A mechanism for infla,tion Money, the State and Modern Mercantilism MURRAY N. ROTHBARD MONEYIS the nerve center of any economy above the most primitive level. An economy I. Money on the Free Market consists of a vast and intricate network of two-person exchanges, and money con- IN THE PURELY free market, no one person stitutes one side of every exchange. Money or group can have control over money. is the medium by which producers of goods Money arises, on the free market, when one and services (sold for money) proceed to or more commodities, in particularly intense become consumers of goods and services demand and possessing such other qualities (bought for money). If any one person or as durability, portability, and divisibility, organization manages to obtain control over are chosen by individuals to serve as media the supply of money-over its quality, its of exchange. Once a commodity begins to quantity, or its usehe or it has thereby be used as a medium, the process accelerates taken a long step toward gaining complete as this makes the good all the more valuable, control of the entire economic system. Simi- until it finally comes to be used as a general larly, it is difficult to see how complete ~CO- medium for exchanges-as a money. Over nomic control could be achieved without the centuries of civilization, gold and silver domination of the supply of money. have been the leading commodities to be Modern Age 279. LICENSED TO UNZ.ORG ELECTRONIC REPRODUCTION PROHIBITED thus established as moneys. On the free or enters the gold-mining businms. Apart market, then, money arises as another-and from voluntary gifts, he will receive gold highly important-use for a commodity on or silver in proportion to the value that the market; in the civilized era, these chosen other exchangers put on his services to them. commodities have been gold and silver.’ It should be evident that, in the free- On the free market, a person can obtain market economy, no one person or group money in only three ways: (a) by producing will be able to control any aspect of society’s a good or service and exchanging it (‘‘sell- money. All money is extracted from the ing it”) for the money-commodity; (b) by ground by private individuals, and there is someone else’s free gift; or (c) by produc- no issue of currency by the State. The total ing the money-commodity itself. Route (b) supply of money is determined by the state will not be dominant in the economy and, of natural resources and by people freely at any rate, it reduces back to the other and voluntarily entering the gold- or silver- two methods, since at some point backward mining business. How much money each in time the gift process must come to an person gets is determined solely by every end; But a good will not be chosen on the individual’s free and vo1u)ntary decision on market as money unless it is in long-lasting how much he will buy and sell, or not buy and great demand, and it cannot be in such and sell, of any given product or service. demand unless it is relatively scarce. There- The aggregate result of these individual fore, route (c) for the acquisition of money choices determines a person’s total sales and involves the complicated production of a income. A free and uncontrolled money, scarce commodity; in the case of gold and and a free and uncontrolled market, go silver, it means finding new reserves of ore necessarily hand in hand. and extracting them from the ground. All And yet, curiously enough, so far has the businesses, all industries on the market tend, world gone from a truly free money that in the long run, to yield about the same even the most “conservative” economists, rate of return; if not, then capital and re- often champions of the free market in other sources will flow out of the poorer earning areas, do not contemplate a return to and into the better earning industry until free-market money. Milton Friedman and rates of return are equalized. Consequently, the economists of the “Chicago School” the gold-mining business will not provide advocate, indeed, a totally fiat paper money, any lasting bonanza on the market; it will manufactured by government and cut loose tend to earn about the same rate of return entirely from any vestigial connection with as other industries. There will then be no gold and silver. The United States Chamber a priori inducement to enter the gold- or of Commerce, in its textbook series on silver-mining industry as compared to any economics, simply concedes: “Money is other industry. Furthermore, gold and silver what the government says it is.”2 But surely are so durable that the proportion of new no free market can endure when control gold or silver mined each year will generally over the vital supply of money is thus be negligible compared to the existing stock. granted permanently to government. The overwhelmingly important route to obtaining money on the market, then, will 11. Money and the State be route (a), the sale of goods and services for someone else’s stock of money. No one will be able to obtain money unless he either INTHE LAISSEZ-FAIRE revolution of the nine- produces goods or services for exchange, teenth century, money was one of the cruciaI 280 Summer 1963 LICENSED TO UNZ.ORG ELECTRONIC REPRODUCTION PROHIBITED areas where this revolution scarcely made people is to provide them, pari passu, with headway. Government retained not only a services they desire. But there is one way to mintage monopoly, legal tender laws, and break the requirement of producing desired the power to fix arbitrary exchange rates goods and services to obtain money; and between gold and silver, but, particularly that is to gain control of the means of cleat- important, it retained its Central Bank, and ing money. If one can create new money thereby its virtual control over the banking simply and easily, then he can enter the system. Since the liabilities of the banking market to consume goods and services with- system, nominally redeemable in gold or out first having to produce any himself. On silver, increasingly became the bulk of each the market, private individuals cannot do country’s money supply, governmental pro- this, since this constitutes the crime of tection and domination of the banking sys- “counterfeiting.” The State, however, has tem loomed as an ever more vital problem. the unique attribute of being able to per- The British classical liberals never even form actions which would be considered thought of disturbing the hallowed status criminal on the part of private individuals of the Bank of England; the United States (“taxatio.n” as against “robbery” ; “war” as struggled intermittently with central bank- against “murder” ; “inflation” as against ing. At other times, money was subject to “counterfeiting”). If the State controls the other variants of government control. Hav- money supply, then it can create new money ing relinquished little of its monetary con- and use it to increase its own expenditures trol in the nineteenth century, the State on goods and services, as well as the ex- has, in the twentieth, moved to take over penditures of its favored, subsidized groups absolute control of the monetary system, in society. The “legalized counterfeiting” of seizing its subjects’ gold and silver and “monetary issue” permits the State to break preventing them from using these commodi- the production-monetary income chain to ties as their money. In this way, in most its own advantage. Necessarily, this also countries, the State has arrogated to itself means to the detriment of the actual pro- a monopoly of monetary issue; the “paper” ducers in society, who must yield resources standard, which forms the nation’s money to the bidding of those who come to the and on which the government-controlled and marketplace equipped with this newly issued manipulated banking system issues its li- money. This is why “inflation”-the in- abilities, is government-issued paper. crease of paper money or bank liabilities- There is no mystery as to why the State is a hidden, and therefore particularly in- clung to its control of money even while sidious, form of taxation. Being hidden, an temporarily relinquishing its grip on other inflation of money is not likely to arouse areas of the economy. For one thing, as we the opposition that may be stirred by overt have seen, control over a nation’s money is taxation. And since monetary inflation is a prerequisite for dictation over the rest of hidden even while its consequence in rising the economy. Another reason for the State’s prices becomes generally evident, the gov- vital interest in money is that only through ernment can join the public in denouncing such control can it break the production-in- rising prices, whiIe conveniently overlook- come nexus of the free market. We have ing its own total responsibility for them. In- seen that, on the free market, the only way deed, it may go a step further; it may de- to obtain money is to produce and sell goods nounce any and all groups in the population, or services to those who wish to buy; thus, whose selling prices naturally rise during an the only way to acquire money from other inflation, for wickedly causing the price rise. Modern Age 281 LICENSED TO UNZ.ORG ELECTRONIC REPRODUCTION PROHIBITED Foreigners, speculators, businessmen (big weal rather than private profit or income, or little) , laborers-whichever scapegoats nor are they shocked that this is so.