The
Origin of Money
(And
How It Was Stolen from You)
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Reserve
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Federal Reserve
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Ezra Pound
by
Alexander "Ace" Baker
Money. Everybody wants it, and you can always use more. But
what is money? Where does it come from? Is it really the
“root of all evil” as the Bible and Pink Floyd have said? Do
we really need it? How did we all come to value little slips
of paper with portraits of dead presidents on them? Why can’t
they just give everybody a million dollars and make us all
rich? And why is any of this important to those who are
concerned about human liberty?
I’ll anticipate some conclusions here: Money is vital to a
prosperous society, without it mankind could do no better
than a primitive agricultural society. Money originates and
evolves privately, in the market, as a solution to the
problems presented by direct barter. Governments (in
collusion with large Banks) around the globe have forcibly
taken over and monopolized the creation of new money, and
abolished the natural gold standard for the sole purpose of
expanding their own power and confiscating wealth. All other
“justifications” for government money are lies based on
completely discredited economic hogwash. The unprecedented
and artificial “fiat money” imposed on us now represents a
grave threat to civilization itself.
What
is Money?
Money can be defined as: A generally accepted medium of
exchange. Theoretically, money can be anything that people
desire to own, not for its direct use, but rather for its
later value in trading for things that are useful. In
practice, around the world and throughout history, one
substance emerged as “the people’s choice” as the best money,
and that substance is gold.
In
the Beginning . . .
Imagine a primitive village with a fisherman (Mr. Fisher), a
baker (Mr. Baker), a wagon maker (Mr. Wagoner) and a berry
picker (Ms. Berry ). Even in primitive societies, workers
tend to specialize like this, because of what Ludwig von
Mises called the two most important facts about humans(!!):
1. That a group of people can produce more goods by
specializing and trading than they can in self-sufficient
isolation.
2. Man’s ability to recognize fact #1.
So trading goods with others is a mutually beneficial,
natural way for humans to improve their situation. If Fisher
wants bread and Baker wants fish, they will want to trade,
say one fish for two loaves of bread. So far, so good. But
what happens if Fisher wants bread, but Baker doesn’t like
fish? This is the first problem with barter, the so-called
“double coincidence of wants.” Fisher has to want what Baker
has at the same time Baker wants what Fisher has.
To solve the problem, Fisher might go visit Ms. Berry , the
berry picker, because he knows that almost everybody likes
berries. He trades his fish for a basket of berries, not
because he wants to eat them, but because he thinks that
Baker will trade loaves of bread for them. When this happens,
berries are beginning to function as money, because they are
being demanded not just for their value as food, but for
their value in exchange.
So we see that money has a function. It solves problems. And
like anything else that has a function, it stands to reason
that some items will work better than others. You could pound
a nail in with a rock, but a hammer works better, because it
has certain qualities (leverage, flat surface) that make it
superior to a rock for that purpose. And so it is with money.
Some things will possess qualities that make it a better
money than other things.
Good
Money vs. Bad Money
What are the properties that make for a good money? One we’ve
already touched on, and that is that money must be something
that nearly everyone values. Another problem with barter is
divisibility. Mr. Baker and Mr. Wagoner might agree that a
nice wagon is worth 1,000 loaves of bread, but Wagoner
doesn’t want 1,000 loaves, he only wants one. He can’t whack
off 1/1000th of a wagon, that would be useless. So a good
money must be something which is still valuable even when
divided into very small amounts. Other qualities that make
for useful money include durability and also
interchangeability, where one unit is the same as any other.
It’s very unlikely that anything extremely common, like sand,
could ever become money because people just don’t value
common things as highly as rare things. That’s good, for
another very important quality of good, sound money is that
it should be costly to produce. Briefly, this is because the
ability to create money without cost carries with it the
extraordinary power to redistribute real wealth to whoever is
allowed to create it. More on this later.
What began to happen, over centuries, in separate societies
all over the world, is that people tried out all sorts of
things as money - salt, seashells, cattle, etc. This was a
spontaneous, natural competition to determine the best money.
That is, the best according to function, as determined by the
market, not the whim of some tyrant.
And
the Winner is . . . (as you might have already heard)
Gold. Precious metals in general and gold in particular have
been chosen time and time again by the market as the
best-functioning money. It happened independently, in
separate societies, over and over again before being
integrated into a world market, so as the world market did
begin to take shape, gold naturally emerged as the chosen
money.
At
the risk of being annoying, this bears repeating:
Money is not an abstract or arbitrary concept, it is a very
real phenomenon with tremendous beneficial consequences for
human existence. It has a purpose. Why on earth would we ever
want to settle for anything less than the very best tool for
such an important job?
The
Original Bankers, and The Original Sin
Now imagine we’re in a somewhat more advanced society,
perhaps in the Middle Ages. Picture a village with farmers
and various other cobblers, coopers, smiths and shopkeepers
readily exchanging gold for their goods and services. The
existence of a widely accepted, well functioning money is
making possible the wider and wider division of labor,
allowing society to produce more, increasing the standard of
living for all.
What if you wanted to safely store some of your gold until
you needed it? In many towns, the local goldsmith was the
only one around with a decent safe, so Mr. Goldsmith (sensing
a legitimate business opportunity) would allow you to
warehouse your valuable money (for a small fee), issuing you
a paper receipt, which would entitle you to reclaim your gold
on demand. Once there were many such warehouse receipts
floating around, people realized they could conveniently
exchange the receipts as money, because everyone knew that
these pieces of paper were “as good as gold.”
As you may have guessed, the goldsmiths were the original
bankers, and these warehouse receipts were the original paper
money. Once paper money backed by gold became established,
Mr. Goldsmith noticed something very interesting. On any
given day, only a small percentage of townspeople actually
came to reclaim their gold. And when they did come to redeem
it, they didn’t care if they got exactly the same gold back,
only that they got the correct amount.
“Hmmmm” thought the less-than-honorable Mr. Goldsmith,
“What’s to stop me from just writing up some extra receipts
for myself to spend? Sure, more and more people will come in
to claim gold, but so what? Even if two or three times as
many people start showing up, I’ll have enough gold in
reserve to cover it. I’m rich!” He was so proud of himself
for his stroke of genius that he went right over and kissed
himself in the mirror. And thus was born the fine art of
counterfeiting, or “Fractional Reserve Banking” as bankers
came to euphemistically call it.
And this counterfeiting scheme worked like a charm. Goldsmith
would print money for himself to spend . . . or lend. People
were suspicious of Mr. Goldsmith’s newfound extravagant
riches, and they were also curious about something else.
Prices on things around the village had been going up and up.
You see, the creation of new money must have the effect of
chasing up prices, because the amount of money that is spent
is closely related to the amount of money that exists. If
more money exists, then more money is spent, and if more
money is spent to buy the same amount of goods, prices must
be higher. This, of course, is called inflation. So if they
gave everybody a million dollars, prices on everything would
go up correspondingly, and no one would be better off.
The
Bank Run - A Beautiful Thing
Anyway, the people’s natural suspicions about Mr. Goldsmith
were correct. It is simply fraudulent for the owner of a
warehouse to issue receipts for goods that don’t exist, or to
lend out someone else’s property that is supposed to be in
safekeeping. If you print a deed to a house and there’s no
house, that’s wrong. If you print a title to a car and
there’s no car, that’s wrong. And if you print a claim to
gold when you have no gold, that’s wrong also.
Eventually the villagers smelled a rat. They got together,
receipts in hand, and all showed up at bank to demand their
gold, most of which simply wasn’t there. This became known as
a “bank run.” Needless to say, the people were most unhappy
with their discovery that the banker they trusted with their
savings was a lying crook who had swindled them. Many a
dishonest banker met up with vigilante justice, no doubt. The
potential for a bank run became an indispensable free-market
check on the integrity of bankers. For while any banker can
be tempted to enrich themselves by artificially expanding the
money supply, they are fearful of going out of business, and
they are damn fearful of an angry mob of swindled customers.
The problem then, as bankers thought of it, was to figure out
how to expand the money supply endlessly, without cost to
themselves, and without fear of a bank run.
Meanwhile,
Back at the Royal Palace . . .
The king had a different problem. Kings dream of empowering
themselves and securing their place in history through
conquest and imperialism. Trouble is, military adventures are
very expensive and the peasants hate being taxed. Like
bankers, kings too fear the wrath of an angry mob.
Well, leave it to Mr. Goldsmith to be struck with yet another
bolt of evil brilliance. He goes to the king and says, “Look,
make my bank the official bank, and tell the people they must
accept my paper money for all debts. Grant me the exclusive
right to print money, take anybody else who prints money and
put them in jail. If you do that for me, oh royal one, here’s
what I’ll do for you. Anytime you need financing for your
war, just print up some pieces of paper and call them
“government bonds.” I’ll “buy” the bonds from you with my
paper money, then you’ll have all the money you ever need!”
The king, being a politician, was good at lying and making up
plausible sounding excuses. So he justified this new central
banking cartel by claiming it was necessary to keep those
greedy bankers in line. Get it? With a nod and a wink, the
government pretends to be the ally of the people, while in
reality seizing the money supply, creating a banking cartel,
and destroying the market mechanism that was the people’s
only real recourse against the inherent dishonesty that is
Fractional Reserve Banking.
Keynes,
the False Prophet of Econ
The preceding was a stylized fable, but conveys accurately
the essence of what has occurred in the real world, e.g. with
the Bank of England, and the U.S. Federal Reserve. Nowadays,
the excuse given for having a central bank is “managing the
economy” (controlling inflation, preventing deflation,
keeping interest rates low, stimulating job creation, blah,
blah, blah). Belief in the wisdom of government economic
meddling is largely based on the theory of “economist” John
Maynard Keynes. Keynesian theory holds that a free market
will over-produce goods, leaving workers unable to buy their
own product, which causes massive business failure and
unemployment. The only remedy, according to Keynes, is for
government to print and spend lots and lots of new money.
It’s not hard to understand why politicians around the world
gushed praise and knighthood upon Lord Keynes, while ignoring
true economic science, which figured out long ago that
government intervention into the economy is always
destructive.
It’s beyond the scope of this article to refute Keynes.
Suffice it to say here that Keynesianism is utter nonsense
from beginning to end. It is self-contradictory, relies on
shifting definitions, defies common sense, contains logical
absurdities, and disregards human nature. It would be
laughable if only it hadn’t been taken seriously. For a
scholarly dissection of this evil doctrine, please see “The
Misesian Case Against Keynes” by Hans-Hermann Hoppe .
The
State vs. The People
A government money monopoly radically changes the
relationship between a people and their rulers. In reality,
government is utterly dependent on its productive citizens
for everything that it buys, just as a blood-sucking parasite
is dependent on its host. Under a system of private money,
this is obvious to all. All government spending eventually
returns back to the hands of private citizens, and if the
government wants to spend more, it must again extract wealth
from the people. Clearly, government is supported by the
productive activity of private citizens.
However, once government acquires the exclusive privilege to
create new money without limit, a strong illusion is created
that makes it now appear that the people are dependent on
government. In truth, government has become the source of
money, but not the source of real wealth. Sadly, today
millions of people mistakenly believe that their government
is the cause of their prosperity. Nothing could be further
from the truth. (See “The Fed is Lifeblood to the Root of
Evil” for more on how central banking works to confiscate and
redistribute wealth).
Clear and Present Danger
Sound money is crucial to the division of labor and thus to
society itself, but that doesn’t mean that people will
automatically and forever accept something as money for no
good reason. The more dollars that are printed, the less each
one is worth. The less money is worth, the worse it
functions. And if money stops functioning, people will
discard it as useless just as they throw away a broken old
VCR. The best single explanation of the fall of the Roman
empire is that various Caesars had relentlessly diluted the
gold content of their coins (inflated the money supply), to
the point where people didn’t want to accept them any more.
Without good money, the problems of barter reappear, and
people have no choice but to revert to a subsistence economy,
which is precisely what happened in Europe in the Fifth
Century.
It almost happened in Germany in the early 1920s. The German
government had gone off the gold standard to finance its war
in 1914, and now was printing money as fast as it could,
trying to pay off its war debt. In 1923, 1 billion Marks were
worth what 1 Mark had been worth a few years before!
Creditors were wiped out, savings accounts and life insurance
policies became worthless. People would buy anything – soap,
hairpins, scrap-metal, anything to avoid holding money, which
was visibly losing value every minute. The society was
reverting to a direct barter existence. Germany was able to
pull back from the brink of complete societal collapse only
by issuing a new currency, the Rentenmark, that was backed by
real property and factories.
The solution to all this, as in most things, is liberty.
Under freedom, gold would almost certainly become money once
again. A 100% reserve gold standard would have the benefit of
preventing inflation (because the creation of new money is
costly), and preventing deflation as well (because once gold
money comes into existence, it stays in existence). The
complete reliance on irredeemable paper money is
unprecedented, having existed only since President Nixon
destroyed the last vestige of the gold standard in 1971. Most
of the major world currencies (the Yen, the Euro) are backed
by the U.S. Dollar, which is backed by nothing. We seem
headed toward a single world paper currency controlled by a
single world banking cartel. Today there exists no barrier
whatsoever to the unlimited creation of new money and bank
credit. There is a strong incentive for those in power (the
U.S. Federal Government, the large multi-national commercial
banks) to enrich themselves by doing so. The only thing
restraining them is their judgment and mercy. God help us.
Credit
for the core ideas expressed in this article must be given to
George Reisman, Murray N. Rothbard, Hans-Hermann Hoppe and of
course Ludwig von Mises.
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