ent things—say, eggs, bread, and a suit of clothes—how can

he do so? How can he break up the plow and give part of it

to a farmer and another part to a tailor? Even where the

goods are divisible, it is generally impossible for two

exchangers to find each other at the same time. If A has a

supply of eggs for sale, and B has a pair of shoes, how can

they get together if A wants a suit? And think of the plight

of an economics teacher who has to find an egg-producer

who wants to purchase a few economics lessons in return

for his eggs! Clearly, any sort of civilized economy is impos-

sible under direct exchange.

Indirect Exchange

But man discovered, in the process of trial and error, the

route that permits a greatly-expanding economy: indirect

exchange. Under indirect exchange, you sell your product

not for a good which you need directly, but for another good

which you then, in turn, sell for the good you want. At first

glance, this seems like a clumsy and round-about operation.

But it is actually the marvelous instrument that permits civilization to develop.

Consider the case of A, the farmer, who wants to buy the

shoes made by B. Since B doesn’t want his eggs, he finds

what B does want—let’s say butter. A then exchanges his

eggs for C’s butter, and sells the butter to B for shoes. He

first buys the butter not because he wants it directly, but

because it will permit him to get his shoes. Similarly, Smith,

Murray N. Rothbard

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a plow-owner, will sell his plow for one commodity which

he can more readily divide and sell—say, butter—and will

then exchange parts of the butter for eggs, bread, clothes,

etc. In both cases, the superiority of butter—the reason

there is extra demand for it beyond simple consumption—

is its greater marketability. If one good is more marketable

than another—if everyone is confident that it will be more

readily sold—then it will come into greater demand

because it will be used as a medium of exchange. It will be

the medium through which one specialist can exchange his

product for the goods of other specialists.

Now just as in nature there is a great variety of skills and

resources, so there is a variety in the marketability of goods.

Some goods are more widely demanded than others, some

are more divisible into smaller units without loss of value,

some more durable over long periods of time, some more

transportable over large distances. All of these advantages

make for greater marketability. It is clear that in every soci-

ety, the most marketable goods will be gradually selected as

the media for exchange. As they are more and more selected

as media, the demand for them increases because of this

use, and so they become even more marketable. The result

is a reinforcing spiral: more marketability causes wider use

as a medium which causes more marketability, etc. Eventu-

ally, one or two commodities are used as general media—in

almost all exchanges—and these are called money.

Historically, many different goods have been used as

media: tobacco in colonial Virginia, sugar in the West

Indies, salt in Abyssinia, cattle in ancient Greece, nails in

Scotland, copper in ancient Egypt, and grain, beads, tea,

cowrie shells, and fishhooks. Through the centuries, two

commodities, gold and silver, have emerged as money in the

free competition of the market, and have displaced the other

What Has Government Done to Our Money?

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commodities. Both are uniquely marketable, are in great

demand as ornaments, and excel in the other necessary

qualities. In recent times, silver, being relatively more abun-

dant than gold, has been found more useful for smaller

exchanges, while gold is more useful for larger transactions.

At any rate, the important thing is that whatever the reason,

the free market has found gold and silver to be the most effi-

cient moneys.

This process: the cumulative development of a medium

of exchange on the free market—is the only way money can

become established. Money cannot originate in any other

way, neither by everyone suddenly deciding to create money

out of useless material, nor by government calling bits of

paper “money.” For embedded in the demand for money is

knowledge of the money-prices of the immediate past; in

contrast to directly-used consumers’ or producers’ goods,

money must have preexisting prices on which to ground a

demand. But the only way this can happen is by beginning

with a useful commodity under barter, and then adding

demand for a medium for exchange to the previous demand

for direct use (e.g., for ornaments, in the case of gold).

Thus, government is powerless to create money for the economy; it

can only be developed by the processes of the free market.

A most important truth about money now emerges from

our discussion: money is a commodity. Learning this simple

lesson is one of the world’s most important tasks. So often

have people talked about money as something much more

or less than this. Money is not an abstract unit of account,

On the origin of money, cf. Carl Menger, Principles of Economics (Glen-

coe, Ill.: Free Press, 1950), pp. 257–71; Ludwig von Mises, The Theory of

Money and Credit, 3rd ed. (New Haven, Conn.: Yale University Press,

1951), pp. 97–123.

Murray N. Rothbard

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divorceable from a concrete good; it is not a useless token

only good for exchanging; it is not a “claim on society”; it is

not a guarantee of a fixed price level. It is simply a commod-

ity. It differs from other commodities in being demanded

mainly as a medium of exchange. But aside from this, it is a

commodity—and, like all commodities, it has an existing

stock, it faces demands by people to buy and hold it, etc. Like

all commodities, its “price”—in terms of other goods—is

determined by the interaction of its total supply, or stock, and

the total demand by people to buy and hold it. (People “buy”

money by selling their goods and services for it, just as they

“sell” money when they buy goods and services.)

Benefits of Money

The emergence of money was a great boon to the

human race. Without money—without a general medium

of exchange—there could be no real specialization, no

advancement of the economy above a bare, primitive level.

With money, the problems of indivisibility and “coincidence

of wants” that plagued the barter society all vanish. Now,

Jones can hire laborers and pay them in . . . money. Smith

can sell his plow in exchange for units of . . . money. The

money-commodity is divisible into small units, and it is

generally acceptable by all. And so all goods and services are

sold for money, and then money is used to buy other goods

and services that people desire. Because of money, an elab-

orate “structure of production” can be formed, with land,

labor services, and capital goods cooperating to advance

production at each stage and receiving payment in money.

The establishment of money conveys another great ben-

efit. Since all exchanges are made in money, all the

What Has Government Done to Our Money?

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exchange-ratios are expressed in money, and so people can

now compare the market worth of each good to that of every

other good. If a TV set exchanges for three ounces of gold,

and an automobile exchanges for sixty ounces of gold, then

everyone can see that one automobile is “worth” twenty TV

sets on the market. These exchange-ratios are prices, and the

money-commodity serves as a common denominator for all

prices. Only the establishment of money-prices on the mar-

ket allows the development of a civilized economy, for only

they permit businessmen to calculate economically. Busi-

nessmen can now judge how well they are satisfying con-

sumer demands by seeing how the selling-prices of their

products compare with the prices they have to pay produc-

tive factors (their “costs”). Since all these prices are expressed

in terms of money, the businessmen can determine whether

they are making profits or losses. Such calculations guide

businessmen, laborers, and landowners in their search for

monetary income on the market. Only such calculations can

allocate resources to their most productive uses—to those

uses that will most satisfy the demands of consumers.

Many textbooks say that money has several functions: a

medium of exchange, unit of account, or “measure of val-

ues,” a “store of value,” etc. But it should be clear that all

of these functions are simply corollaries of the one great

function: the medium of exchange. Because gold is a gen-

eral medium, it is most marketable, it can be stored to serve

as a medium in the future as well as the present, and all

prices are expressed in its terms.

Because gold is a commodity medium for all exchanges, it can serve as a unit of

Money does not “measure” prices or values; it is the common denomina-

tor for their expression. In short, prices are expressed in money; they are

not measured by it.

Murray N. Rothbard

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account for present, and expected future, prices. It is

important to realize that money cannot be an abstract unit

of account or claim, except insofar as it serves as a medium

of exchange.

The Monetary Unit

Now that we have seen how money emerged, and what

it does, we may ask: how is the money-commodity used?

Specifically, what is the stock, or supply, of money in society,

and how is it exchanged?

In the first place, most tangible physical goods are

traded in terms of weight. Weight is the distinctive unit of a

tangible commodity, and so trading takes place in terms of

units like tons, pounds, ounces, grains, grams, etc.

Gold is no exception. Gold, like other commodities, will be traded

in units of weight.

It is obvious that the size of the common unit chosen in

trading makes no difference to the economist. One country,

on the metric system, may prefer to figure in grams; Eng-

land or America may prefer to reckon in grains or ounces.

All units of weight are convertible into each other; one

pound equals sixteen ounces; one ounce equals 437.5 grains

or 28.35 grams, etc.

Even those goods nominally exchanging in terms of volume (bale, bushel,

etc.) tacitly assume a standard weight per unit volume.

One of the cardinal virtues of gold as money is its homogeneity—unlike

many other commodities, it has no differences in quality. An ounce of pure

gold equals any other ounce of pure gold the world over.

What Has Government Done to Our Money?

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Assuming gold is chosen as the money, the size of the

gold-unit used in reckoning is immaterial to us. Jones may

sell a coat for one gold ounce in America, or for 28.35 grams

in France; both prices are identical.

All this might seem like laboring the obvious, except

that a great deal of misery in the world would have been

avoided if people had fully realized these simple truths.

Nearly everyone, for example, thinks of money as abstract

units for something or other, each cleaving uniquely to a

certain country. Even when countries were on the “gold

standard,” people thought in similar terms. American

money was “dollars,” French was “francs,” German

“marks,” etc. All these were admittedly tied to gold, but all

were considered sovereign and independent, and hence it

was easy for countries to “go off the gold standard.” Yet all

of these names were simply names for units of weight of gold or

silver.

The British “pound sterling” originally signified a

pound weight of silver. And what of the dollar? The dollar

began as the generally applied name of an ounce weight of

silver coined by a Bohemian Count named Schlick, in the

sixteenth century. The Count of Schlick lived in Joachim’s

Valley or Jaochimsthal. The Count’s coins earned a great

reputation for their uniformity and fineness, and they were

widely called “Joachim’s thalers,” or, finally, “thaler.” The

name “dollar” eventually emerged from “thaler.”

On the free market, then, the various names that units

may have are simply definitions of units of weight. When we

were “on the gold standard” before 1933, people liked to say

that the “price of gold” was “fixed at twenty dollars per

ounce of gold.” But this was a dangerously misleading way

of looking at our money. Actually, “the dollar” was defined

as the name for (approximately) 1/20 of an ounce of gold. It

Murray N. Rothbard

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was therefore misleading to talk about “exchange rates” of

one country’s currency for another. The “pound sterling”

did not really “exchange” for five “dollars.”

The dollar was defined as 1/20 of a gold ounce, and the pound sterling was,

at that time, defined as the name for 1/4 of a gold ounce,

simply traded for 5/20 of a gold ounce. Clearly, such

exchanges, and such a welter of names, were confusing and

misleading. How they arose is shown below in the chapter

on government meddling with money. In a purely free mar-

ket, gold would simply be exchanged directly as “grams,”

grains, or ounces, and such confusing names as dollars,

francs, etc., would be superfluous. Therefore, in this sec-

tion, we will treat money as exchanging directly in terms of

ounces or grams.

Clearly, the free market will choose as the common unit

whatever size of the money-commodity is most convenient.

If platinum were the money, it would likely be traded in

terms of fractions of an ounce; if iron were used, it would be

reckoned in pounds or tons. Clearly, the size makes no dif-

ference to the economist.

The Shape of Money

If the size or the name of the money-unit makes little

economic difference; neither does the shape of the mone-

tary metal. Since the commodity is the money, it follows

that the entire stock of the metal, so long as it is available to

Actually, the pound sterling exchanged for $4.87, but we are using $5 for

greater convenience of calculation.

What Has Government Done to Our Money?

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man, constitutes the world’s stock of money. It makes no

real difference what shape any of the metal is at any time. If

iron is the money, then all the iron is money, whether it is in

the form of bars, chunks, or embodied in specialized

machinery.

Gold has been traded as money in the raw form

of nuggets, as gold dust in sacks, and even as jewelry. It

should not be surprising that gold, or other moneys, can be

traded in many forms, since their important feature is their

weight.

It is true, however, that some shapes are often more con-

venient than others. In recent centuries, gold and silver

have been broken down into coins, for smaller, day-to-day

transactions, and into larger bars for bigger transactions.

Other gold is transformed into jewelry and other orna-

ments. Now, any kind of transformation from one shape to

another costs time, effort, and other resources. Doing this

work will be a business like any other, and prices for this

service will be set in the usual manner. Most people agree

that it is legitimate for jewelers to make ornaments out of

raw gold, but they often deny that the same applies to the

manufacture of coins. Yet, on the free market, coinage is

essentially a business like any other.

Many people believed, in the days of the gold standard,

that coins were somehow more “really” money than plain,

uncoined gold “bullion” (bars, ingots, or any other shape).

It is true that coins commanded a premium over bullion,

but this was not caused by any mysterious virtue in the

coins; it stemmed from the fact that it cost more to manu-

facture coins from bullion than to remelt coins back into

Iron hoes have been used extensively as money, both in Asia and Africa.

Murray N. Rothbard

Page 22

bullion. Because of this difference, coins were more valu-

able on the market.

Private Coinage

The idea of private coinage seems so strange today that

it is worth examining carefully. We are used to thinking of

coinage as a “necessity of sovereignty.” Yet, after all, we are

not wedded to a “royal prerogative,” and it is the American

concept that sovereignty rests, not in government, but in the

people.

How would private coinage work? In the same way, we

have said, as any other business. Each minter would pro-

duce whatever size or shape of coin is most pleasing to his

customers. The price would be set by the free competition

of the market.

The standard objection is that it would be too much

trouble to weigh or assay bits of gold at every transaction.

But what is there to prevent private minters from stamping

the coin and guaranteeing its weight and fineness? Private

minters can guarantee a coin at least as well as a govern-

ment mint. Abraded bits of metal would not be accepted as

coin. People would use the coins of those minters with the

best reputation for good quality of product. We have seen

that this is precisely how the “dollar” became prominent—

as a competitive silver coin.

Opponents of private coinage charge that fraud would

run rampant. Yet, these same opponents would trust gov-

ernment to provide the coinage. But if government is to be

trusted at all, then surely, with private coinage, govern-

ment could at least be trusted to prevent or punish fraud.

It is usually assumed that the prevention or punishment of

What Has Government Done to Our Money?

Page 23

fraud, theft, or other crimes is the real justification for gov-

ernment. But if government cannot apprehend the crimi-

nal when private coinage is relied upon, what hope is there

for a reliable coinage when the integrity of the private

market place operators is discarded in favor of a govern-

ment monopoly of coinage? If government cannot be

trusted to ferret out the occasional villain in the free mar-

ket in coin, why can government be trusted when it finds

itself in a position of total control over money and may

debase coin, counterfeit coin, or otherwise with full legal

sanction perform as the sole villain in the market place? It

is surely folly to say that government must socialize all

property in order to prevent anyone from stealing property.

Yet the reasoning behind abolition of private coinage is the

same.

Moreover, all modern business is built on guarantees of

standards. The drug store sells an eight ounce bottle of

medicine; the meat packer sells a pound of beef. The buyer

expects these guarantees to be accurate, and they are. And

think of the thousands upon thousands of specialized, vital

industrial products that must meet very narrow standards

and specifications. The buyer of a 1/2 inch bolt must get a

1/2 inch bolt and not a mere 3/8 inch.

Yet, business has not broken down. Few people suggest

that the government must nationalize the machine-tool

industry as part of its job of defending standards against

fraud. The modern market economy contains an infinite

number of intricate exchanges, most depending on definite

standards of quantity and quality. But fraud is at a mini-

mum, and that minimum, at least in theory, may be prose-

cuted. So it would be if there were private coinage. We can

be sure that a minter’s customers, and his competitors,

Murray N. Rothbard

Page 24

would be keenly alert to any possible fraud in the weight or

fineness of his coins.

Champions of the government’s coinage monopoly

have claimed that money is different from all other com-

modities, because “Gresham’s Law” proves that “bad

money drives out good” from circulation. Hence, the free

market cannot be trusted to serve the public in supplying

good money. But this formulation rests on a misinterpreta-

tion of Gresham’s famous law. The law really says that

“money overvalued artificially by government will drive out

of circulation artificially undervalued money.” Suppose, for

example, there are one-ounce gold coins in circulation.

After a few years of wear and tear, let us say that some coins

weigh only .9 ounces. Obviously, on the free market, the

worn coins would circulate at only 90 percent of the value

of the full-bodied coins, and the nominal face-value of the

former would have to be repudiated.

If anything, it will be

the “bad” coins that will be driven from the market. But

suppose the government decrees that everyone must treat

the worn coins as equal to new, fresh coins, and must accept

them equally in payment of debts. What has the govern-

ment really done? It has imposed price control by coercion

on the “exchange rate” between the two types of coin. By

insisting on the par-ratio when the worn coins should

exchange at 10 percent discount, it artificially overvalues the

worn coins and undervalues new coins. Consequently,

See Herbert Spencer, Social Statics (New York: D. Appleton 1890), p. 438.

To meet the problem of wear-and-tear, private coiners might either set a

time limit on their stamped guarantees of weight, or agree to recoin anew,

either at the original or at the lower weight. We may note that in the free

economy there will not be the compulsory standardization of coins that

prevails when government monopolies direct the coinage.

What Has Government Done to Our Money?

Page 25

everyone will circulate the worn coins, and hoard or export

the new. “Bad money drives out good money,” then, not on

the free market, but as the direct result of governmental

intervention in the market.

Despite never-ending harassment by governments,

making conditions highly precarious, private coins have

flourished many times in history. True to the virtual law

that all innovations come from free individuals and not the

state, the first coins were minted by private individuals and

goldsmiths. In fact, when the government first began to

monopolize the coinage, the royal coins bore the guarantees

of private bankers, whom the public trusted far more,

apparently, than they did the government. Privately-minted

gold coins circulated in California as late as 1848.

The “Proper” Supply of Money

Now we may ask: what is the supply of money in soci-

ety and how is that supply used? In particular, we may raise

the perennial question, how much money “do we need”?

Must the money supply be regulated by some sort of “crite-

rion,” or can it be left alone to the free market?

Murray N. Rothbard

For historical examples of private coinage, see B.W. Barnard, “The use of

Private Tokens for Money in the United States,” Quarterly Journal of Eco-

nomics (1916–17): 617–26; Charles A. Conant, The Principles of Money and

Banking (New York: Harper Bros., 1905), vol. I, 127–32; Lysander

Spooner, A Letter to Grover Cleveland (Boston: B.R. Tucker, 1886), p. 79;

and J. Laurence Laughlin, A New Exposition of Money, Credit and Prices

(Chicago: University of Chicago Press, 1931), vol. I, pp. 47–51. On

coinage, also see Mises, Theory of Money and Credit, pp. 65–67; and Edwin

Cannan, Money, 8th ed. (London: Staples Press, 1935), pp. 33ff.

Page 26

First, the total stock, or supply, of money in society at any

one time, is the total weight of the existing money-stuff. Let us

assume, for the time being, that only one commodity is

established on the free market as money. Let us further

assume that gold is that commodity (although we could

have taken silver, or even iron; it is up to the market, and not

to us, to decide the best commodity to use as money). Since

money is gold, the total supply of money is the total weight

of gold existing in society. The shape of gold does not mat-

ter—except if the cost of changing shapes in certain ways is

greater than in others (e.g., minting coins costing more than

melting them). In that case, one of the shapes will be cho-

sen by the market as the money-of-account, and the other

shapes will have a premium or discount in accordance with

their relative costs on the market.

Changes in the total gold stock will be governed by the

same causes as changes in other goods. Increases will stem

from greater production from mines; decreases from being

used up in wear and tear, in industry, etc. Because the mar-

ket will choose a durable commodity as money, and because

money is not used up at the rate of other commodities—but

is employed as a medium of exchange—the proportion of

new annual production to its total stock will tend to be

quite small. Changes in total gold stock, then, generally

take place very slowly.

What “should” the supply of money be? All sorts of cri-

teria have been put forward: that money should move in

accordance with population, with the “volume of trade,”

with the “amounts of goods produced,” so as to keep the

“price level” constant, etc. Few indeed have suggested leav-

ing the decision to the market. But money differs from other

commodities in one essential fact. And grasping this differ-

ence furnishes a key to understanding monetary matters.

What Has Government Done to Our Money?

Page 27

When the supply of any other good increases, this increase

confers a social benefit; it is a matter for general rejoicing.

More consumer goods mean a higher standard of living for

the public; more capital goods mean sustained and

increased living standards in the future. The discovery of

new, fertile land or natural resources also promises to add to

living standards, present and future. But what about

money? Does an addition to the money supply also benefit

the public at large?

Consumer goods are used up by consumers; capital

goods and natural resources are used up in the process of

producing consumer goods. But money is not used up; its

function is to act as a medium of exchanges—to enable

goods and services to travel more expeditiously from one

person to another. These exchanges are all made in terms of

money prices. Thus, if a television set exchanges for three

gold ounces, we say that the “price” of the television set is

three ounces. At any one time, all goods in the economy will

exchange at certain gold-ratios or prices. As we have said,

money, or gold, is the common denominator of all prices.

But what of money itself? Does it have a “price”? Since a

price is simply an exchange-ratio, it clearly does. But, in this

case, the “price of money” is an array of the infinite number

of exchange-ratios for all the various goods on the market.

Thus, suppose that a television set costs three gold

ounces, an auto sixty ounces, a loaf of bread 1/100 of an

ounce, and an hour of Mr. Jones’s legal services one ounce.

The “price of money” will then be an array of alternative

exchanges. One ounce of gold will be “worth” either 1/3 of

a television set, 1/60 of an auto, 100 loaves of bread, or one

hour of Jones’s legal service. And so on down the line. The

price of money, then, is the “purchasing power” of the mon-

etary unit—in this case, of the gold ounce. It tells what that

Murray N. Rothbard

Page 28

ounce can purchase in exchange, just as the money-price of

a television set tells how much money a television set can

bring in exchange.

What determines the price of money? The same forces

that determine all prices on the market—that venerable but

eternally true law: “supply and demand.” We all know that

if the supply of eggs increases, the price will tend to fall; if

the buyers’ demand for eggs increases, the price will tend to

rise. The same is true for money. An increase in the supply

of money will tend to lower its “price;” an increase in the

demand for money will raise it. But what is the demand for

money? In the case of eggs, we know what “demand”

means; it is the amount of money consumers are willing to

spend on eggs, plus eggs retained and not sold by suppliers.

Similarly, in the case of money, “demand” means the vari-

ous goods offered in exchange for money, plus the money

retained in cash and not spent over a certain time period. In

both cases, “supply” may refer to the total stock of the good

on the market.

What happens, then, if the supply of gold increases,

demand for money remaining the same? The “price of

money” falls, i.e., the purchasing power of the money-unit

will fall all along the line. An ounce of gold will now be

worth less than 100 loaves of bread, 1/3 of a television set,

etc. Conversely, if the supply of gold falls, the purchasing

power of the gold-ounce rises.

What is the effect of a change in the money supply? Fol-

lowing the example of David Hume, one of the first econo-

mists, we may ask ourselves what would happen if,

overnight, some good fairy slipped into pockets, purses, and

bank vaults, and doubled our supply of money. In our

example, she magically doubled our supply of gold. Would

we be twice as rich? Obviously not. What makes us rich is

What Has Government Done to Our Money?

Page 29

an abundance of goods, and what limits that abundance is

a scarcity of resources: namely land, labor, and capital. Mul-

tiplying coin will not whisk these resources into being. We

may feel twice as rich for the moment, but clearly all we are

doing is diluting the money supply. As the public rushes out

to spend its new-found wealth, prices will, very roughly,

double—or at least rise until the demand is satisfied, and

money no longer bids against itself for the existing goods.

Thus, we see that while an increase in the money sup-

ply, like an increase in the supply of any good, lowers its

price, the change does not—unlike other goods—confer a

social benefit. The public at large is not made richer.

Whereas new consumer or capital goods add to standards of

living, new money only raises prices—i.e., dilutes its own

purchasing power. The reason for this puzzle is that money

is only useful for its exchange value. [What about its other, original use as a commodity?]

Other goods have various

“real” utilities, so that an increase in their supply satisfies

more consumer wants. Money has only utility for prospec-

tive exchange; its utility lies in its exchange value, or “pur-

chasing power.” Our law—that an increase in money does

not confer a social benefit—stems from its unique use as a

medium of exchange.

An increase in the money supply, then, only dilutes the

effectiveness of each gold ounce; on the other hand, a fall in

the supply of money raises the power of each gold ounce to

do its work. We come to the startling truth that it doesn’t

matter what the supply of money is. Any supply will do as

well as any other supply. The free market will simply adjust

by changing the purchasing power, or effectiveness of the

gold-unit. There is no need to tamper with the market in

order to alter the money supply that it determines.

At this point, the monetary planner might object: “All

right, granting that it is pointless to increase the money

Murray N. Rothbard

Page 30

supply, isn’t gold mining a waste of resources? Shouldn’t

the government keep the money supply constant, and pro-

hibit new mining?” This argument might be plausible to

those who hold no principled objections to government

meddling, though it would not convince the determined

advocate of liberty. But the objection overlooks an impor-

tant point: that gold is not only money, but is also,

inevitably, a commodity. An increased supply of gold may

not confer any monetary benefit, but it does confer a non-

monetary benefit—i.e., it does increase the supply of gold

used in consumption (ornaments, dental work, and the

like) and in production (industrial work). Gold mining,

therefore, is not a social waste at all.

We conclude, therefore, that determining the supply of

money, like all other goods, is best left to the free market.

Aside from the general moral and economic advantages of

freedom over coercion, no dictated quantity of money will

do the work better, and the free market will set the produc-

tion of gold in accordance with its relative ability to satisfy

the needs of consumers, as compared with all other produc-

tive goods.

The Problem of “Hoarding”

The critic of monetary freedom is not so easily silenced,

however. There is, in particular, the ancient bugbear of

“hoarding.” The image is conjured up of the selfish old

Gold mining is, of course, no more profitable than any other business; in

the long-run, its rate of return will be equal to the net rate of return in any

other industry.

What Has Government Done to Our Money?

Page 31

miser who, perhaps irrationally, perhaps from evil motives,

hoards up gold unused in his cellar or treasure trove—

thereby stopping the flow of circulation and trade, causing

depressions and other problems. Is hoarding really a men-

ace?

In the first place, what has simply happened is an

increased demand for money on the part of the miser. As a

result, prices of goods fall, and the purchasing power of the

gold-ounce rises. There has been no loss to society, which

simply carries on with a lower active supply of more “pow-

erful” gold ounces.

Even in the worst possible view of the matter, then,

nothing has gone wrong, and monetary freedom creates no

difficulties. But there is more to the problem than that. For

it is by no means irrational for people to desire more or less

money in their cash balances.

Let us, at this point, study cash balances further. Why

do people keep any cash balances at all? Suppose that all of

us were able to foretell the future with absolute certainty. In

that case, no one would have to keep cash balances on

hand. Everyone would know exactly how much he will

spend, and how much income he will receive, at all future

dates. He need not keep any money at hand, but will lend

out his gold so as to receive his payments in the needed

amounts on the very days he makes his expenditures. But,

of course, we necessarily live in a world of uncertainty. Peo-

ple do not precisely know what will happen to them, or

what their future incomes or costs will be. The more uncer-

tain and fearful they are, the more cash balances they will

want to hold; the more secure, the less cash they will wish

to keep on hand. Another reason for keeping cash is also a

function of the real world of uncertainty. If people expect

the price of money to fall in the near future, they will spend

Murray N. Rothbard

Page 32

their money now while money is more valuable, thus

“dishoarding” and reducing their demand for money. Con-

versely, if they expect the price of money to rise, they will

wait to spend money later when it is more valuable, and

their demand for cash will increase. People’s demands for

cash balances, then, rise and fall for good and sound rea-

sons.

Economists err if they believe something is wrong when

money is not in constant, active “circulation.” Money is

only useful for exchange value, true, but it is not only useful

at the actual moment of exchange. This truth has been often

overlooked. Money is just as useful when lying “idle” in

somebody’s cash balance, even in a miser’s “hoard.”

For

that money is being held now in wait for possible future

exchange—it supplies to its owner, right now, the useful-

ness of permitting exchanges at any time—present or

future—the owner might desire.

It should be remembered that all gold must be owned by

someone, and therefore that all gold must be held in peo-

ple’s cash balances. If there are 3,000 tons of gold in the

society, all 3,000 tons must be owned and held, at any one

time, in the cash balances of individual people. The total

sum of cash balances is always identical with the total sup-

ply of money in the society. Thus, ironically, if it were not

for the uncertainty of the real world, there could be no mon-

etary system at all! In a certain world, no one would be will-

ing to hold cash, so the demand for money in society would

fall infinitely, prices would skyrocket without end, and any

At what point does a man’s cash balance become a faintly disreputable

“hoard,” or the prudent man a miser? It is impossible to fix any definite

criterion: generally, the charge of “hoarding” means that A is keeping more

cash than B thinks is appropriate for A.

What Has Government Done to Our Money?

Page 33

monetary system would break down. Instead of the exis-

tence of cash balances being an annoying and troublesome

factor, interfering with monetary exchange, it is absolutely

necessary to any monetary economy.

It is misleading, furthermore, to say that money “circu-

lates.” Like all metaphors taken from the physical sciences,

it connotes some sort of mechanical process, independent of

human will, which moves at a certain speed of flow, or

“velocity.” Actually, money does not “circulate”; it is, from

time, to time, transferred from one person’s cash balance to

another’s. The existence of money, once again, depends

upon people’s willingness to hold cash balances.

At the beginning of this section, we saw that “hoarding”

never brings any loss to society. Now, we will see that move-

ment in the price of money caused by changes in the demand

for money yields a positive social benefit—as positive as any

conferred by increased supplies of goods and services. We

have seen that the total sum of cash balances in society is

equal and identical with the total supply of money. Let us

assume the supply remains constant, say at 3,000 tons. Now,

suppose, for whatever reason—perhaps growing apprehen-

sion—people’s demand for cash balances increases. Surely, it

is a positive social benefit to satisfy this demand. But how

can it be satisfied when the total sum of cash must remain

the same? Simply as follows: with people valuing cash bal-

ances more highly, the demand for money increases, and

prices fall. As a result, the same total sum of cash balances

now confers a higher “real” balance, i.e., it is higher in pro-

portion to the prices of goods—to the work that money has

to perform. In short, the effective cash balances of the public

have increased. Conversely, a fall in the demand for cash will

cause increased spending and higher prices. The public’s

Murray N. Rothbard

Page 34

desire for lower effective cash balances will be satisfied by the

necessity for given total cash to perform more work.

Therefore, while a change in the price of money stem-

ming from changes in supply merely alters the effectiveness

of the money-unit and confers no social benefit, a fall or rise

caused by a change in the demand for cash balances does

yield a social benefit—for it satisfies a public desire for

either a higher or lower proportion of cash balances to the

work done by cash. On the other hand, an increased supply

of money will frustrate public demand for a more effective

sum total of cash (more effective in terms of purchasing

power).

People will almost always say, if asked, that they want as

much money as they can get! But what they really want is

not more units of money—more gold ounces or “dollars”—

but more effective units, i.e., greater command of goods and

services bought by money. We have seen that society cannot

satisfy its demand for more money by increasing its sup-

ply—for an increased supply will simply dilute the effective-

ness of each ounce, and the money will be no more really

plentiful than before. People’s standard of living (except in

the nonmonetary uses of gold) cannot increase by mining

more gold. If people want more effective gold ounces in

their cash balances, they can get them only through a fall in

prices and a rise in the effectiveness of each ounce.

10.

Stabilize the Price Level?

Some theorists charge that a free monetary system would

be unwise, because it would not “stabilize the price level,”

i.e., the price of the money-unit. Money, they say, is supposed

to be a fixed yardstick that never changes. Therefore, its

What Has Government Done to Our Money?

Page 35

value, or purchasing power, should be stabilized. Since the

price of money would admittedly fluctuate on the free mar-

ket, freedom must be overruled by government manage-

ment to insure stability.

Stability would provide justice, for

example, to debtors and creditors, who will be sure of pay-

ing back dollars, or gold ounces, of the same purchasing

power as they lent out.

Yet, if creditors and debtors want to hedge against future

changes in purchasing power, they can do so easily on the

free market. When they make their contracts, they can agree

that repayment will be made in a sum of money adjusted by

some agreed-upon index number of changes in the value of

money. The stabilizers have long advocated such measures,

but strangely enough, the very lenders and borrowers who

are supposed to benefit most from stability, have rarely

availed themselves of the opportunity. Must the government

then force certain “benefits” on people who have already

freely rejected them? Apparently, businessmen would rather

take their chances, in this world of irremediable uncertainty,

on their ability to anticipate the conditions of the market.

After all, the price of money is no different from any other

free price on the market. They can change in response to

changes in demand of individuals; why not the monetary

price?

Artificial stabilization would, in fact, seriously distort

and hamper the workings of the market. As we have indi-

cated, people would be unavoidably frustrated in their

desires to alter their real proportion of cash balances; there

How the government would go about this is unimportant at this point.

Basically, it would involve governmentally-managed changes in the money

supply.

Murray N. Rothbard

Page 36

would be no opportunity to change cash balances in propor-

tion to prices. Furthermore, improved standards of living

come to the public from the fruits of capital investment.

Increased productivity tends to lower prices (and costs) and

thereby distribute the fruits of free enterprise to all the pub-

lic, raising the standard of living of all consumers. Forcible

propping up of the price level prevents this spread of higher

living standards.

Money, in short, is not a “fixed yardstick.” It is a com-

modity serving as a medium for exchanges. Flexibility in its

value in response to consumer demands is just as important

and just as beneficial as any other free pricing on the mar-

ket.

11.

Coexisting Moneys

So far we have obtained the following picture of money

in a purely free economy: gold or silver coming to be used

as a medium of exchange; gold minted by competitive pri-

vate firms, circulating by weight; prices fluctuating freely on

the market in response to consumer demands and supplies

of productive resources. Freedom of prices necessarily

implies freedom of movement for the purchasing power of

the money-unit; it would be impossible to use force and

interfere with movements in the value of money without

simultaneously crippling freedom of prices for all goods.

The resulting free economy would not be chaotic. On the

contrary, the economy would move swiftly and efficiently to

supply the wants of consumers. The money market can also

be free.

Thus far, we have simplified the problem by assuming

only one monetary metal—say, gold. Suppose that two or

What Has Government Done to Our Money?

Page 37

more moneys continue to circulate on the world market—

say, gold and silver. Possibly, gold will be the money in one

area and silver in another, or else they both may circulate

side by side. Gold, for example, being ounce-for-ounce

more valuable on the market than silver, may be used for

larger transactions and silver for smaller. Would not two

moneys be impossibly chaotic? Wouldn’t the government

have to step in and impose a fixed ration between the two

(“bimetallism”) or in some way demonetize one or the

other metal (impose a “single standard”)?

It is very possible that the market, given free rein, might

eventually establish one single metal as money. But in

recent centuries, silver stubbornly remained to challenge

gold. It is not necessary, however, for the government to step

in and save the market from its own folly in maintaining

two moneys. Silver remained in circulation precisely

because it was convenient (for small change, for example).

Silver and gold could easily circulate side by side, and have

done so in the past. The relative supplies of and demands

for the two metals will determine the exchange rate between

the two, and this rate, like any other price, will continually

fluctuate in response to these changing forces. At one time,

for example, silver and gold ounces might exchange at 16:1,

another time at 15:1, etc. Which metal will serve as a unit of

account depends on the concrete circumstances of the mar-

ket. If gold is the money of account, then most transactions

will be reckoned in gold ounces, and silver ounces will

exchange at a freely-fluctuating price in terms of the gold.

It should be clear that the exchange rate and the pur-

chasing powers of the units of the two metals will always

tend to be proportional. If prices of goods are fifteen times

as much in silver as they are in gold, then the exchange rate

will tend to be set at 15:1. If not, it will pay to exchange from

Murray N. Rothbard

Page 38

one to the other until parity is reached. Thus, if prices are

fifteen times as much in terms of silver as gold while sil-

ver/gold is 20:1, people will rush to sell their goods for gold,

buy silver, and then rebuy the goods with silver, reaping a

handsome gain in the process. This will quickly restore the

“purchasing power parity” of the exchange rate; as gold gets

cheaper in terms of silver, silver prices of goods go up, and

gold prices of goods go down.

The free market, in short, is eminently orderly not only

when money is free but even when there is more than one

money circulating.

What kind of “standard” will a free money provide?

The important thing is that the standard not be imposed by

government decree. If left to itself, the market may establish

gold as a single money (“gold standard”), silver as a single

money (“silver standard”), or, perhaps most likely, both as

moneys with freely-fluctuating exchange rates (“parallel

standards”).

For historical examples of parallel standards, see W. Stanley Jevons,

Money and the Mechanism of Exchange (London: Kegan Paul, 1905), pp.

88–96, and Robert S. Lopez, “Back to Gold, 1252,” Economic History

Review (December 1956): 224. Gold coinage was introduced into modern

Europe almost simultaneously in Genoa and Florence. Florence instituted

bimetallism, while “Genoa, on the contrary, in conformity to the principle

of restricting state intervention as much as possible, did not try to enforce

a fixed relation between coins of different metals,” ibid. On the theory of

parallel standards, see Mises, Theory of Money and Credit, pp. 179f. For a

proposal that the United States go onto a parallel standard, by an official

of the U.S. Assay Office, see I.W. Sylvester, Bullion Certificates as Currency

(New York, 1882).

What Has Government Done to Our Money?

Page 39

12.

Money Warehouses

Suppose, then, that the free market has established

gold as money (forgetting again about silver for the sake of

simplicity). Even in the convenient shape of coins, gold is

often cumbersome and awkward to carry and use directly in

exchange. For larger transactions, it is awkward and expen-

sive to transport several hundred pounds of gold. But the

free market, ever ready to satisfy social needs, comes to the

rescue. Gold, in the first place, must be stored somewhere,

and just as specialization is most efficient in other lines of

business, so it will be most efficient in the warehousing

business. Certain firms, then, will be successful on the mar-

ket in providing warehousing services. Some will be gold

warehouses, and will store gold for its myriad owners. As in

the case of all warehouses, the owner’s right to the stored

goods is established by a warehouse receipt which he receives

in exchange for storing the goods. The receipt entitles the

owner to claim his goods at any time he desires. This ware-

house will earn profit no differently from any other—i.e., by

charging a price for its storage services.

There is every reason to believe that gold warehouses, or

money warehouses, will flourish on the free market in the

same way that other warehouses will prosper. In fact, ware-

housing plays an even more important role in the case of

money. For all other goods pass into consumption, and so

must leave the warehouse after a while to be used up in pro-

duction or consumption. But money, as we have seen, is

mainly not “used” in the physical sense; instead, it is used

to exchange for other goods, and to lie in wait for such

exchanges in the future. In short, money is not so much

“used up” as simply transferred from one person to another.

Murray N. Rothbard

Page 40

In such a situation, convenience inevitably leads to

transfer of the warehouse receipt instead of the physical gold

itself. Suppose, for example, that Smith and Jones both store

their gold in the same warehouse. Jones sells Smith an

automobile for 100 gold ounces. They could go through the

expensive process of Smith’s redeeming his receipt, and

moving their gold to Jones’s office, with Jones turning right

around and redepositing the gold again. But they will

undoubtedly choose a far more convenient course: Smith

simply gives Jones a warehouse receipt for 100 ounces of

gold.

In this way, warehouse receipts for money come more

and more to function as money substitutes. Fewer and fewer

transactions move the actual gold; in more and more cases

paper titles to the gold are used instead. As the market

develops, there will be three limits on the advance of this

substitution process. One is the extent that people us these

money warehouses—called banks—instead of cash. Clearly,

if Jones, for some reason, didn’t like to use a bank, Smith

would have to transport the actual gold. The second limit is

the extent of the clientele of each bank. In other words, the

more transactions taking place between clients of different

banks, the more gold will have to be transported. The more

exchanges are made by clients of the same bank, the less

need to transport the gold. If Jones and Smith were clients

of different warehouses, Smith’s bank (or Smith himself)

would have to transport the gold to Jones’s bank. Third, the

clientele must have confidence in the trustworthiness of

their banks. If they suddenly find out, for example, that the

bank officials have had criminal records, the bank will likely

lose its business in short order. In this respect, all ware-

houses—and all businesses resting on good will—are alike.

What Has Government Done to Our Money?

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As banks grow and confidence in them develops, their

clients may find it more convenient in many cases to waive

their right to paper receipts—called bank notes—and,

instead, to keep their titles as open book accounts. In the mon-

etary realm, these have been called bank deposits. Instead of

transferring paper receipts, the client has a book claim at

the bank; he makes exchanges by writing an order to his

warehouse to transfer a portion of this account to someone

else. Thus, in our example, Smith will order the bank to

transfer book title to his 100 gold ounces to Jones. This writ-

ten order is called a check.

It should be clear that, economically, there is no differ-

ence whatever between a bank note and a bank deposit.

Both are claims to ownership of stored gold; both are trans-

ferred similarly as money substitutes, and both have the

identical three limits on their extent of use. The client can

choose, according to this convenience, whether he wishes to

keep his title in note, or deposit, form.

Now, what has happened to their money supply as a

result of all these operations? If paper notes or bank

deposits are used as “money substitutes,” does this mean

that the effective money supply in the economy has

increased even though the stock of gold has remained the

same? Certainly not. For the money substitutes are simply

warehouse receipts for actually-deposited gold. If Jones

deposits 100 ounces of gold in his warehouse and gets a

receipt for it, the receipt can be used on the market as

money, but only as a convenient stand-in for the gold, not as

an increment. The gold in the vault is then no longer a part

A third form of money-substitute will be token coins for very small

change. These are, in effect, equivalent to bank notes, but “printed” on

base metal rather than on paper.

Murray N. Rothbard

Page 42

of the effective money supply, but is held as a reserve for its

receipt, to be claimed whenever desired by its owner. An

increase or decrease in the use of substitutes, then, exerts no

change on the money supply. Only the form of the supply is

changed, not the total. Thus the money supply of a com-

munity may begin as ten million gold ounces. Then, six

million may be deposited in banks, in return for gold notes,

whereupon the effective supply will now be: four million

ounces of gold, six million ounces of gold claims in paper

notes. The total money supply has remained the same.

Curiously, many people have argued that it would be

impossible for banks to make money if they were to operate

on this “100 percent reserve” basis (gold always represented

by its receipt). Yet, there is no real problem, any more than

for any warehouse. Almost all warehouses keep all the

goods for their owners (100 percent reserve) as a matter of

course—in fact, it would be considered fraud or theft to do

otherwise. Their profits are earned from service charges to

their customers. The banks can charge for their services in

the same way. If it is objected that customers will not pay the

high service charges, this means that the banks’ services are

not in very great demand, and the use of their services will

fall to the levels that consumers find worthwhile.

We come now to perhaps the thorniest problem facing

the monetary economist: an evaluation of “fractional

reserve banking.” We must ask the question: would frac-

tional reserve banking be permitted in a free market, or

would it be proscribed as fraud? It is well-known that banks

have rarely stayed on a “100 percent” basis very long. Since

money can remain in the warehouse for a long period of

time, the bank is tempted to use some of the money for its

own account—tempted also because people do not ordinar-

ily care whether the gold coins they receive back from the

What Has Government Done to Our Money?

Page 43

warehouse are the identical gold coins they deposited. The

bank is tempted, then to use other people’s money to earn a

profit for itself.

If the banks lend out the gold directly, the receipts, of

course, are now partially invalidated. There are now some

receipts with no gold behind them; in short, the bank is

effectively insolvent, since it cannot possibly meet its own

obligations if called upon to do so. It cannot possibly hand

over its customers’ property, should they all so desire.

Generally, banks, instead of taking the gold directly,

print uncovered or “pseudo” warehouse receipts, i.e., ware-

house receipts for gold that is not and cannot be there.

These are then loaned at a profit. Clearly, the economic

effect is the same. More warehouse receipts are printed

than gold exists in the vaults. What the bank has done is to

issue gold warehouse receipts which represent nothing, but

are supposed to represent 100 percent of their face value in

gold. The pseudo-receipts pour forth on the trusting mar-

ket in the same way as the true receipts, and thus add to the

effective money supply of the country. In the above exam-

ple, if the banks now issue two million ounces of false

receipts, with no gold behind them, the money supply of

the country will rise from ten to twelve million gold

ounces—at least until the hocus-pocus has been discovered

and corrected. There are now, in addition to four million

ounces of gold held by the public, eight million ounces of

money substitutes, only six million of which are covered by

gold.

Issue of pseudo-receipts, like counterfeiting of coin, is

an example of inflation, which will be studied further below.

Inflation may be defined as any increase in the economy’s sup-

ply of money not consisting of an increase in the stock of the

Murray N. Rothbard

Page 44

money metal. Fractional reserve banks, therefore, are inher-

ently inflationary institutions.

Defenders of banks reply as follows: the banks are sim-

ply functioning like other businesses—they take risks.

Admittedly, if all the depositors presented their claims, the

banks would be bankrupt, since outstanding receipts exceed

gold in the vaults. But, banks simply take the chance—usu-

ally justified—that not everyone will ask for his gold. The

great difference, however, between the “fractional reserve”

bank and all other business is this: other businessmen use

their own or borrowed capital in ventures, and if they bor-

row credit, they promise to pay at a future date, taking care

to have enough money at hand on that date to meet their

obligation. If Smith borrows 100 gold ounces for a year, he

will arrange to have 100 gold ounces available on that future

date. But the bank isn’t borrowing from its depositors; it

doesn’t pledge to pay back gold at a certain date in the

future. Instead, it pledges to pay the receipt in gold at any

time, on demand. In short, the bank note or deposit is not

an IOU, or debt; it is a warehouse receipt for other people’s

property. Further, when a businessman borrows or lends

money, he does not add to the money supply. The loaned

funds are saved funds, part of the existing money supply

being transferred from saver to borrower. Bank issues, on

the other hand, artificially increase the money supply since

pseudo-receipts are injected into the market.

A bank, then, is not taking the usual business risk. It

does not, like all businessmen, arrange the time pattern of

its assets proportionately to the time pattern of liabilities,

i.e., see to it that it will have enough money, on due dates,

to pay its bills. Instead, most of its liabilities are instanta-

neous, but its assets are not.

What Has Government Done to Our Money?

Page 45

The bank creates new money out of thin air, and does

not, like everyone else, have to acquire money by produc-

ing and selling its services. In short, the bank is already

and at all times bankrupt; but its bankruptcy is only

revealed when customers get suspicious and precipitate

“bank runs.” No other business experiences a phenome-

non like a “run.” No other business can be plunged into

bankruptcy overnight simply because its customers decide

to repossess their own property. No other business creates

fictitious new money, which will evaporate when truly

gauged.

The dire economic effects of fractional bank money will

be explored in the next chapter. Here we conclude that,

morally, such banking would have no more right to exist in

a truly free market than any other form of implicit theft. It

is true that the note or deposit does not actually say on its

face that the warehouse guarantees to keep a full backing of

gold on hand at all times. But the bank does promise to

redeem on demand, and so when it issues any fake receipts,

it is already committing fraud, since it immediately

becomes impossible for the bank to keep its pledge and

redeem all of its notes and deposits.

Fraud, therefore, is

immediately being committed when the act of issuing

pseudo-receipts takes place. Which particular receipts are

fraudulent can only be discovered after a run on the bank

has occurred (since all the receipts look alike), and the late-

coming claimants are left high and dry.

See Amasa Walker, The Science of Wealth, 3rd ed. (Boston: Little, Brown,

1867), pp. 139–41; and pp. 126–232 for an excellent discussion of the prob-

lems of a fractional-reserve money.

Perhaps a libertarian system would consider “general warrant deposits”

(which allow the warehouse to return any homogeneous good to the

Murray N. Rothbard

Page 46

If fraud is to be proscribed in a free society, then frac-

tional reserve banking would have to meet the same fate.

Suppose, however, that fraud and fractional reserve bank-

ing are permitted, with the banks only required to fulfill

their obligations to redeem in gold on demand. Any failure

to do so would mean instant bankruptcy. Such a system has

come to be known as “free banking.” Would there then be a

heavy fraudulent issue of money substitutes, with resulting

artificial creation of new money? Many people have

assumed so, and believed that “wildcat banking” would

then simply inflate the money supply astronomically. But,

on the contrary, “free banking” would lead to a far “harder”

monetary system than we have today.

The banks would be checked by the same three limits

that we noted above, and checked rather rigorously. In the

first place, each bank’s expansion will be limited by a loss of

gold to another bank. For a bank can only expand money

within the limits of its own clientele. Suppose, for example,

that Bank A, with 10,000 ounces of gold deposited, now

issues 2,000 ounces of false warehouse receipts to gold, and

lends them to various enterprises, or invests them in securi-

ties. The borrower, or former holder of securities, will spend

What Has Government Done to Our Money?

depositor) as “specific warrant deposits,” which, like bills of lading, pawn

tickets, dock warrants, etc., establish ownership to certain specific ear-

marked objects. For, in the case of a general deposit warrant, the ware-

house is tempted to treat the goods as its own property, instead of being the

property of its customers. This is precisely what the banks have been doing.

See Jevons, Money and the Medium of Exchange, pp. 207–12.

Fraud is implicit theft, since it means that a contract has not been com-

pleted after the value has been received. In short, if A sells B a box labeled

“corn flakes” and it turns out to be straw upon opening, A’s fraud is really

theft of B’s property. Similarly, the issue of warehouse receipts for nonex-

istent goods, identical with genuine receipts, is fraud upon those who pos-

sess claims to nonexistent property.

Page 47

the new money on various goods and services. Eventually,

the money going the rounds will reach an owner who is a

client of another bank, B.

At that point, Bank B will call upon Bank A to redeem

its receipt in gold, so that the gold can be transferred to

Bank B’s vaults. Clearly, the wider the extent of each bank’s

clientele, and the more the clients trade with one another,

the more scope there is for each bank to expand its credit

and money supply. For if the bank’s clientele is narrow, then

soon after its issue of created money, it will be called upon

to redeem—and, as we have seen, it doesn’t have the

wherewithal to redeem more than a fraction of its obliga-

tions. To avoid the threat of bankruptcy from this quarter,

then, the narrower the scope of a bank’s clientele, the

greater the fraction of gold it must keep in reserve, and the

less it can expand. If there is one bank in each country, there

will be far more scope for expansion than if there is one

bank for every two persons in the community. Other things

being equal, then, the more banks there are, and the tinier

their size, the “harder”—and better—the monetary supply

will be. Similarly, a bank’s clientele will also be limited by

those who don’t use a bank at all. The more people use

actual gold instead of bank money, the less room there is for

bank inflation.

Suppose, however, that the banks form a cartel, and

agree to pay out each other’s receipts, and not call for

redemption. And suppose further that bank money is in

universal use. Are there any limits left on bank expansion?

Yes, there remains the check of client confidence in the

banks. As bank credit and the money supply expand further

and further, more and more clients will get worried over the

lowering of the reserve fraction. And, in a truly free society,

those who know the truth about the real insolvency of the

Murray N. Rothbard

Page 48

What Has Government Done to Our Money?

banking system will be able to form AntiBank Leagues to

urge clients to get their money out before it is too late. In

short, leagues to urge bank runs, or the threat of their for-

mation, will be able to stop and reverse the monetary

expansion.

None of this discussion is meant to impugn the general

practice of credit, which has an important and vital function

on the free market. In a credit transaction, the possessor of

money (a good useful in the present) exchanges it for an

IOU payable at some future date (the IOU being a “future

good”) and the interest charge reflects the higher valuation

of present goods over future goods on the market. But bank

notes or deposits are not credit; they are warehouse receipts,

instantaneous claims to cash (e.g., gold) in the bank vaults.

The debtor makes sure that he pays his debt when payment

becomes due; the fractional reserve banker can never pay

more than a small fraction of his outstanding liabilities.

We turn, in the next chapter, to a study of the various

forms of governmental interference in the monetary sys-

tem—most of them designed, not to repress fraudulent

issue, but on the contrary, to remove these and other natu-

ral checks on inflation.

13.

Summary

What have we learned about money in a free society?

We have learned that all money has originated, and must

originate, in a useful commodity chosen by the free market

as a medium of exchange. The unit of money is simply a

unit of weight of the monetary commodity—usually a

metal, such as gold or silver. Under freedom, the commodi-

ties chosen as money, their shape and form, are left to the

Page 49

Murray N. Rothbard

voluntary decisions of free individuals. Private coinage,

therefore, is just as legitimate and worthwhile as any busi-

ness activity. The “price” of money is its purchasing power

in terms of all goods in the economy, and this is determined

by its supply, and by every individual’s demand for money.

Any attempt by government to fix the price will interfere

with the satisfaction of people’s demands for money. If peo-

ple find it more convenient to use more than one metal as

money, the exchange rate between them on the market will

be determined by the relative demands and supplies, and

will tend to equal the ratios of their respective purchasing

power. Once there is enough supply of a metal to permit the

market to choose it as money, no increase in supply can

improve its monetary function. An increase in money sup-

ply will then merely dilute the effectiveness of each ounce of

money without helping the economy. An increased stock of

gold or silver, however, fulfills more nonmonetary wants

(ornament, industrial purposes, etc.) served by the metal,

and is therefore socially useful. Inflation (an increase in

money substitutes not covered by an increase in the metal

stock) is never socially useful, but merely benefits one set of

people at the expense of another. Inflation, being a fraudu-

lent invasion of property, could not take place on the free

market.

In sum, freedom can run a monetary system as superbly

as it runs the rest of the economy. Contrary to many writers,

there is nothing special about money that requires extensive

governmental dictation. Here, too, free men will best and

most smoothly supply all their economic wants. For money

as for all other activities of man, “liberty is the mother, not

the daughter, of order.”

Page 50

Page 51

III.

OVERNMENT

EDDLING

ITH

ONEY

The Revenue of Government

OVERNMENTS

IN CONTRAST TO

all other organizations, do

not obtain their revenue as payment for their services. Con-

sequently, governments face an economic problem different

from that of everyone else. Private individuals who want to

acquire more goods and services from others must produce

and sell more of what others want. Governments need only

find some method of expropriating more goods without the

owner’s consent.

In a barter economy, government officials can only

expropriate resources in one way: by seizing goods in kind.

In a monetary economy they will find it easier to seize mon-

etary assets, and then use the money to acquire goods and

services for government, or else pay the money as subsidies

to favored groups. Such seizure is called taxation.

Direct seizure of goods is therefore not now as extensive as monetary

expropriation. Instances of the former still occurring are “due process”

seizure of land under eminent domain, quartering of troops in an occu-

pied country, and especially compulsory confiscation of labor service (e.g.,

military conscription, compulsory jury duty, and forcing business to keep

tax records and collect withholding taxes).

Page 52

Taxation, however, is often unpopular, and, in less tem-

perate days, frequently precipitated revolutions. The emer-

gence of money, while a boon to the human race, also

opened a more subtle route for governmental expropriation

of resources. On the free market, money can be acquired by

producing and selling goods and services that people want,

or by mining (a business no more profitable, in the long

run, than any other). But if government can find ways to

engage in counterfeiting—the creation of new money out of

thin air—it can quickly produce its own money without

taking the trouble to sell services or mine gold. It can then

appropriate resources slyly and almost unnoticed, without

rousing the hostility touched off by taxation. In fact, coun-

terfeiting can create in its very victims the blissful illusion of

unparalleled prosperity.

Counterfeiting is evidently but another name for infla-

tion—both creating new “money” that is not standard gold

or silver, and both functioning similarly. And now we see

why governments are inherently inflationary: because infla-

tion is a powerful and subtle means for government acqui-

sition of the public’s resources, a painless and all the more

dangerous form of taxation.

The Economic Effects of Inflation

To gauge the economic effects of inflation, let us see

what happens when a group of counterfeiters set about

their work. Suppose the economy has a supply of 10,000

gold ounces, and counterfeiters, so cunning that they can-

not be detected, pump in 2,000 “ounces” more. What will

be the consequences? First, there will be a clear gain to the

counterfeiters. They take the newly-created money and use

What Has Government Done to Our Money?

Page 53

it to buy goods and services. In the words of the famous

New Yorker cartoon, showing a group of counterfeiters in

sober contemplation of their handiwork: “Retail spending

is about to get a needed shot in the arm.” Precisely. Local

spending, indeed, does get a shot in the arm. The new

money works its way, step by step, throughout the economic

system. As the new money spreads, it bids prices up—as we

have seen, new money can only dilute the effectiveness of

each dollar. But this dilution takes time and is therefore

uneven; in the meantime, some people gain and other peo-

ple lose. In short, the counterfeiters and their local retailers

have found their incomes increased before any rise in the

prices of the things they buy. But, on the other hand, peo-

ple in remote areas of the economy, who have not yet

received the new money, find their buying prices rising

before their incomes. Retailers at the other end of the coun-

try, for example, will suffer losses. The first receivers of the

new money gain most, and at the expense of the latest

receivers.

Inflation, then, confers no general social benefit;

instead, it redistributes the wealth in favor of the first-com-

ers and at the expense of the laggards in the race. And

inflation is, in effect, a race—to see who can get the new

money earliest. The latecomers—the ones stuck with the

loss—are often called the “fixed income groups.” Minis-

ters, teachers, people on salaries, lag notoriously behind

other groups in acquiring the new money. Particular suf-

ferers will be those depending on fixed money contracts—

contracts made in the days before the inflationary rise in

prices. Life insurance beneficiaries and annuitants, retired

persons living off pensions, landlords with long term

leases, bondholders and other creditors, those holding

Murray N. Rothbard

Page 54

cash, all will bear the brunt of the inflation. They will be

the ones who are “taxed.”

Inflation has other disastrous effects. It distorts that key-

stone of our economy: business calculation. Since prices do

not all change uniformly and at the same speed, it becomes

very difficult for business to separate the lasting from the

transitional, and gauge truly the demands of consumers or

the cost of their operations. For example, accounting prac-

tice enters the “cost” of an asset at the amount the business

has paid for it. But if inflation intervenes, the cost of replac-

ing the asset when it wears out will be far greater than that

recorded on the books. As a result, business accounting will

seriously overstate their profits during inflation—and may

even consume capital while presumably increasing their

investments.

Similarly, stockholders and real estate holders

will acquire capital gains during an inflation that are not

really “gains” at all. But they may spend part of these gains

without realizing that they are thereby consuming their

original capital.

By creating illusory profits and distorting economic cal-

culation, inflation will suspend the free market’s penalizing

of inefficient, and rewarding of efficient, firms. Almost all

It has become fashionable to scoff at the concern displayed by “conserva-

tives” for the “widows and orphans” hurt by inflation. And yet this is pre-

cisely one of the chief problems that must be faced. Is it really “progressive”

to rob widows and orphans and to use the proceeds to subsidize farmers

and armament workers?

This error will be greatest in those firms with the oldest equipment, and

in the most heavily capitalized industries. An undue number of firms,

therefore, will pour into these industries during an inflation. For further

discussion of this accounting-cost error, see W.T. Baxter, “The Accoun-

tant’s Contribution to the Trade Cycle,” Economica (May 1955): 99–112.

What Has Government Done to Our Money?

Page 55

firms will seemingly prosper. The general atmosphere of a

“sellers’ market” will lead to a decline in the quality of

goods and of service to consumers, since consumers often

resist price increases less when they occur in the form of

downgrading of quality.

The quality of work will decline in

an inflation for a more subtle reason: people become enam-

ored of “get-rich-quick” schemes, seemingly within their

grasp in an era of ever-rising prices, and often scorn sober

effort. Inflation also penalizes thrift and encourages debt,

for any sum of money loaned will be repaid in dollars of

lower purchasing power than when originally received. The

incentive, then, is to borrow and repay later rather than save

and lend. Inflation, therefore, lowers the general standard

of living in the very course of creating a tinsel atmosphere

of “prosperity.”

Fortunately, inflation cannot go on forever. For eventu-

ally people wake up to this form of taxation; they wake up

to the continual shrinkage in the purchasing power of their

dollar.

At first, when prices rise, people say: “Well, this is

abnormal, the product of some emergency. I will postpone

my purchases and wait until prices go back down.” This is

the common attitude during the first phase of an inflation.

This notion moderates the price rise itself, and conceals the

inflation further, since the demand for money is thereby

increased. But, as inflation proceeds, people begin to real-

ize that prices are going up perpetually as a result of per-

petual inflation. Now people will say: “I will buy now,

though prices are ‘high,’ because if I wait, prices will go up

In these days of rapt attention to “cost-of-living indexes” (e.g., escalator-

wage contracts) there is strong incentive to increase prices in such a way

that the change will not be revealed in the index.

Murray N. Rothbard

Page 56

still further.” As a result, the demand for money now falls

and prices go up more, proportionately, than the increase in

the money supply. At this point, the government is often

called upon to “relieve the money shortage” caused by the

accelerated price rise, and it inflates even faster. Soon, the

country reaches the stage of the “crack-up boom,” when

people say: “I must buy anything now—anything to get rid

of money which depreciates on my hands.” The supply of

money skyrockets, the demand plummets, and prices rise

astronomically. Production falls sharply, as people spend

more and more of their time finding ways to get rid of their

money. The monetary system has, in effect, broken down

completely, and the economy reverts to other moneys, if

they are attainable—other metal, foreign currencies if this is

a one-country inflation, or even a return to barter condi-

tions. The monetary system has broken down under the

impact of inflation.

This condition of hyper-inflation is familiar historically

in the assignats of the French Revolution, the Continentals

of the American Revolution, and especially the German cri-

sis of 1923, and the Chinese and other currencies after

World War II.

A final indictment of inflation is that whenever the

newly issued money is first used as loans to business, infla-

tion causes the dread “business cycle.” This silent but

deadly process, undetected for generations, works as fol-

lows: new money is issued by the banking system, under the

aegis of government, and loaned to business. To business-

men, the new funds seem to be genuine investments, but

these funds do not, like free-market investments, arise from

On the German example, see Costantino Bresciani-Turroni, The Econom-

ics of Inflation (London: George Allen and Unwin, 1937).

What Has Government Done to Our Money?

Page 57

voluntary savings. The new money is invested by business-

men in various projects, and paid out to workers and other

factors as higher wages and prices. As the new money filters

down to the whole economy, the people tend to re-establish

their old voluntary consumption/saving proportions. In

short, if people wish to save and invest about 20 percent of

their incomes and consume the rest, new bank money

loaned to business at first makes the saving proportion look

higher. When the new money seeps down to the public, it

re-establishes its old 20–80 proportion, and many invest-

ments are now revealed to be wasteful. Liquidation of the

wasteful investments of the inflationary boom constitutes

the depression phase of the business cycle.

Compulsory Monopoly of the Mint

For government to use counterfeiting to add to its rev-

enue, many lengthy steps must be travelled down the road

away from the free market. Government could not simply

invade a functioning free market and print its own paper

tickets. Done so abruptly, few people would accept the gov-

ernment’s money. Even in modern times, many people in

“backward countries” have simply refused to accept paper

money, and insist on trading only in gold. Governmental

incursion, therefore, must be far more subtle and gradual.

For a further discussion, see Murray N. Rothbard, America’s Great Depres-

sion (Princeton, N.J.: D. Van Nostrand, 1963), Part I.

Murray N. Rothbard

Page 58

Until a few centuries ago, there were no banks, and

therefore the government could not use the banking engine

for massive inflation as it can today. What could it do when

only gold and silver circulated?

The first step, taken firmly by every sizeable govern-

ment, was to seize an absolute monopoly of the minting

business. That was the indispensable means of getting con-

trol of the coinage supply. The king’s or the lord’s picture

was stamped upon coins, and the myth was propagated

that coinage is an essential prerogative of royal or baronial

“sovereignty.” The mintage monopoly allowed government

to supply whatever denominations of coin it, and not the

public, wanted. As a result, the variety of coins on the mar-

ket was forcibly reduced. Furthermore, the mint could now

charge a high price, greater than costs (“seigniorage”), a

price just covering costs (“brassage”), or supply coins free

of charge. Seigniorage was a monopoly price, and it

imposed a special burden on the conversion of bullion to

coin; gratuitous coinage, on the other hand, overstimulated

the manufacture of coins from bullion, and forced the gen-

eral taxpayer to pay for minting services utilized by others.

Having acquired the mintage monopoly, governments

fostered the use of the name of the monetary unit, doing

their best to separate the name from its true base in the

underlying weight of the coin. This, too, was a highly

important step, for it liberated each government from the

necessity of abiding by the common money of the world

market. Instead of using grains or grams of gold or silver,

each State fostered its own national name in the supposed

interests of monetary patriotism: dollars, marks, francs,

and the like. The shift made possible the preeminent

What Has Government Done to Our Money?

Page 59

means of governmental counterfeiting of coin: debase-

ment.

Debasement

Debasement was the State’s method of counterfeiting

the very coins it had banned private firms from making in

the name of vigorous protection of the monetary standard.

Sometimes, the government committed simple fraud,

secretly diluting gold with a base alloy, making shortweight

coins. More characteristically, the mint melted and recoined

all the coins of the realm, giving the subjects back the same

number of “pounds” or “marks,” but of a lighter weight.

The leftover ounces of gold or silver were pocketed by the

King and used to pay his expenses. In that way, government

continually juggled and redefined the very standard it was

pledged to protect. The profits of debasement were haugh-

tily claimed as “seigniorage” by the rulers.

Rapid and severe debasement was a hallmark of the

Middle Ages, in almost every country in Europe. Thus, in

1200 A.D., the French livre tournois was defined at ninety-

eight grams of fine silver; by 1600 A.D. it signified only

eleven grams. A striking case is the dinar, a coin of the Sara-

cens in Spain. The dinar originally consisted of sixty-five

gold grains, when first coined at the end of the seventh cen-

tury. The Saracens were notably sound in monetary mat-

ters, and by the middle of the twelfth century, the dinar was

still sixty grains. At that point, the Christian kings con-

quered Spain, and by the early thirteenth century, the dinar

(now called maravedi) was reduced to fourteen grains. Soon

the gold coin was too light to circulate, and it was converted

into a silver coin weighing twenty-six grains of silver. This,

Murray N. Rothbard

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too, was debased, and by the mid-fifteenth century, the

maravedi was only 1.5 silver grains, and again too small to

circulate.

Gresham’s Law and Coinage

A. Bimetallism

Government imposes price controls largely in order to

divert public attention from governmental inflation to the

alleged evils of the free market. As we have seen, “Gre-

sham’s Law”—that an artificially overvalued money tends

to drive an artificially undervalued money out of circula-

tion—is an example of the general consequences of price

control. Government places, in effect, a maximum price on

one type of money in terms of the other. Maximum price

causes a shortage—disappearance into hoards or exports—

of the currency suffering the maximum price (artificially

undervalued), and leads it to be replaced in circulation by

the overpriced money.

We have seen how this works in the case of new versus

worn coins, one of the earliest examples of Gresham’s Law.

Changing the meaning of money from weight to mere tale,

and standardizing denominations for their own rather

than for the public’s convenience, the governments called

new and worn coins by the same name, even though they

were of different weight. As a result, people hoarded or

exported the full weight new coins, and passed the worn

On debasement, see Elgin Groseclose, Money and Man (New York: Fred-

erick Ungar, 1961), pp. 57–76.

What Has Government Done to Our Money?

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coins in circulation, with governments hurling maledic-

tions at “speculators,” foreigners, or the free market in gen-

eral, for a condition brought about by the government itself.

A particularly important case of Gresham’s Law was the

perennial problem of the “standard.” We saw that the free

market established “parallel standards” of gold and silver,

each freely fluctuating in relation to the other in accordance

with market supplies and demands. But governments

decided they would help out the market by stepping in to

“simplify” matters. How much clearer things would be,

they felt, if gold and silver were fixed at a definite ratio, say,

twenty ounces of silver to one ounce of gold! Then, both

moneys could always circulate at a fixed ratio—and, far

more importantly, the government could finally rid itself of

the burden of treating money by weight instead of by tale.

Let us imagine a unit, the “rur,” defined by Ruritanians as

1/20 of an ounce of gold. We have seen how vital it is for the

government to induce the public to regard the “rur” as an

abstract unit of its own right, only loosely connected to gold.

What better way of doing this than to fix the gold/silver

ratio? Then, “rur” becomes not only 1/20 ounce of gold, but

also one ounce of silver. The precise meaning of the word

“rur”—a name for gold weight—is now lost, and people

begin to think of the “rur” as something tangible in its own

right, somehow set by the government, for good and effi-

cient purposes, as equal to certain weights of both gold and

silver.

Now we see the importance of abstaining from patriotic

or national names for gold ounces or grains. Once such a

label replaces the recognized world units of weight, it

becomes much easier for governments to manipulate the

money unit and give it an apparent life of its own. The fixed

gold-silver ration, known as bimetallism, accomplished this

Murray N. Rothbard

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task very neatly. It did not, however, fulfill its other job of

simplifying the nation’s currency. For, once again, Gresham’s

Law came into prominence. The government usually set the

bimetallic ration originally (say, 20/1) at the going rate on

the free market. But the market ratio, like all market prices,

inevitably changes over time, as supply and demand condi-

tions change. As changes occur, the fixed bimetallic ratio

inevitably becomes obsolete. Change makes either gold or

silver overvalued. Gold then disappears into cash balance,

black market, or exports, when silver flows in from abroad

and comes out of cash balances to become the only circulat-

ing currency in Ruritania. For centuries, all countries strug-

gled with calamitous effects of suddenly alternating metal-

lic currencies. First silver would flow in and gold disappear;

then, as the relative market ratios changed, gold would pour

in and silver disappear.

Finally, after weary centuries of bimetallic disruption,

governments picked one metal as the standard, generally

gold. Silver was relegated to “token coin” status, for small

denominations, but not at full weight. (The minting of

token coins was also monopolized by government, and,

since not backed 100 percent by gold, was a means of

expanding the money supply.) The eradication of silver as

money certainly injured many people who preferred to use

silver for various transactions. There was truth in the war-

cry of the bimetallists that a “crime against silver” had been

committed; but the crime was really the original imposition

of bimetallism in lieu of parallel standards. Bimetallism cre-

ated an impossibly difficult situation, which the government

Many debasements, in fact, occurred covertly, with governments claiming

that they were merely bringing the official gold-silver ratio into closer

alignment with the market.

What Has Government Done to Our Money?

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could either meet by going back to full monetary freedom

(parallel standards) or by picking one of the two metals as

money (gold or silver standard). Full monetary freedom,

after all this time, was considered absurd and quixotic; and

so the gold standard was generally adopted.

B. Legal Tender

How was the government able to enforce its price con-

trols on monetary exchange rates? By a device known as

legal tender laws. Money is used for payment of past debts, as

well as for present “cash” transactions. With the name of the

country’s currency now prominent in accounting instead its

actual weight, contracts began to pledge payment in certain

amounts of “money.” Legal tender laws dictated what that

“money” could be. When only the original gold or silver was

designated “legal tender,” people considered it harmless, but

they should have realized that a dangerous precedent had

been set for government control of money. If the govern-

ment sticks to the original money, its legal tender law is

superfluous and unnecessary.

On the other hand, the gov-

ernment may declare as legal tender a lower-quality cur-

rency side-by-side with the original. Thus, the government

Lord Farrer, Studies in Currency 1898 (London: Macmillan, 1898), p. 43.

The ordinary law of contract does all that is necessary

without any law giving special functions to particular

forms of currency. We have adopted a gold sovereign as our

unit. . . . If I promise to pay 100 sovereigns, it needs no spe-

cial currency law of legal tender to say that I am bound to

pay 100 sovereigns, and that, if required to pay the 100 sov-

ereigns, I cannot discharge my obligation by paying any-

thing else.

On the legal tender laws, see also Ludwig von Mises, Human Action (New

Haven, Conn.: Yale University Press, 1949), pp. 432n. and 444.

Murray N. Rothbard

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may decree worn coins as good as new ones in paying off

debt, or silver and gold equivalent to each other in the fixed

ratio. The legal tender laws then bring Gresham’s Law into

being.

When legal tender laws enshrine an overvalued money,

they have another effect; they favor debtors at the expense of

creditors. For then debtors are permitted to pay back their

debts in a much poorer money than they had borrowed, and

creditors are swindled out of the money rightfully theirs.

This confiscation of creditors property, however, only bene-

fits outstanding debtors; future debtors will be burdened by

the scarcity of credit generated by the memory of govern-

ment spoliation of creditors.

Summary:

Government and Coinage

The compulsory minting monopoly and legal tender

legislation were the capstones in governments’ drive to gain

control of their nations’ money. Bolstering these measures,

each government moved to abolish the circulation of all

coins minted by rival governments.

Within each country,

only the coin of its own sovereign could now be used;

between countries, unstamped gold and silver bullion was

used in exchange. This further severed the ties between the

various parts of the world market, further sundering one

country from another, and disrupting the international

division of labor. Yet, purely hard money did not leave too

The use of foreign coins was prevalent in the Middle Ages and in the

United States down to the middle of the nineteenth century.

What Has Government Done to Our Money?

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much scope for governmental inflation. There were limits

to the debasing that governments could engineer, and the

fact that all countries used gold and silver placed definite

checks on the control of each government over its own ter-

ritory. The rulers were still held in check by the discipline

of an international metallic money.

Governmental control of money could only become

absolute, and its counterfeiting unchallenged, as money-

substitutes came into prominence in recent centuries. The

advent of paper money and bank deposits, an economic

boon when backed fully by gold or silver, provided the open

sesame for government’s road to power over money, and

thereby over the entire economic system.

Permitting Banks to Refuse Payment

The modern economy, with its widespread use of banks

and money-substitutes, provides the golden opportunity for

government to fasten its control over the money supply and

permit inflation at its discretion. We have seen in section 12,

page 38, that there are three great checks on the power of

any bank to inflate under a “free-banking” system: (1) the

extent of the clientele of each bank; (2) the extent of the

clientele of the whole banking system, i.e., the extent to

which people use money-substitutes; and (3) the confi-

dence of the clients in their banks. The narrower the clien-

tele of each bank, of the banking system as a whole, or the

shakier the state of confidence, the stricter will be the limits

on inflation in the economy. Government’s privileging and

controlling of the banking system has operated to suspend

these limits.

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All these limits, of course, rest on one fundamental obli-

gation: the duty of the banks to redeem their sworn liabili-

ties on demand. We have seen that no fractional-reserve

bank can redeem all of its liabilities; and we have also seen

that this is the gamble that every bank takes. But it is, of

course, essential to any system of private property that con-

tract obligations be fulfilled. The bluntest way for govern-

ment to foster inflation, then, is to grant the banks the spe-

cial privilege of refusing to pay their obligations, while yet

continuing in their operation. While everyone else must

pay their debts or go bankrupt, the banks are permitted to

refuse redemption of their receipts, at the same time forcing

their own debtors to pay when their loans fall due. The

usual name for this is a “suspension of specie payments.” A

more accurate name would be “license for theft;” for what

else can we call a governmental permission to continue in

business without fulfilling one’s contract?

In the United States, mass suspension of specie pay-

ment in times of bank troubles became almost a tradition. It

started in the War of 1812. Most of the country’s banks were

located in New England, a section unsympathetic to Amer-

ica’s entry into the war. These banks refused to lend for war

purposes, and so the government borrowed from new banks

in the other states. These banks issued new paper money to

make the loans. The inflation was so great that calls for

redemption flooded into the new banks, especially from the

conservative nonexpanding banks of New England, where

the government spent most of its money on war goods. As a

result, there was a mass “suspension” in 1814, lasting for

over two years (well beyond the end of the war); during that

time, banks sprouted up, issuing notes with no need to

redeem in gold or silver.

What Has Government Done to Our Money?

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This suspension set a precedent for succeeding eco-

nomic crises; 1819, 1837, 1857, and so forth. As a result of

this tradition, the banks realized that they need have no fear

of bankruptcy after an inflation, and this, of course, stimu-

lated inflation and “wildcat banking.” Those writers who

point to nineteenth century America as a horrid example of

“free banking,” fail to realize the importance of this clear

dereliction of duty by the states in every financial crisis.

The governments and the banks, persuaded the public

of the justice of their acts. In fact, anyone trying to get his

money back during a crisis was considered “unpatriotic”

and a despoiler of his fellowmen, while banks were often

commended for patriotically bailing out the community in

a time of trouble. Many people, however, were bitter at the

entire proceeding and from this sentiment grew the famous

“hard money” Jacksonian movement that flourished before

the Civil War.

Despite its use in the United States, such periodic priv-

ilege to banks did not catch hold as a general policy in the

modern world. It was a crude instrument, too sporadic (it

could not be permanent since few people would patronize

banks that never paid their obligations)—and, what’s more,

it provided no means of government control over the bank-

ing system. What governments want, after all, is not simply

inflation, but inflation completely controlled and directed

by themselves. There must be no danger of the banks run-

ning the show. And so, a far subtler, smoother, more perma-

nent method was devised, and sold to the public as a hall-

mark of civilization itself—Central Banking.

See Horace White, Money and Banking, 4th ed. (Boston: Ginn, 1911),

pp. 322–27.

Murray N. Rothbard

Page 68

Central Banking:

Removing the Checks on Inflation

Central Banking is now put in the same class with mod-

ern plumbing and good roads: any economy that doesn’t

have it is called “backward,” “primitive,” hopelessly out of

the swim. America’s adoption of the Federal Reserve Sys-

tem—our Central Bank—in 1913 was greeted as finally

putting us in the ranks of the “advanced” nations.

Central Banks are often nominally owned by private

individuals or, as in the United States, jointly by private

banks; but they are always directed by government-

appointed officials, and serve as arms of the government.

Where they are privately owned, as in the original Bank of

England or the Second Bank of the United States, their

prospective profits add to the usual governmental desire for

inflation.

A Central Bank attains its commanding position from

its governmentally granted monopoly of the note issue. This

is often the unsung key to its power. Invariably, private

banks are prohibited from issuing notes, and the privilege

is reserved to the Central Bank. The private banks can only

grant deposits. If their customers ever wish to shift from

deposits to notes, therefore, the banks must go to the Cen-

tral Bank to get them. Hence the Central Bank’s lofty

perch as a “bankers’ bank.” It is a bankers’ bank because

the bankers are forced to do business with it. As a result,

bank deposits became redeemable not only in gold, but

also in Central Bank notes. And these new notes were not

just plain bank notes. They were liabilities of the Central

Bank, an institution invested with all the majestic aura of

What Has Government Done to Our Money?

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the government itself. Government, after all, appoints the

Bank officials and coordinates its policy with other state pol-

icy. It receives the notes in taxes, and declares them to be

legal tender.

As a result of these measures, all the banks in the coun-

try became clients of the Central Bank.

Gold poured into

the Central Bank from the private banks, and, in exchange,

the public got Central Bank notes and the disuse of gold

coins. Gold coins were scoffed at by “official” opinion as

cumbersome, old-fashioned, inefficient—an ancient

“fetish,” perhaps useful in children’s socks at Christmas,

but that’s about all. How much safer, more convenient,

more efficient is the gold when resting as bullion in the

mighty vaults of the Central Bank! Bathed by this propa-

ganda, and influenced by the convenience and governmen-

tal backing of the notes, the public more and more stopped

using gold coins in its daily life. Inexorably, the gold flowed

into the Central Bank where, more “centralized,” it per-

mitted a far greater degree of inflation of money-substi-

tutes.

In the United States, the Federal Reserve Act compels

the banks to keep the minimum ratio of reserves to deposits

and, since 1917, these reserves could only consist of deposits

at the Federal Reserve Bank. Gold could no longer be part

of a bank’s legal reserves; it had to be deposited in the Fed-

eral Reserve Bank.

In the United States, the banks were forced by law to join the Federal

Reserve System, and to keep their accounts with the Federal Reserve

Banks. (Those “state banks” that are not members of the Federal Reserve

System keep their reserves with member banks.)

Murray N. Rothbard

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The entire process took the public off the gold habit and

placed the people’s gold in the none-too-tender care of the

State—where it could be confiscated almost painlessly.

International traders still used gold bullion in their large-

scale transactions, but they were an insignificant proportion

of the voting population.

One of the reasons the public could be lured from gold

to bank notes was the great confidence everyone had in the

Central Bank. Surely, the Central Bank, possessed of almost

all the gold in the realm, backed by the might and prestige

of government, could not fail and go bankrupt! And it is

certainly true that no Central Bank in recorded history has

ever failed. But why not? Because of the sometimes unwrit-

ten but very clear rule that it could not be permitted to fail!

If governments sometimes allowed private banks to suspend

payment, how much more readily would it permit the Cen-

tral Bank—its own organ—to suspend when in trouble!

The precedent was set in Central Banking history when

England permitted the Bank of England to suspend in the

late eighteenth century, and allowed this suspension for

over twenty years.

The Central Bank thus became armed with the almost

unlimited confidence of the public. By this time, the public

could not see that the Central Bank was being allowed to

counterfeit at will, and yet remain immune from any liabil-

ity if its bona fides should be questioned. It came to see the

Central Bank as simply a great national bank, performing a

public service, and protected from failure by being a virtual

arm of the government.

The Central Bank proceeded to invest the private banks

with the public’s confidence. This was a more difficult task.

The Central Bank let it be known that it would always act

as a “lender of last resort” to the banks—i.e., that the Bank

What Has Government Done to Our Money?

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would stand ready to lend money to any bank in trouble,

especially when many banks are called upon to pay their

obligations.

Governments also continued to prop up banks by dis-

couraging bank “runs” (i.e., cases where many clients sus-

pect chicanery and ask to get back their property). Some-

times, they will permitted banks to suspend payment, as in

the compulsory bank “holidays” of 1933. Laws were passed

prohibiting public encouragement of bank runs, and, as in

the 1929 depression in America, government campaigned

against “selfish” and “unpatriotic” gold “hoarders.” America

finally “solved” its pesky problem of bank failures when it

adopted Federal Deposit Insurance in 1933. The Federal

Deposit Insurance Corporation has only a negligible propor-

tion of “backing” for the bank deposits it “insures.” But the

public has been given the impression (and one that may well

be accurate) that the federal government would stand ready

to print enough new money to redeem all of the insured

deposits. As a result, the government has managed to trans-

fer its own command of vast public confidence to the entire

banking system, as well as to the Central Bank.

We have seen that, by setting up a Central Bank, govern-

ments have greatly widened, if not removed, two of the three

main checks on bank credit inflation. What of the third

check—the problem of the narrowness of each bank’s clien-

tele? Removal of this check is one of the main reasons for

the Central Bank’s existence. In a free-banking system,

inflation by any one bank would soon lead to demands for

redemption by the other banks, since the clientele of any one

bank is severely limited. But the Central Bank, by pumping

reserves into all the banks, can make sure that they can all

expand together, and at a uniform rate. If all banks are

expanding, then there is no redemption problem of one

Murray N. Rothbard

Page 72

bank upon another, and each bank finds that its clientele is

really the whole country. In short, the limits on bank expan-

sion are immeasurably widened, from the clientele of each

bank to that of the whole banking system. Of course, this

means that no bank can expand further than the Central

Bank desires. Thus, the government has finally achieved

the power to control and direct the inflation of the banking

system.

In addition to removing the checks on inflation, the act

of establishing a Central Bank has a direct inflationary

impact. Before the Central Bank began, banks kept their

reserves in gold; now gold flows into the Central Bank in

exchange for deposits with the Bank, which are now

reserves for the commercial banks. But the Bank itself keeps

only a fractional reserve of gold to its own liabilities! There-

fore, the act of establishing a Central Bank greatly multi-

plies the inflationary potential of the country.

Central Banking:

Directing the Inflation

Precisely how does the Central Bank go about its task of

regulating the private banks? By controlling the banks’

The establishment of the Federal Reserve in this way increased three-

fold the expansive power of the banking system of the United States. The

Federal Reserve System also reduced the average legal reserve require-

ments of all banks from approximately 21 percent in 1913 to 10 percent by

1917, thus further doubling the inflationary potential—a combined poten-

tial inflation of six-fold. See Chester A. Phillips, T.F. McManus, and R.W.

Nelson, Banking and the Business Cycle (New York: Macmillan, 1937), pp.

23ff.

What Has Government Done to Our Money?

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“reserves”—their deposit accounts at the Central Bank.

Banks tend to keep a certain ratio of reserves to their total

deposit liabilities, and in the United States government

control is made easier by imposing a legal minimum ratio

on the bank. The Central Bank can stimulate inflation,

then, by pouring reserves into the banking system, and also

by lowering the reserve ratio, thus permitting a nationwide

bank credit-expansion. If the banks keep a reserve/deposit

ratio of 1:10, then “excess reserves” (above the required

ratio) of ten million dollars will permit and encourage a

nationwide bank inflation of 100 million. Since banks profit

by credit expansion, and since government has made it

almost impossible for them to fail, they will usually try to

keep “loaned up” to their allowable maximum.

The Central Bank adds to the quantity of bank reserves

by buying assets on the market. What happens, for example,

if the Bank buys an asset (any asset) from Mr. Jones, valued

at $1,000? The Central Bank writes out a check to Mr. Jones

for $1,000 to pay for the asset. The Central Bank does not

keep individual accounts, so Mr. Jones takes the check and

deposits it in his bank. Jones’ bank credits him with a $1,000

deposit, and presents the check to the Central Bank, which

has to credit the bank with an added $1,000 in reserves.

This $1,000 in reserves permits a multiple bank credit

expansion, particularly if added reserves are in this way

poured into many banks across the country.

If the Central Bank buys an asset from a bank directly,

then the result is even clearer; the bank adds to its reserves,

and a base for multiple credit expansion is established.

Undoubtedly, the favorite asset for Central Bank pur-

chase has been government securities. In that way, the gov-

ernment assures a market for its own securities. Govern-

ment can easily inflate the money supply by issuing new

Murray N. Rothbard

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bonds, and then order its Central Bank to purchase them.

Often the Central Bank undertakes to support the market

price of government securities at a certain level, thereby

causing a flow of securities into the Bank, and a consequent

perpetual inflation.

Besides buying assets, the Central Bank can create new

bank reserves in another way: by lending them. The rate

which the Central Bank charges the banks for this service is

the “rediscount rate.” Clearly, borrowed reserves are not as

satisfactory to the banks as reserves that are wholly theirs,

since there is now pressure for repayment. Changes in the

rediscount rate receive a great deal of publicity, but they are

clearly of minor importance compared to the movements in

the quantity of bank reserves and the reserve ratio.

When the Central Bank sells assets to the banks or the

public, it lowers bank reserves, and causes pressure for

credit contraction and deflation—lowering—of the money

supply. We have seen, however, that governments are inher-

ently inflationary; historically, deflationary action by the

government has been negligible and fleeting. One thing is

often forgotten: deflation can only take place after a previ-

ous inflation; only pseudo-receipts, not gold coins, can be

retired and liquidated.

10.

Going Off the Gold Standard

The establishment of Central Banking removes the

checks of bank credit expansion, and puts the inflationary

engine into operation. It does not remove all restraints,

however. There is still the problem of the Central Bank

itself. The citizens can conceivably make a run on the Cen-

tral Bank, but this is most improbable. A more formidable

What Has Government Done to Our Money?

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threat is the loss of gold to foreign nations. For just as the

expansion of one bank loses gold to the clients of other,

nonexpanding banks, so does monetary expansion in one

country cause a loss of gold to the citizens of other coun-

tries. Countries that expand faster are in danger of gold

losses and calls upon their banking system for gold redemp-

tion. This was the classic cyclical pattern of the nineteenth

century; a country’s Central Bank would generate bank

credit expansion; prices would rise; and as the new money

spread from domestic to foreign clientele, foreigners would

more and more try to redeem the currency in gold. Finally,

the Central Bank would have to call a halt and enforce a

credit contraction in order to save the monetary standard.

There is one way that foreign redemption can be

avoided: inter-Central Bank cooperation. If all Central

Banks agree to inflate at about the same rate, then no coun-

try would lose gold to any other, and all the world together

could inflate almost without limit. With every government

jealous of its own power and responsive to different pres-

sures, however, such goose-step cooperation has so far

proved almost impossible. One of the closest approaches

was the American Federal Reserve agreement to promote

domestic inflation in the 1920s in order to help Great

Britain and prevent it from losing gold to the United States.

In the twentieth century, governments, rather than

deflate or limit their own inflation, have simply “gone off the

gold standard” when confronted with heavy demands for

gold. This, of course, insures that the Central Bank cannot

fail, since its notes now become the standard money. In short,

government has finally refused to pay its debts, and has vir-

tually absolved the banking system from that onerous duty.

Pseudo-receipts to gold were first issued without backing and

then, when the day of reckoning drew near, the bankruptcy

Murray N. Rothbard

Page 76

was shamelessly completed by simply eliminating gold

redemption. The severance of the various national currency

names (dollar, pound, mark) from gold and silver is now

complete.

At first, governments refused to admit that this was a

permanent measure. They referred to the “suspension of

specie payments,” and it was always understood that even-

tually, after the war or other “emergency” had ended, the

government would again redeem its obligations. When the

Bank of England went off gold at the end of the eighteenth

century, it continued in this state for twenty years, but

always with the understanding that gold payment would be

resumed after the French wars were ended.

Temporary “suspensions,” however, are primrose paths

to outright repudiation. The gold standard, after all, is no

spigot that can be turned on or off as government whim

decrees. Either a gold-receipt is redeemable or it is not; once

redemption is suspended the gold standard is itself a mock-

ery.

Another step in the slow extinction of gold money was

the establishment of the “gold bullion standard.” Under this

system, the currency is no longer redeemable in coins; it can

only be redeemed in large, highly valuable, gold bars. This,

in effect, limits gold redemption to a handful of specialists

in foreign trade. There is no longer a true gold standard, but

governments can still proclaim their adherence to gold. The

European “gold standards” of the 1920s were pseudo-stan-

dards of this type.

See Melchior Palyi, “The Meaning of the Gold Standard,” Journal of

Business (July 1941): 299–304.

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Finally, governments went “off gold” officially and

completely, in a thunder of abuse against foreigners and

“unpatriotic gold hoarders.” Government paper now

becomes the fiat standard money. Sometimes, Treasury

rather than Central Bank paper has been the fiat money,

especially before the development of a Central Banking sys-

tem. The American Continentals, the Greenbacks, and

Confederate notes of the Civil War period, the French assig-

nats, were all fiat currencies issued by the Treasuries. But

whether Treasury or Central Bank, the effect of fiat issue is

the same: the monetary standard is now at the mercy of the

government, and bank deposits are redeemable simply in

government paper.

11.

Fiat Money and the Gold Problem

When a country goes off the gold standard and onto the

fiat standard, it adds to the number of “moneys” in exis-

tence. In addition to the commodity moneys, gold and sil-

ver, there now flourish independent moneys directed by

each government imposing its fiat rule. And just as gold and

silver will have an exchange rate on the free market, so the

market will establish exchange rates for all the various mon-

eys. In a world of fiat moneys, each currency, if permitted,

will fluctuate freely in relation to all the others. We have

seen that for any two moneys, the exchange rate is set in

accordance with the proportionate purchasing-power pari-

ties, and that these in turn are determined by the respective

supplies and demands for the various currencies. When a

currency changes its character from gold-receipt to fiat

paper, confidence in its stability and quality is shaken, and

demand for it declines. Furthermore, now that it is cut off

Murray N. Rothbard

Page 78

from gold, its far greater quantity relative to its former gold

backing now becomes evident. With a supply greater than

gold and a lower demand, its purchasing-power, and hence

its exchange rate, quickly depreciate in relation to gold. And

since government is inherently inflationary, it will keep

depreciating as time goes on.

Such depreciation is highly embarrassing to the govern-

ment—and hurts citizens who try to import goods. The

existence of gold in the economy is a constant reminder of

the poor quality of the government paper, and it always

poses a threat to replace the paper as the country’s money.

Even with the government giving all the backing of its pres-

tige and its legal tender laws to its fiat paper, gold coins in

the hands of the public will always be a permanent reproach

and menace to the government’s power over the country’s

money.

In America’s first depression, 1819–1821, four Western

states (Tennessee, Kentucky, Illinois, and Missouri) estab-

lished state-owned banks, issuing fiat paper. They were

backed by legal tender provisions in the states, and some-

times by legal prohibition against depreciating the notes.

And yet, all these experiments, born in high hopes, came

quickly to grief as the new paper depreciated rapidly to neg-

ligible value. The projects had to be swiftly abandoned.

Later, the greenbacks circulated as fiat paper in the North

during and after the Civil War. Yet, in California, the people

refused to accept the greenbacks and continued to use gold

as their money. As a prominent economist pointed out:

In California, as in other states, the paper was legal

tender and was receivable for public dues; nor was

there any distrust or hostility toward the federal

government. But there was a strong feeling . . . in

favor of gold and against paper. . . . Every debtor

What Has Government Done to Our Money?

Page 79

had the legal right to pay off his debts in depreci-

ated paper. But if he did so, he was a marked man

(the creditor was likely to post him publicly in the

newspapers) and he was virtually boycotted.

Throughout this period paper was not used in Cal-

ifornia. The people of the state conducted their

transactions in gold, while all the rest of the United

States used convertible paper.

It became clear to governments that they could not

afford to allow people to own and keep their gold. Govern-

ment could never cement its power over a nation’s currency,

if the people, when in need, could repudiate the fiat paper

and turn to gold for their money. Accordingly, governments

have outlawed gold holding by their citizens. Gold, except

for a negligible amount permitted for industrial and orna-

mental purposes, has generally been nationalized. To ask

for return of the public’s confiscated property is now consid-

ered hopelessly backward and old-fashioned.

12.

Fiat Money and Gresham’s Law

With fiat money established and gold outlawed, the

way is clear for full-scale, government-run inflation. Only

Frank W. Taussig, Principles of Economics, 2nd ed. (New York: Macmil-

lan, 1916), vol. I, p. 312. Also see J.K. Upton, Money in Politics, 2nd ed.

(Boston: Lothrop Publishing, 1895), pp. 69 ff.

For an incisive analysis of the steps by which the American government

confiscated the people’s gold and went off the gold standard in 1933, see

Garet Garrett, The People’s Pottage (Caldwell, Idaho: Caxton Printers,

1953), pp. 15–41.

Murray N. Rothbard

Page 80

one very broad check remains: the ultimate threat of

hyper-inflation, the crack-up of the currency. Hyper-infla-

tion occurs when the public realizes that the government is

bent on inflation, and decides to evade the inflationary tax

on its resources by spending money as fast as possible while

it still retains some value. Until hyper-inflation sets in, how-

ever, government can now manage the currency and the

inflation undisturbed. New difficulties arise, however. As

always, government intervention to cure one problem raises

a host of new, unexpected problems. In a world of fiat mon-

eys, each country has its own money. The international

division of labor, based on an international currency, has

been broken, and countries tend to divide into their own

autarchic units. Lack of monetary certainty disrupts trade

further. The standard of living in each country thereby

declines. Each country has freely-fluctuating exchange

rates with all other currencies. A country inflating beyond

the others no longer fears a loss of gold; but it faces other

unpleasant consequences. The exchange rate of its currency

falls in relation to foreign currencies. This is not only

embarrassing but even disturbing to citizens who fear fur-

ther depreciation. It also greatly raises the costs of imported

goods, and this means a great deal to those countries with a

high proportion of international trade.

In recent years, therefore, governments have moved to

abolish freely-fluctuating exchange rates. Instead, they fixed

arbitrary exchange rates with other currencies. Gresham’s

Law tells us precisely the result of any such arbitrary price

control. Whatever rate is set will not be the free-market one,

since that can be only be determined from day-to-day on the

market. Therefore, one currency will always be artificially

overvalued and the other, undervalued. Generally, govern-

ments have deliberately overvalued their currencies—for

What Has Government Done to Our Money?

Page 81

prestige reasons, and also because of the consequences that

follow. When a currency is overvalued by decree, people rush

to exchange it for the undervalued currency at the bargain

rates; this causes a surplus of overvalued, and a shortage of

the undervalued, currency. The rate, in short, is prevented

from moving to clear the exchange market. In the present

world, foreign currencies have generally been overvalued

relative to the dollar. The result has been the famous phe-

nomenon of the “dollar shortage”—another testimony to

the operation of Gresham’s Law.

Foreign countries, clamoring about a “dollar shortage,”

thus brought it about by their own policies. It is possible

that these governments actually welcomed this state of

affairs, for (a) it gave them an excuse to clamor for Ameri-

can dollar aid to “relieve the dollar shortage in the free

world,” and (b) it gave them an excuse to ration imports

from America. Undervaluing dollars causes imports from

America to be artificially cheap and exports to America

artifically expensive. The result: a trade deficit and worry

over the dollar drain.

The foreign government then

stepped in to tell its people sadly that it is unfortunately

necessary for it to ration imports: to issue licenses to

importers, and determine what is imported “according to

need.” To ration imports, many governments confiscate the

foreign exchange holdings of their citizens, backing up an

artificially high valuation on domestic currency by forcing

these citizens to accept far less domestic money than they

could have acquired on the free market. Thus, foreign

exchange, as well as gold, has been nationalized, and

In the last few years, the dollar has been overvalued in relation to other

currencies, and hence the dollar drains from the U.S.

Murray N. Rothbard

Page 82

exporters penalized. In countries where foreign trade is

vitally important, this government “exchange control”

imposes virtual socialization on the economy. An artificial

exchange rate thus gives countries an excuse for demanding

foreign aid and for imposing socialist controls over trade.

At present, the world is enmeshed in a chaotic welter of

exchange controls, currency blocs, restrictions on convert-

ibility, and multiple systems of rates. In some countries a

“black market” in foreign exchange is legally encouraged to

find out the true rate, and multiple discriminatory rates are

fixed for different types of transactions. Almost all nations

are on a fiat standard, but they have not had the courage to

admit this outright, and so they proclaim some such fiction

as “restricted gold bullion standard.” Actually, gold is used

not as a true definition for currencies, but as a convenience

by governments: for (a) fixing a currency’s rate with respect

to gold makes it easy to reckon any exchange in terms of any

other currency; and (b) gold is still used by the different

governments. Since exchange rates are fixed, some item

must move to balance every country’s payments, and gold

is the ideal candidate. In short gold is no longer the world’s

money; it is now the governments’ money, used in payments

to one another.

Clearly, the inflationists’ dream is some sort of world

paper money, manipulated by a world government and

Central Bank, inflating everywhere at a common rate. This

dream still lies in the dim future, however; we are still far

from world government, and national currency problems

What Has Government Done to Our Money?

For an excellent discussion of foreign exchange and exchange controls,

see George Winder, The Free Convertibility of Sterling (London: Batch-

worth Press, 1955).

Page 83

have so far been too diverse and conflicting to permit mesh-

ing into a single unit. Yet, the world has moved steadily in

this direction. The International Monetary Fund, for exam-

ple, is basically an institution designed to bolster national

exchange control in general, and foreign undervaluation of

the dollar in particular. The Fund requires each member

country to fix its exchange rate, and then to pool gold and

dollars to lend to governments that find themselves short of

hard currency.

13.

Government and Money

Many people believe that the free market, despite some

admitted advantages, is a picture of disorder and chaos.

Nothing is “planned,” everything is haphazard. Govern-

ment dictation, on the other hand, seems simple and

orderly; decrees are handed down and they are obeyed. In

no area of the economy is this myth more prevalent than in

the field of money. Seemingly, money, at least, must come

under stringent government control. But money is the

lifeblood of the economy; it is the medium for all transac-

tions. If government dictates over money, it has already cap-

tured a vital command post for control over the economy,

and has secured a stepping-stone for full socialism. We have

seen that a free market in money, contrary to common

assumption, would not be chaotic; that, in fact, it would be

a model of order and efficiency.

What, then, have we learned about government and

money? We have seen that, over the centuries, government

has, step by step, invaded the free market and seized com-

plete control over the monetary system. We have seen that

each new control, sometimes seemingly innocuous, has

Murray N. Rothbard

Page 84

What Has Government Done to Our Money?

begotten new and further controls. We have seen that gov-

ernments are inherently inflationary, since inflation is a

tempting means of acquiring revenue for the State and its

favored groups. The slow but certain seizure of the monetary

reins has thus been used to (a) inflate the economy at a pace

decided by government; and (b) bring about socialistic

direction of the entire economy.

Furthermore, government meddling with money has

not only brought untold tyranny into the world; it has also

brought chaos and not order. It has fragmented the peace-

ful, productive world market and shattered it into a thou-

sand pieces, with trade and investment hobbled and ham-

pered by myriad restrictions, controls, artificial rates,

currency breakdowns, etc. It has helped bring about wars by

transforming a world of peaceful intercourse into a jungle

of warring currency blocs. In short, we find that coercion, in

money as in other matters, brings, not order, but conflict

and chaos.

Page 85

IV.

THE MONETARY BREAKDOWN OF THE WEST

SINCE THE FIRST EDITION OFthis book was written, the

chickens of the monetary interventionists have come home

to roost. The world monetary crisis of February–March,

1973, followed by the dollar plunge of July, was only the lat-

est of an accelerating series of crises which provide a virtual

textbook illustration of our analysis of the inevitable conse-

quences of government intervention in the monetary sys-

tem. After each crisis is temporarily allayed by a “Band-Aid”

solution, the governments of the West loudly announce that

the world monetary system has now been placed on sure

footing, and that all the monetary crises have been solved.

President Nixon went so far as to call the Smithsonian

Agreement of December 18, 1971, the “greatest monetary

agreement in the history of the world,” only to see this

greatest agreement collapse in a little over a year. Each

“solution” has crumbled more rapidly than its predecessor.

Page 86

To understand the current monetary chaos, it is neces-

sary to trace briefly the international monetary develop-

ments of the twentieth century, and to see how each set of

unsound inflationist interventions has collapsed of its own

inherent problems, only to set the stage for another round of

interventions. The twentieth century history of the world

monetary order can be divided into nine phases. Let us

examine each in turn.

Phase I:

The Classical Gold Standard, 1815–1914

We can look back upon the “classical” gold standard, the

Western world of the nineteenth and early twentieth cen-

turies, as the literal and metaphorical Golden Age. With the

exception of the troublesome problem of silver, the world

was on a gold standard, which meant that each national

currency (the dollar, pound, franc, etc.) was merely a name

for a certain definite weight of gold. The “dollar,” for exam-

ple, was defined as 1/20 of a gold ounce, the pound sterling

as slightly less than 1/4 of a gold ounce, and so on. This

meant that the “exchange rates” between the various

national currencies were fixed, not because they were arbi-

trarily controlled by government, but in the same way that

one pound of weight is defined as being equal to sixteen

ounces.

The international gold standard meant that the benefits

of having one money medium were extended throughout

the world. One of the reasons for the growth and prosperity

of the United States has been the fact that we have enjoyed

one money throughout the large area of the country. We

What Has Government Done to Our Money?

Page 87

have had a gold or at least a single dollar standard within

the entire country, and did not have to suffer the chaos of

each city and county issuing its own money which would

then fluctuate with respect to the moneys of all the other

cities and counties. The nineteenth century saw the benefits

of one money throughout the civilized world. One money

facilitated freedom of trade, investment, and travel through-

out that trading and monetary area, with the consequent

growth of specialization and the international division of

labor.

It must be emphasized that gold was not selected arbi-

trarily by governments to be the monetary standard. Gold

had developed for many centuries on the free market as the

best money; as the commodity providing the most stable

and desirable monetary medium. Above all, the supply and

provision of gold was subject only to market forces, and not

to the arbitrary printing press of the government.

The international gold standard provided an automatic

market mechanism for checking the inflationary potential

of government. It also provided an automatic mechanism

for keeping the balance of payments of each country in

equilibrium. As the philosopher and economist David

Hume pointed out in the mid-eighteenth century, if one

nation, say France, inflates its supply of paper francs, its

prices rise; the increasing incomes in paper francs stimulate

imports from abroad, which are also spurred by the fact that

prices of imports are now relatively cheaper than prices at

home. At the same time, the higher prices at home discour-

age exports abroad; the result is a deficit in the balance of

payments, which must be paid for by foreign countries

cashing in francs for gold. The gold outflow means that

France must eventually contract its inflated paper francs in

order to prevent a loss of all of its gold. If the inflation has

Murray N. Rothbard

Page 88

taken the form of bank deposits, then the French banks

have to contract their loans and deposits in order to avoid

bankruptcy as foreigners call upon the French banks to

redeem their deposits in gold. The contraction lowers

prices at home, and generates an export surplus, thereby

reversing the gold outflow, until the price levels are equal-

ized in France and in other countries as well.

It is true that the interventions of governments previous

to the nineteenth century weakened the speed of this mar-

ket mechanism, and allowed for a business cycle of inflation

and recession within this gold standard framework. These

interventions were particularly: the governments’ monopo-

lizing of the mint, legal tender laws, the creation of paper

money, and the development of inflationary banking pro-

pelled by each of the governments. But while these inter-

ventions slowed the adjustments of the market, these

adjustments were still in ultimate control of the situation.

So while the classical gold standard of the nineteenth cen-

tury was not perfect, and allowed for relatively minor

booms and busts, it still provided us with by far the best

monetary order the world has ever known, an order which

worked, which kept business cycles from getting out of

hand, and which enabled the development of free interna-

tional trade, exchange, and investment.

For a recent study of the classical gold standard, and a history of the early

phases of its breakdown in the twentieth century, see Melchior Palyi, The

Twilight of Gold, 1914–1936 (Chicago: Henry Regnery, 1972).

What Has Government Done to Our Money?

Page 89

Phase II:

World War I and After

If the classical gold standard worked so well, why did it

break down? It broke down because governments were

entrusted with the task of keeping their monetary promises,

of seeing to it that pounds, dollars, francs, etc., were always

redeemable in gold as they and their controlled banking sys-

tem had pledged. It was not gold that failed; it was the folly

of trusting government to keep its promises. To wage the

catastrophic war of World War I, each government had to

inflate its own supply of paper and bank currency. So severe

was this inflation that it was impossible for the warring gov-

ernments to keep their pledges, and so they went “off the

gold standard,” i.e., declared their own bankruptcy, shortly

after entering the war. All except the United States, which

entered the war late, and did not inflate the supply of dol-

lars enough to endanger redeemability. But, apart from the

United States, the world suffered what some economists

now hail as the Nirvana of freely-fluctuating exchange rates

(now called “dirty floats”), competitive devaluations, war-

ring currency blocs, exchange controls, tariffs and quotas,

and the breakdown of international trade and investment.

The inflated pounds, francs, marks, etc., depreciated in

relation to gold and the dollar; monetary chaos abounded

throughout the world.

In those days there were, happily, very few economists

to hail this situation as the monetary ideal. It was generally

recognized that Phase II was the threshold to international

disaster, and politicians and economists looked around for

Murray N. Rothbard

Page 90

ways to restore the stability and freedom of the classical gold

standard.

Phase III:

The Gold Exchange Standard

(Britain and the United States) 1926–1931

How to return to the Golden Age? The sensible thing to

do would have been to recognize the facts of reality, the fact

of the depreciated pound, franc, mark, etc., and to return to

the gold standard at a redefined rate: a rate that would rec-

ognize the existing supply of money and price levels. The

British pound, for example, had been traditionally defined

at a weight which made it equal to $4.86. But by the end of

World War I, the inflation in Britain had brought the pound

down to approximately $3.50 on the free foreign exchange

market. Other currencies were similarly depreciated. The

sensible policy would have been for Britain to return to gold

at approximately $3.50, and for the other inflated countries

to do the same. Phase I could have been smoothly and rap-

idly restored. Instead, the British made the fateful decision

to return to gold at the old par of $4.86.

It did so for reasons

of British national “prestige,” and in a vain attempt to re-

establish London as the “hard money” financial center of

the world. To succeed at this piece of heroic folly, Britain

would have had to deflate severely its money supply and its

price levels, for at a $4.86 pound British export prices were

What Has Government Done to Our Money?

On the crucial British error and its consequence in leading to the 1929

depression, see Lionel Robbins, The Great Depression (New York: Macmil-

lan, 1934).

Page 91

far too high to be competitive in the world markets. But

deflation was now politically out of the question, for the

growth of trade unions, buttressed by a nationwide system

of unemployment insurance, had made wage rates rigid

downward; in order to deflate, the British government

would have had to reverse the growth of its welfare state. In

fact, the British wished to continue to inflate money and

prices. As a result of combining inflation with a return to an

overvalued par, British exports were depressed all during

the 1920s and unemployment was severe all during the

period when most of the world was experiencing an eco-

nomic boom.

How could the British try to have their cake and eat it

at the same time? By establishing a new international mon-

etary order which would induce or coerce other govern-

ments into inflating or into going back to gold at overvalued

pars for their own currencies, thus crippling their own

exports and subsidizing imports from Britain. This is pre-

cisely what Britain did, as it led the way, at the Genoa Con-

ference of 1922, in creating a new international monetary

order, the gold-exchange standard.

The gold-exchange standard worked as follows: The

United States remained on the classical gold standard,

redeeming dollars in gold. Britain and the other countries of

the West, however, returned to a pseudo-gold standard,

Britain in 1926 and the other countries around the same

time. British pounds and other currencies were not payable

in gold coins, but only in large-sized bars, suitable only for

international transactions. This prevented the ordinary cit-

izens of Britain and other European countries from using

gold in their daily life, and thus permitted a wider degree of

paper and bank inflation. But furthermore, Britain

redeemed pounds not merely in gold, but also in dollars;

Murray N. Rothbard

Page 92

while the other countries redeemed their currencies not in

gold, but in pounds. And most of these countries were

induced by Britain to return to gold at overvalued parities.

The result was a pyramiding of United States on gold, of

British pounds on dollars, and of other European curren-

cies on pounds—the “gold-exchange standard,” with the

dollar and the pound as the two “key currencies.”

Now when Britain inflated, and experienced a deficit in

its balance of payments, the gold standard mechanism did

not work to quickly restrict British inflation. For instead of

other countries redeeming their pounds for gold, they kept

the pounds and inflated on top of them. Hence Britain and

Europe were permitted to inflate unchecked, and British

deficits could pile up unrestrained by the market discipline

of the gold standard. As for the United States, Britain was

able to induce the United States to inflate dollars so as not

to lose many dollar reserves or gold to the United States.

The point of the gold-exchange standard is that it can-

not last; the piper must eventually be paid, but only in a dis-

astrous reaction to the lengthy inflationary boom. As ster-

ling balances piled up in France, the United States, and

elsewhere, the slightest loss of confidence in the increas-

ingly shaky and jerry-built inflationary structure was bound

to lead to general collapse. This is precisely what happened

in 1931; the failure of inflated banks throughout Europe,

and the attempt of “hard money” France to cash in its ster-

ling balances for gold, led Britain to go off the gold standard

completely. Britain was soon followed by the other countries

of Europe.

What Has Government Done to Our Money?

Page 93

Phase IV:

Fluctuating Fiat Currencies, 1931–1945

The world was now back to the monetary chaos of

World War I, except that now there seemed to be little hope

for a restoration of gold. The international economic order

had disintegrated into the chaos of clean and dirty floating

exchange rates, competing devaluations, exchange con-

trols, and trade barriers; international economic and mon-

etary warfare raged between currencies and currency blocs.

International trade and investment came to a virtual stand-

still; and trade was conducted through barter agreements

conducted by governments competing and conflicting with

one another. Secretary of State Cordell Hull repeatedly

pointed out that these monetary and economic conflicts of

the 1930s were the major cause of World War II.

The United States remained on the gold standard for

two years, and then, in 1933–34, went off the classical gold

standard in a vain attempt to get out of the depression.

American citizens could no longer redeem dollars in gold,

and were even prohibited from owning any gold, either here

or abroad. But the United States remained, after 1934, on a

peculiar new form of gold standard, in which the dollar,

now redefined to 1/35 of a gold ounce, was redeemable in

gold to foreign governments and Central Banks. A lingering

tie to gold remained. Furthermore, the monetary chaos in

Murray N. Rothbard

Cordell Hull, Memoirs (New York, 1948), vol. I, p. 81. Also see Richard N.

Gardner, Sterling-Dollar Conspiracy (Oxford: Clarendon Press, 1956), p.

141.

Page 94

Europe led to gold flowing into the only relatively safe

monetary haven, the United States.

The chaos and the unbridled economic warfare of the

1930s points up an important lesson: the grievous political

flaw (apart from the economic problems) in the Milton

Friedman-Chicago School monetary scheme for freely-

fluctuating fiat currencies. For what the Friedmanites

would do—in the name of the free market—is to cut all ties

to gold completely, leave the absolute control of each

national currency in the hands of its central government

issuing fiat paper as legal tender—and then advise each

government to allow its currency to fluctuate freely with

respect to all other fiat currencies, as well as to refrain from

inflating its currency too outrageously. The grave political

flaw is to hand total control of the money supply to the

Nation-State, and then to hope and expect that the State

will refrain from using that power. And since power always

tends to be used, including the power to counterfeit legally,

the naivete, as well as the statist nature, of this type of pro-

gram should be starkly evident.

And so, the disastrous experience of Phase IV, the 1930s

world of fiat paper and economic warfare, led the United

States authorities to adopt as their major economic war aim

of World War II the restoration of a viable international

monetary order, an order on which could be built a renais-

sance of world trade and the fruits of the international divi-

sion of labor.

What Has Government Done to Our Money?

Page 95

Phase V:

Bretton Woods and the New Gold

Exchange Standard (the United States)

1945–1968

The new international monetary order was conceived

and then driven through by the United States at an interna-

tional monetary conference at Bretton Woods, New Hamp-

shire, in mid-1944, and ratified by the Congress in July,

1945. While the Bretton Woods system worked far better

than the disaster of the 1930s, it worked only as another

inflationary recrudescence of the gold-exchange standard of

the 1920s and—like the 1920s—the system lived only on

borrowed time.

The new system was essentially the gold-exchange

standard of the 1920s but with the dollar rudely displacing

the British pound as one of the “key currencies.” Now the

dollar, valued at 1/35 of a gold ounce, was to be the only key

currency. The other difference from the 1920s was that the

dollar was no longer redeemable in gold to American citi-

zens; instead, the 1930’s system was continued, with the

dollar redeemable in gold only to foreign governments and

their Central Banks. No private individuals, only govern-

ments, were to be allowed the privilege of redeeming dollars

in the world gold currency. In the Bretton Woods system,

the United States pyramided dollars (in paper money and

in bank deposits) on top of gold, in which dollars could be

redeemed by foreign governments; while all other govern-

ments held dollars as their basic reserve and pyramided

their currency on top of dollars. And since the United States

began the post-war world with a huge stock of gold

Murray N. Rothbard

Page 96

(approximately $25 billion) there was plenty of play for

pyramiding dollar claims on top of it. Furthermore, the sys-

tem could “work” for a while because all the world’s curren-

cies returned to the new system at their pre-World War II

pars, most of which were highly overvalued in terms of their

inflated and depreciated currencies. The inflated pound

sterling, for example, returned at $4.86, even though it was

worth far less than that in terms of purchasing power on the

market. Since the dollar was artificially undervalued and

most other currencies overvalued in 1945, the dollar was

made scarce, and the world suffered from a so-called dollar

shortage, which the American taxpayer was supposed to be

obligated to make up by foreign aid. In short, the export sur-

plus enjoyed by the undervalued American dollar was to be

partly financed by the hapless American taxpayer in the

form of foreign aid.

There being plenty of room for inflation before retribu-

tion could set in, the United States government embarked

on its post-war policy of continual monetary inflation, a

policy it has pursued merrily ever since. By the early 1950s,

the continuing American inflation began to turn the tide of

international trade. For while the United States was inflat-

ing and expanding money and credit, the major European

governments, many of them influenced by “Austrian” mon-

etary advisers, pursued a relatively “hard money” policy

(e.g., West Germany, Switzerland, France, Italy). Steeply

inflationist Britain was compelled by its outflow of dollars

to devalue the pound to more realistic levels (for a while it

was approximately $2.40). All this, combined with the

increasing productivity of Europe, and later Japan, led to

continuing balance of payments deficits with the United

States. As the 1950s and 1960s wore on, the United States

became more and more inflationist, both absolutely and

What Has Government Done to Our Money?

Page 97

relatively to Japan and Western Europe. But the classical

gold standard check on inflation—especially American

inflation—was gone. For the rules of the Bretton Woods

game provided that the West European countries had to

keep piling up their reserve, and even use these dollars as a

base to inflate their own currency and credit.

But as the 1950s and 1960s continued, the harder-

money countries of West Europe (and Japan) became rest-

less at being forced to pile up dollars that were now increas-

ingly overvalued instead of undervalued. As the purchasing

power and hence the true value of dollars fell, they became

increasingly unwanted by foreign governments. But they

were locked into a system that was more and more of a

nightmare. The American reaction to the European com-

plaints, headed by France and DeGaulle’s major monetary

adviser, the classical gold-standard economist Jacques

Rueff, was merely scorn and brusque dismissal. American

politicians and economists simply declared that Europe

was forced to use the dollar as its currency, that it could do

nothing about its growing problems, and therefore the

United States could keep blithely inflating while pursuing a

policy of “benign neglect” toward the international mone-

tary consequences of its own actions.

But Europe did have the legal option of redeeming dol-

lars in gold at $35 an ounce. And as the dollar became

increasingly overvalued in terms of hard money currencies

and gold, European governments began more and more to

exercise that option. The gold standard check was coming

into use; hence gold flowed steadily out of the United States

for two decades after the early 1950s, until the United States

gold stock dwindled over this period from over $20 billion to

$9 billion. As dollars kept inflating upon a dwindling gold

base, how could the United States keep redeeming foreign

Murray N. Rothbard

Page 98

dollars in gold—the cornerstone of the Bretton Woods sys-

tem? These problems did not slow down continued United

States inflation of dollars and prices, or the United States

policy of “benign neglect,” which resulted by the late 1960s

in an accelerated pileup of no less than $80 billion in

unwanted dollars in Europe (known as Eurodollars). To try

to stop European redemption of dollars into gold, the

United States exerted intense political pressure on the

European governments, similar but on a far larger scale to

the British cajoling of France not to redeem its heavy ster-

ling balances until 1931. But economic law has a way, at

long last, of catching up with governments, and this is what

happened to the inflation-happy United States government

by the end of the 1960s. The gold-exchange system of Bret-

ton Woods—hailed by the United States political and eco-

nomic Establishment as permanent and impregnable—

began to unravel rapidly in 1968.

Phase VI:

The Unraveling of Bretton Woods,

1968–1971

As dollars piled up abroad and gold continued to flow

outward, the United States found it increasingly difficult to

maintain the price of gold at $35 an ounce in the free gold

markets at London and Zurich. Thirty-five dollars an

ounce was the keystone of the system, and while American

citizens have been barred since 1934 from owning gold any-

where in the world, other citizens have enjoyed the freedom

to own gold bullion and coin. Hence, one way for individ-

ual Europeans to redeem their dollars in gold was to sell

What Has Government Done to Our Money?

Page 99

their dollars for gold at $35 an ounce in the free gold mar-

ket. As the dollar kept inflating and depreciating, and as

American balance of payments deficits continued, Euro-

peans and other private citizens began to accelerate their

sales of dollars into gold. In order to keep the dollar at $35

an ounce, the United States government was forced to leak

out gold from its dwindling stock to support the $35 price at

London and Zurich.

A crisis of confidence in the dollar on the free gold mar-

kets led the United States to effect a fundamental change in

the monetary system in March 1968. The idea was to stop

the pesky free gold market from ever again endangering the

Bretton Woods arrangement. Hence was born the “two-tier

gold market.” The idea was that the free gold market could

go to blazes; it would be strictly insulated from the real

monetary action in the Central Banks and governments of

the world. The United States would no longer try to keep

the free-market gold price at $35; it would ignore the free

gold market, and it and all the other governments agreed to

keep the value of the dollar at $35 an ounce forevermore.

The governments and Central Banks of the world would

henceforth buy no more gold from the “outside” market

and would sell no more gold to that market; from now on

gold would simply move as counters from one Central Bank

to another, and new gold supplies, free gold market, or pri-

vate demand for gold would take their own course com-

pletely separated from the monetary arrangements of the

world.

Along with this, the United States pushed hard for the

new launching of a new kind of world paper reserve, Spe-

cial Drawing Rights (SDRs), which it was hoped would

eventually replace gold altogether and serve as a new world

paper currency to be issued by a future World Reserve Bank;

Murray N. Rothbard

Page 100

if such a system were ever established, then the United

States could inflate unchecked forevermore, in collabora-

tion with other world governments (the only limit would

then be the disastrous one of a worldwide runaway inflation

and the crackup of the world paper currency). But the

SDRs, combatted intensely as they have been by Western

Europe and the “hard-money” countries, have so far been

only a small supplement to American and other currency

reserves.

All pro-paper economists, from Keynesians to Fried-

manites, were now confident that gold would disappear

from the international monetary system; cut off from its

“support” by the dollar, these economists all confidently

predicted, the free-market gold price would soon fall below

$35 an ounce, and even down to the estimated “industrial”

nonmonetary gold price of $10 an ounce. Instead, the free

price of gold, never below $35, had been steadily above $35,

and by early 1973 had climbed to around $125 an ounce, a

figure that no pro-paper economist would have thought

possible as recently as a year earlier.

Far from establishing a permanent new monetary sys-

tem, the two-tier gold market only bought a few years of

time; American inflation and deficits continued. Eurodol-

lars accumulated rapidly, gold continued to flow outward,

and the higher free-market price of gold simply revealed the

accelerated loss of world confidence in the dollar. The two-

tier system moved rapidly toward crisis—and to the final

dissolution of Bretton Woods.

100

What Has Government Done to Our Money?

On the two-tier gold market, see Jacques Rueff, The Monetary Sin of the

West (New York: Macmillan, 1972).

Page 101

Phase VII:

The End of Bretton Woods:

Fluctuating Fiat Currencies,

August–December 1971

On August 15, 1971, at the same time that President

Nixon imposed a price-wage freeze in a vain attempt to

check bounding inflation, Mr. Nixon also brought the post-

war Bretton Woods system to a crashing end. As European

Central Banks at last threatened to redeem much of their

swollen stock of dollars for gold, President Nixon went

totally off gold. For the first time in American history, the

dollar was totally fiat, totally without backing in gold. Even

the tenuous link with gold maintained since 1933 was now

severed. The world was plunged into the fiat system of the

thirties—and worse, since now even the dollar was no

longer linked to gold. Ahead loomed the dread spectre of

currency blocs, competing devaluations, economic warfare,

and the breakdown of international trade and investment,

with the worldwide depression that would then ensue.

What to do? Attempting to restore an international

monetary order lacking a link to gold, the United States led

the world into the Smithsonian Agreement on December

18, 1971.

Murray N. Rothbard

101

Page 102

Phase VIII:

The Smithsonian Agreement,

December 1971–February 1973

The Smithsonian Agreement, hailed by President

Nixon as the “greatest monetary agreement in the history of

the world,” was even more shaky and unsound than the

gold-exchange standard of the 1920s or than Bretton

Woods. For once again, the countries of the world pledged

to maintain fixed exchange rates, but this time with no gold

or world money to give any currency backing. Furthermore,

many European currencies were fixed at undervalued pari-

ties in relation to the dollar; the only United States conces-

sion was a puny devaluation of the official dollar rate to $38

an ounce. But while much too little and too late, this deval-

uation was significant in violating an endless round of offi-

cial American pronouncements, which had pledged to

maintain the $35 rate forevermore. Now at last the $35 price

was implicitly acknowledged as not graven on tablets of

stone.

It was inevitable that fixed exchange rates, even with

wider agreed zones of fluctuation, but lacking a world

medium of exchange, were doomed to rapid defeat. This

was especially true since American inflation of money and

prices, the decline of the dollar, and balance of payments

deficits continued unchecked.

The swollen supply of Eurodollars, combined with the

continued inflation and the removal of gold backing, drove

the free-market gold price up to $215 an ounce. And as the

overvaluation of the dollar and the undervaluation of

European and Japanese hard money became increasingly

102

What Has Government Done to Our Money?

Page 103

evident, the dollar finally broke apart on the world markets

in the panic months of February–March 1973. It became

impossible for West Germany, Switzerland, France and the

other hard money countries to continue to buy dollars in

order to support the dollar at an overvalued rate. In little

over a year, the Smithsonian system of fixed exchange rates

without gold had smashed apart on the rocks of economic

reality.

Phase IX:

Fluctuating Fiat Currencies,

March 1973–?

With the dollar breaking apart, the world shifted again,

to a system of fluctuating fiat currencies. Within the West

European bloc, exchange rates were tied to one another,

and the United States again devalued the official dollar rate

by a token amount to $42 an ounce. As the dollar plunged

in foreign exchange from day to day, and the West German

mark, the Swiss franc, and the Japanese yen hurtled

upward, the American authorities, backed by the Friedman-

ite economists, began to think that this was the monetary

ideal. It is true that dollar surpluses and sudden balance of

payments crises do not plague the world under fluctuating

exchange rates. Furthermore, American export firms began

to chortle that falling dollar rates made American goods

cheaper abroad, and therefore benefitted exports. It is true

that governments persisted in interfering with exchange

fluctuations (“dirty” instead of “clean” floats), but overall it

seemed that the international monetary order had sundered

into a Friedmanite utopia.

Murray N. Rothbard

103

Page 104

But it became clear all too soon that all is far from well

in the current international monetary system. The long-run

problem is that the hard-money countries will not sit by for-

ever and watch their currencies become more expensive and

their exports hurt for the benefit of their American competi-

tors. If American inflation and dollar depreciation contin-

ues, they will soon shift to the competing devaluation,

exchange controls, currency blocs, and economic warfare of

the 1930s. But more immediate is the other side of the coin:

the fact that depreciating dollars means that American

imports are far more expensive, American tourists suffer

abroad, and cheap exports are snapped up by foreign coun-

tries so rapidly as to raise prices of exports at home (e.g., the

American wheat-and-meat price inflation). So that Ameri-

can exporters might indeed benefit, but only at the expense

of the inflation-ridden American consumer. The crippling

uncertainty of rapid exchange rate fluctuations was brought

starkly home to Americans with the rapid plunge of the dol-

lar in foreign exchange markets in July 1973.

Since the United States went completely off gold in

August 1971 and established the Friedmanite fluctuating

fiat system in March 1973, the United States and the world

have suffered the most intense and most sustained bout of

peacetime inflation in the history of the world. It should be

clear by now that this is scarcely a coincidence. Before the

dollar was cut loose from gold, Keynesians and Friedman-

ites, each in their own way devoted to fiat paper money,

confidently predicted that when fiat money was established,

the market price of gold would fall promptly to its nonmon-

etary level, then estimated at about $8 an ounce. In their

scorn of gold, both groups maintained that it was the

mighty dollar that was propping up the price of gold, and

not vice versa. Since 1971, the market price of gold has

104

What Has Government Done to Our Money?

Page 105

never been below the old fixed price of $35 an ounce, and

has almost always been enormously higher. When, during

the 1950s and 1960s, economists such as Jacques Rueff were

calling for a gold standard at a price of $70 an ounce, the

price was considered absurdly high. It is now even more

absurdly low. The far higher gold price is an indication of

the calamitous deterioration of the dollar since “modern”

economists had their way and all gold backing was

removed.

It is now all too clear that the world has become fed up

with the unprecedented inflation, in the United States and

throughout the world, that has been sparked by the fluctu-

ating fiat currency era inaugurated in 1973. We are also

weary of the extreme volatility and unpredictability of cur-

rency exchange rates. This volatility is the consequence of

the national fiat money system, which fragmented the

world’s money and added artificial political instability to

the natural uncertainty in the free-market price system. The

Friedmanite dream of fluctuating fiat money lies in ashes,

and there is an understandable yearning to return to an

international money with fixed exchange rates.

Unfortunately, the classical gold standard lies forgotten,

and the ultimate goal of most American and world leaders

is the old Keynesian vision of a one-world fiat paper stan-

dard, a new currency unit issued by a World Reserve Bank

(WRB). Whether the new currency be termed “the bancor”

(offered by Keynes), the “unita” (proposed by World War II

United States Treasury official Harry Dexter White), or the

“phoenix” (suggested by The Economist) is unimportant.

The vital point is that such an international paper currency,

while indeed free of balance of payments crises since the

WRB could issue as much bancors as it wished and supply

them to its country of choice, would provide for an open

Murray N. Rothbard

105

Page 106

channel for unlimited world-wide inflation, unchecked by

either balance-of-payments crises or by declines in

exchange rates. The WRB would then be the all-powerful

determinant of the world’s money supply and its national

distribution. The WRB could and would subject the world

to what it believes will be a wisely-controlled inflation.

Unfortunately, there would then be nothing standing in the

way of the unimaginably catastrophic economic holocaust

of world-wide runaway inflation, nothing, that is, except

the dubious capacity of the WRB to fine-tune the world

economy.

While a world-wide paper unit and Central Bank

remain the ultimate goal of world’s Keynesian-oriented

leaders, the more realistic and proximate goal is a return to

a glorified Bretton Woods scheme, except this time without

the check of any backing in gold. Already the world’s major

Central Banks are attempting to “coordinate” monetary

and economic policies, harmonize rates of inflation, and fix

exchange rates. The militant drive for a European paper

currency [call it the 'Euro'] issued by a European Central Bank seems on the

verge of success. This goal is being sold to the gullible pub-

lic by the fallacious claim that a free-trade European Eco-

nomic Community (EEC) necessarily requires an overar-

ching European bureaucracy, a uniformity of taxation

throughout the EEC, and, in particular, a European Cen-

tral Bank and paper unit. Once that is achieved, closer coor-

dination with the Federal Reserve and other major Central

Banks will follow immediately. And then, could a World

Central Bank be far behind? Short of that ultimate goal,

however, we may soon be plunged into yet another Bretton

Woods, with all the attendant crises of the balance of pay-

ments and Gresham’s Law that follow from fixed exchange

rates in a world of fiat moneys.

106

What Has Government Done to Our Money?

Page 107

As we face the future, the prognosis for the dollar and

for the international monetary system is grim indeed. Until

and unless we return to the classical gold standard at a real-

istic gold price, the international money system is fated to

shift back and forth between fixed and fluctuating exchange

rates with each system posing unsolved problems, working

badly, and finally disintegrating. And fueling this disinte-

gration will be the continued inflation of the supply of dol-

lars and hence of American prices which show no sign of

abating. The prospect for the future is accelerating and

eventually runaway inflation at home, accompanied by

monetary breakdown and economic warfare abroad. This

prognosis can only be changed by a drastic alteration of the

American and world monetary system: by the return to a

free market commodity money such as gold, and by remov-

ing government totally from the monetary scene.

Murray N. Rothbard

107

Page 108

Page 109

109

American revolution, 56

Bancor, 105

Bank of England, 68, 70, 76

Banks and Banking,

central, 67, 68–74, 82, 99

free, 45–46, 65, 67

holidays, 71

notes, 40–41, 65

88 percent reserve, 42–43

runs on, 42, 45, 48, 66, 72

wildcat, 46, 67

world central, 105–06