‘What has Government Done to Our Money?’ by Murray N. Rothbard is a brilliant, to-the-point book that lays out the basics of exchange, from barter to money, and how the members of government, from monarchies to democracies, have repeatedly seized control of its supply and debased it for their own purposes throughout history. He pays special attention to the Western transition from the classical gold standard to the fiat currencies of today.
Having read parts of this book before, the sections that intrigued me the most this time were related to the “price of money” and how changes in supply via specie debasement or fractional reserve and central banking affect the prices of goods in the market. The term “price of money” may seem confusing, but it becomes clear if instead of thinking about prices as the amount of money that will exchange for one unit of a particular good, you think about the amount of goods that will exchange for one unit of money. In other words, if the price of a cup of coffee is $4, a board game is $40, and a book is $20, etc., you could say that one dollar is equal to 1/4 a cup of coffee, 1/40 a board game, or 1/20 a book, etc. As Rothbard puts it, the price of money is an “array of the infinite number of exchange-ratios for all the various goods on the market.” Rothbard continues by stating that the price of money is determined in the same way as all other goods – by supply and demand:
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.” … In the case of money, “demand” means the various goods offered in exchange for money, plus the money retained in cash and not spent over a certain time period. … “Supply” may refer to the total stock of the good on the market.
Using the standard supply and demand curves, we can see graphically (haha) what it means to increase the money supply and butcher the purchasing power (equilibrium) of money.
This clearly shows how an increase in supply (S1 to S2) decreases the purchasing power of money. It shouldn’t be hard to visualize that an increase in demand results in an increase in the purchasing power. Here’s Rothbard on supply, demand, and inflation:
… while a change in the price of money stemming 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 [savings] 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. … 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.
What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor, and capital. Multiplying coin will not whisk these resources into being.
Inflation has other disastrous effects. It distorts that keystone of our economy: business calculation. … Almost all 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. … Inflation also penalizes thrift and encourages debt… Inflation, therefore, lowers the general standard of living in the very course of creating a tinsel atmosphere of “prosperity.”
Here are a few more quotes of interest regarding government involvement in the money supply.
Governments, in contrast to all other organizations, do not obtain their revenue as payment for their services. Consequently, 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.
If government cannot be trusted to ferret out the occasional villain in the free market 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.
The sections on the monetary breakdown of the West, and in particular the classical gold standard, are enlightening as well. A key thing to keep in mind when learning about the classical gold standard is that Western currencies were defined as particular weights of gold. In the same sense that 1 inch is 2.54 cm or 1 mile is 1.60963 km, 1 dollar was defined as 1/20 an ounce of gold and the pound sterling was defined as about 1/4 an ounce of gold. Governments’ promises to pay people in gold for their currency bound their hands and prevented them from going nuts with inflation (or else gold would flow out of the country as trade deficits developed), as long as they stayed on the gold standard. (As a side note, the gold standard did not fail. Members of government are the ones who failed because they did not live up to their promises of honoring the gold standard.)
‘What Has Government Done to Our Money?’ is a great starter for a newbie Austrian and anyone interested in taking a step back from the confusion generated by mainstream pundits and getting a logical perspective of what money is and what happens when governments get control of the money supply. It’s free in .pdf and .ebook at mises.org.