History Repeats: Abandoning Sound Money Leads To Tyranny And Ruin
Money is one of the most misunderstood topics of our time, and we’re seeing the implications of this play out every day.
To understand money, one first must first understand that human beings have always been incentivized to participate in exchange. If humans could not, or did not, trade, the majority of people would die young: whether by starvation, disease, or exposure to the elements.
The survivors would be left with an extremely low standard of living; not a world any of us would want to live in. This means that exchange is a necessary condition, not only of our economy, but of human flourishing.
Origins of Money
Before there was money, there was barter (also known as direct exchange) – a system in which every good is traded directly against every other good.
A small island economy could function this way: a couple of coconuts traded for fishing line, or a bushel of bananas in exchange for bamboo with which to build a shelter.
As Tho Bishop from the Mises Institute illustrates, imagine that a farmer wants to buy a pair of boots, so he visits the town cobbler and tries to trade a dozen eggs in exchange. However, the cobbler in town doesn’t want eggs. The cobbler might want beef, but the farmer isn’t willing to slaughter his cow for boots.
A trade where both parties are happy is now difficult. It’s easy to see how unmanageable this system is as populations grow, and as needs and wants expand.
Let’s revisit our farmer: Instead of offering eggs, he realizes that what the cobbler really wants is butter. So he goes out and trades for butter, and then uses that butter to trade for boots. If enough people also want butter, our farmer may buy more—not to use it, but to exchange it for other goods and services. This is called indirect exchange.
Many goods throughout history, with varying degrees of effectiveness, have filled the role of “butter.” Salt, wampum, and tobacco have all been used as money, just to name a few. However, gold and silver emerged as universally accepted monies by the free market because of their durability, transportability, fungibility, and scarcity.
Emerged is the key. The process through which money is “created” is not one of central planning or of creation at all, but rather one in which money is “discovered” by markets.
Gold and silver have other qualities that make them a sound form of money.
These precious metals are relatively scarce, used across a variety of industries, and are aesthetically beautiful.
They are fungible – an ounce of silver is, for all intents and purposes, uniform.
They are divisible. If you split one ounce of gold into two, the two halves are of equal value that add up to the value of the whole.
Compare this to diamonds. They may have some qualities of a store of wealth over time, but each diamond is unique and cutting one in half will reduce its value by far more than half.
This process—the cumulative development of a medium of exchange on the free market—is how societies throughout history chose reliable forms of money and moved away from barter, explains Bishop.
However, not all forms of money have stood the test of time.
What Is Sound Money?
Sound money carries no counterparty risk (unlike a banknote, it is not simultaneously someone else’s obligation). And it retains relatively stable purchasing power over time.
Sound money has two pretty simple value propositions. The first is that sound money protects capital and creates stability. People can accumulate savings and transmit value over time, allowing them to better plan, save, and invest for the future.
The second is that sound money acts as a defense against excess debt accumulation and an ever-growing government.
The current system of fiat money issued by central banks enables unlimited deficit spending by government. Inflation allows the costs to be socialized across all holders of the currency by slowly and steadily stealing everyone’s purchasing power.
From decade-long wars, to wasteful domestic programs, the ability to create currency endlessly has empowered the government to spend in ways that it would not be able to if not for a printing press.
The Decline of Sound Money in the United States
The Framers of the United States Constitution understood the importance of sound money, and that’s why they codified it. Article 1, section 10 states: “No State shall emit bills of credit…[or] make any Thing but gold and silver Coin a Tender in Payment of Debts.”
However, less than a hundred years into the American experiment, the Civil War began. Wars are expensive, and the federal government, which had a policy to only print notes that were backed by an equal amount of gold and silver, was running low on specie.
Lincoln and his money managers knew citizens would be wary of unbacked paper notes. After all, the Constitutional Convention that took place less than 75 years prior had overwhelmingly rejected paper money based, in part, on recent experiences with it.
George Washington wrote that paper money was “wicked.” James Madison wrote it was “unjust” and “unconstitutional.”
Even though it was unconstitutional, Lincoln’s government issued unbacked paper money, called Greenbacks.
But how could he get people to accept them in exchange for their goods and services? The answer is the use of government force through what are known as legal tender laws.
It’s worth noting that the government expected the plebeians to use and accept this fake money, but any customs duties or other taxes still had to be paid with real gold or silver coin.
Legal tender is a stamp of approval by the federal government that magically turns strips of unbacked paper into money people must accept, if begrudgingly at first. By the end of the war, nearly half a billion unbacked notes had been issued.
As always happens with paper money, Greenbacks lost the overwhelming majority of their purchasing power before the country went back on a gold standard.
Over the next 150 years, though, the steady destruction of sound money continued.
The 20th Century Brought the Outright Destruction of Sound Money
In 1913, Congress created the Federal Reserve System (which has since served to devalue the Federal Reserve Note more than 97%, despite its mandate to maintain price stability).
Then came an income tax, gold confiscation by executive order, the abrogation of gold clause contracts, and ultimately the complete severance of any tie between gold and the Federal Reserve Note in 1971.
What came next surprises no one: An explosion of government spending brings us to today.
Biden administration bureaucrats face no constraints on their borrowing and bailout schemes. America is now well down the road to financial insolvency, shouldering more than $30 trillion in debt.
History teaches us no government can ultimately escape the consequences of removing sound money from its monetary system. Absent the constraints on ever-expanding fiat money supply imposed by gold and silver, the current inflation problem can only worsen.
Fri, 09/09/2022 – 21:40