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Government money…

Posted by
November 19, 2014
in Blog

… is not Sound Money


“I am convinced we shall never have good money again so long as we leave it in the hands of government. Government has always destroyed the monetary systems.” * 

Sound money is private money—government-issued monopoly currency has never been a stable standard of value. For centuries rulers have decreed what could serve the function of money, outlawing foreign and other competitors to the “official” currency. Having established a legal monopoly on the issuance of money, governments found ways to debase the value of that currency. Even when gold and silver coins bearing the seal of the king or emperor were the legal money, the government would melt the coins, add a bit of lead, and reissue the coins. This is the all-too-common practice that gave rise to the expression “debase the currency.”

There has never been any effective constraint on any form of government—whether democracy or authoritarian monarchy—to maintain a currency with stable purchasing power. Politicians will always want to spend more money than any tax system can generate. James Madison said our nation could not choose to use a fiat currency—money that is not backed by gold or silver—until we discovered and institutionalized political arrangements that would constrain politicians from spending more now—as well as promising to spend more in the future—than the tax system can generate.

Madison understood that a fiat currency issued by government might theoretically be superior to a specie currency, but he also understood the incentives of politicians. As he put the issue, “It cannot be doubted that a paper currency, rigidly limited in its quantity to purposes absolutely necessary, may be equal and even superior in value to specie. But experience does not favor reliance on such experiments. Whenever the paper has not been convertible into specie, and its quantity has depended on the policy of the Government, a depreciation has been produced by an undue increase, or an apprehension of it.” **

While trying to think of a way to prevent government from abusing its power to create money, Madison asked, “But what is to ensure the inflexible adherence of the Legislative Ensurer to their own principles and purposes?” ***

We still have not discovered an answer to that question. However, history tells us that–in our quest for sound money–efforts to re-establish gold backing for national monopoly currencies issued by governments are not likely to be successful. Instead, emerging technologies have fostered innovations in ‘cybercash’ in competition to official currencies. Contracts denominated in private cybercash defined in terms of gold might enjoy stronger constitutional protections from political abuse than would national monopoly currencies.


 

*Friedrich A. Hayek, video-tapedInterview with Leo Rosten, 1978

**Madison, James, Letter to C.D. Williams, February 1820.

***Madison, James, Letter to Mr. Teachle, March 15, 1831.

4 Comments

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