In his book What has government done with our money? Murray Rothbard argued that money is just a commodity, which is accepted for transactions by the public. As a commodity, it's value should be subject to supply and demand. Today governments monopolise money creation and outlaw alternative currencies. With the gold standard gone, there is no checks and balances to govern the creation of money. This must be one of the factors that contribute to today's financial crisis in the world.
In this book, Murray Rothbard's main thesis was that money is just be a commodity, and it should be treated as such. Money is just a commodity that is accepted by the public for transactions. Many things have been used as money; for example, gold, silver, corn, etc.
As a commodity, they value of money should be subject to supply and demand.
Currencies are used to reflect the value of other commodities.
If one commodity is not fit to play the role of a currency, then people would naturally replace them. For example, sea shells were used in ancient China. It was only fit for the purpose when most inland people have no access to large quantity of sea shells.
When first created, bank notes were just receipts to gold deposits. Depositors could get their gold back at any time. So bank notes were just a convenient way to represent gold, which was used as a currency. If more gold were found, the value of gold would devalue, following the laws of the market.
Now governments define our currencies. Government defined money, or fiat money, is not subject to checks and balances. Governments tend to inflate their currencies because doing so allows them to get extra revenue without raising tax (which damage their chance of getting re-elected).
Central banks are created to "regulate" banks. All banks must keep a reserve in the Central Bank.
Central bank can encourage inflation through reduction of minimum reserves by banks. This will lead to credit expansion by the banks. Governments can create and control inflation through:
With fiat money, governments can create money out of nothing. This is better than counterfeiting, which, apart from being illegal, incurs cost to the counterfeiter!
Rothbard argued that governments should not be allowed to dictate what can and cannot be used as money. But they do!
Governments control money supply. Central banks define interest rates. Most people accept these without question. Rothbard argued that governments should not be allowed to manipulate the supply of money.
Creation of money without constraints will lead to hyperinflation, which is possibly where the world is heading towards.
In any case, a system that lacks checks and balances tend to be unstable. Unstable systems will collapse in one way or another.
Hyperinflation is a major threat to fiat money. "Hyper-inflation 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." (page 80)
"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." (p.104)
With fiat money,
"there would then be nothing standing in the way of the unimaginably catastrophic economic holocaust of world-wide runaway inflation" (p.106).
[End]
Related: An agent-based analysis of the financial crisis
All Rights Reserved