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Murray Rothbard would have been delighted by the publication of a Persian translation of What Has Government Done to Our Money? Economic truth isn’t confined to the speakers of one language. It is timelessly true. Wherever and whenever money exists, the laws of money apply. These laws will make or break a country’s economy, so it is essential for the educated public in Iran to be aware of them.
What are these laws? The free market position that Mises and his greatest successor Murray Rothbard laid out regards money as a good like any other, one whose creation and management should be handled by the market economy. There should be no policy at all. That’s the free market answer.
Most economists are happy to have the market for shoes, watches, and computers managed by the market, but they draw the line on money. They believe that in this sector, we need socialist-style money management.
This is where the Austrians are different. Carl Menger broke new ground in 1871 by explaining the origin of money. It was not created by the state or by some sort of social compact. It emerged from within the structures of the market economy. Barter is suitable for a primitive level of development, but once societies and economies grow more complex, traders find a need for a good that they can purchase and hold to trade for other goods and services at a later time. This good is the most highly valued good in society, also called money. Rothbard, like Mises, shows that this was no accident. Money had to emerge in this way.
Money makes possible the emergence of cardinal numbers that permit calculation of profits and losses over time. This is the essence of what it means to economize. But unlike all other commodities, an increase in the stock of money confers no social benefit, since money’s main function is to facilitate the exchange of other goods and services. Indeed, increasing the stock of money through a central bank like the Fed in the United States has horrific consequences, and Rothbard provides the clearest explanation available of inflation.
Experience suggests that the best money commodity is one that is divisible, qualitatively uniform, has a high value per unit of weight, is portable, and cannot be manufactured without end. Precious metals, then, have served this function quite well. One precious metal rose above the others in being the most suitable, and that is gold. Now, there is nothing magical or mystical about gold that made it money. It just happened to conform mostly closely to the features that make for excellent money.
That’s why the quality of money in society is so critical to a well-functioning economy. And how do we ensure quality? It is the same with money and banking as it is with computers and cell phones. We need the market to be in charge. We need free entry and exit, rivalrous competition, consumer sovereignty, and no special privileges. Our current monetary system has none of those features, so we shouldn’t be surprised to see the quality of our money slipping day by day.
In such a free-market system, money would be convertible domestically and internationally. Demand deposits would have 100% reserves, while the reserve ratios for time deposits would be subject to the economic prudence of bankers and the watchful eye of the consuming public.
It is, however, the historical dimension of Rothbard’s work that makes it so persuasive. Starting with the 19th-century classical gold standard, he ends with the likely emergence of a European Currency Unit and an eventual world fiat money. Especially notable are his explanations of the Bretton Woods system and the closing of the gold window in the early 1970s.
Rothbard shows that government has always and everywhere been the enemy of sound money. Through banking cartels and inflation, government and its favored interests loot the people’s earnings, water down the value of the market’s money, and cause recessions and depressions.
In mainstream economics, most of this is denied or ignored. The emphasis is always on the “best” way to use monetary policy. What should guide the Fed? The GNP? Interest rates? The yield curve? The foreign exchange value of the dollar? A commodity index? Rothbard would tell us that all such questions presuppose central planning, and are the root of monetary evil.
Really, it is perverse that we should ever be sanguine about inflation. It would be as if we screamed bloody murder if someone broke into our house one night and stole all our flatware, our electronics, and our precious metals. But if the same burglar had the key and came in every day to grab just a fork, an iPod, or a Krugerrand, should we happily announce that we are experiencing a low-burglar rate?
Murray Rothbard used to say that the main thing he bought with his money was scholarly books, one of the fastest-rising goods, and so his personal inflation rate was far above the average. Of course, that was before the internet starting doing strange things to book prices, driving the price of new books way down, and the price of used books way up.
Looking at the long trend, we can say not only that the Fed has failed to do its job but, even worse, it has produced the very opposite results of its promise.
This is especially true in the area of business cycles, which the Fed was supposed to counter with careful management of the money supply. It was supposed to provide more money in times when business conditions supposedly required more liquidity. It was supposed to pull back on its money creation in other times when liquidity was not necessary.
No surprise: it turns out that the Fed has never met business conditions that it deemed not to be in need of liquidity.
In many ways, the Fed is a childish institution. I mean this in a very precise sense. A key feature of childish behavior is that it is action taken without a thought given to how actions might affect the reactions of others. Children always assume that they live and act in a vacuum. They are forever shocked to see that others’ lives are impacted by their choices. Part of the process of maturity involves the realization that one’s actions cause reactions from others.
But it takes many years to mature. Childish traits can continue even into teenage and college years, when kids still imagine themselves to be autonomous actors and forget that their actions generate responses from others that might foil their plans.
Think of the typical teenage driver, buzzing in and out of lanes, zipping around cars, speeding up and slowing down based solely on his own whim. He doesn’t give a thought to how his behavior impacts the responses of other drivers, and makes the roads less safe. He looks at traffic patterns as a given, and assumes that everyone is neutral with regard to his own driving.
So too does the Fed pursue its goal without a thought to how market actors are going to respond. It will lower the price of credit on the market for bank lending. This affects other interest rates by driving them down. All of it is paid for by money created out of thin air. In the same way that children and teens might consider their actions “neutral” from the point of view of others – since they are thinking only of themselves – so too the Fed considers money to be neutral with respect to the market. The Fed figures that it is only adding liquidity, but in fact it is gravely distorting the decision-making process, particularly as it affects long-term investment.
It is because this assumption of neutral money is at the heart of the monetary model of the Fed that they can believe that its inflationary policies do not constitute intervention in the market process. What they do not consider is that cheap credit sends signals to entrepreneurs to overextend themselves, planning products that take a very long time to complete and presuming a more robust capital stock than exists in reality. When the reality is revealed – usually after the rate of monetary expansion slows – the boom turns to bust. Here we have a short description of the business cycle in its barest outlines., and Rothbard explains how this happens in a way everyone can understand.
This is one of Rothbard’s most influential works, despite its length. I can’t count the number of times academics and non-academics alike have told me that it forever changed the way they looked at monetary policy. What Has Government Done to Our Money? is the best introduction to money, bar none. The prose is straightforward, the logic relentless, the facts compelling, as in all Rothbard’s writings.
Shidvash Sepehrdad has rendered a great service to the people of Iran with this translation. I hope it gets the hearing it deserves, for the good of the Iranian people and the whole world.