By Llewellyn H. Rockwell, Jr.Hard-money advocates in American politics, from Thomas Jefferson to Ron Paul, have always favored a specie standard: that is, the dollar defined as a weight of precious metal.
In Austrian economics, the tradition has been the same. Carl Menger and Eugen von Böhm-Bawerk advocated a gold standard as politicians and as professors. (They were both cabinet ministers as well as scholars.) Ludwig von Mises, the greatest exponent of the Austrian school, was the first fully to apply Austrian theory to money. He too advocated a gold standard as well as the abolition of central banking and the establishment of 100%-reserve, non-inflationary free banking.
Building on Menger, Mises showed—in his famous regression theorem—that money must originate on the market as a useful commodity. The most liquid (i.e., the most readily acceptable) commodity becomes money. From the dawn of civilization, this has been gold, with silver playing a useful subsidiary role.
But, like many other truths, this idea is unpopular in mainstream economics, where fiat-paper money, central banking, commercial bank privilege, and inflation are considered scientific. In response to this, there is growing popularity for a monetary theory that threatens neither the academic nor the banking establishment.
That theory (and the resulting policy prescriptions) has four parts: 1) Forget gold. Keynes called it a “barbarous relic,” and so it is; 2) Ignore the Federal Reserve. It can be circumvented, and besides, it may even be a “market institution” (huh?); 3) Criticize legal-tender laws as the central problem; 4) Encourage banks to issue their own unbacked paper money, which would then outcompete the Fed’s dollars.
Point one is answered by theory and history, as shown by Mises. Point two: the Federal Reserve was created and is sustained by the government’s police power. It is perhaps the most anti-market institution in America, as well as the Politburo of our monetary enemy. Its predecessor was called the “Monster” by Andrew Jackson, and that is still a good name for this unconstitutional giant of state control and banking privilege.
Point three is irrelevant and a policy dead-end. Legal-tender laws, which require us to accept Federal Reserve Notes, are unconstitutional restraints on our freedom and should be repealed. But as Murray N. Rothbard has shown, this is not enough to allow private, non-dollar competitors to succeed. Mises’s regression theorem proves that people, having used the dollar for two centuries, will not switch to Chase Manhattan “Rockies” (or whatever the banks’ currencies would be called). Even at the height of the great German or Chinese inflations, with monetary depreciation in thousands of percent, people still clung to marks and yen.
These currencies, like the dollar, the pound, and the franc, originated on the market as useful commodities, and were then nationalized by government. Only monies that originate on the market as useful commodities can win acceptance. That’s why #4 is, as Professor Rothbard points out, an entrepreneurial scheme masquerading as theory, although he is happy to allow the market to decide its fate.
Only the denationalization of the dollar, not money generically, will end the tyranny of inflation and the business cycle, and of the transfers of wealth from the working and middle classes to the government-connected rich that go with them.
That means fixing the dollar permanently as a weight of gold: probably about 1/2,000 of an ounce, which would back the entire money supply with the gold held by the U.S. government, and the U.S. gold held by the International Monetary Fund. This gold would then be disgorged to the American people in return for their notes and deposits. Just as important, the central bank would be abolished, and banks required to adhere to the same standards of non-fraudulent behavior as other businesses. They would get no government license to inflate.
This is a very long-run cause, of course, and it is criticized as unrealistic by the would-be mainstreamers. But it is their strategy that is actually impractical.
Great change must originate in the world of ideas. But we will never bring about a monetary revolution without mobilizing the people. And great popular movements cannot be built on repealing legal tender. Gold and anti-central banking, as our own history shows, are mobilizing issues. They also have the not-inconsiderable virtue of being true.
When we do establish sound money, and gold coins circulate, Morgan Guaranty will be free to print up its irredeemable “Trilats.” Just don’t ask me to accept them.