Toward Radical Monetary Reform; L. Reed

Lawrence W. Reed Toward Radical Monetary Reform IN the late 19th century and early 20th, the issue which occupied cen ter stage ofeconomiccontroversy was "the money question." From the time of the Civil War greenbacks through Bryan's "Cross of Gold" speech of 1896 until the establishment of the Federal Reserve System in 1913, politicians, academics, editors, and business people squared off in heated debate over the proper monetary policy for the nation. After the dramatic events 'of the Great Depression and the creation of the post-war monetary system, the issue became relatively dormant as attention turned to other things. But recently, "the money question" has emerged in full force once again. Its Mr. Reed is Assistant Professor of Economics at Northwood Institute In Midland, Michigan and direc tor of the college's annual Freedom Seminars. He is co-edltor and co-author,· along with Dr. Dale Hay wood, ala new book When We Are Free.

resurrection has i come, not coinci dentally, as an aftershock of a finan cial earthquake ~f staggering· pro portions. What has haplpened is that the lmonetary chickeds have come home to roost. Decad~s of government managed· money', have produced a frightening flirtation with runaway prices. The American dollar has lost at least 80 per cent of its 1940 value. The bond market has suffered fan tastic losses. The devastation of dol lar-denominated a)ssets-savings, life insurance, pensi~n funds, and the like-in real terms is tremendous. Faith and confidence in the future purchasing powet of the dollar are everywhere in qu~stion. We have been witness to nothing less than the historic demonetiza tion of fiat money!. The damage this process has wrought may yet assign government paper to the status of 240 THE FREEMAN April ''barbarous relic" which Keynes once mistakenly ascribed to gold. Who can' honestly survey the wreckage and pronounce of the monetary authori ties, "This is a job well done"?

It is in this unfortunate set of cir cumstances that proposals for "mon etary reform" are proliferating. It is not the objective of this essay to pro pose yet another or to endorse any particular one already advanced. Rather, the objective is to illumi nate the intellectual path which any meaningful reform must take. The author leaves it to others to chart the specifics. To begin with, monetary reform ers must come to grips with some thing fundamental to the origin and history of money. They must redis cover what the Austrian economist Carl Menger told us in his path breaking Principles ofEconomics in 1871: "Money is not an invention of the state. It is not the product of a legislative act. Even the sanction of political authority is not necessary for its existence." Of Natural Origin The origin of money was entirely natural. It sprang from the awk wardness of barter and the desire for a marketable commodity to facili tate exchange. The first time man traded a good for something which he intended to use not for consump tion himself but rather as a means to acquire what he really wanted, a medium of exchange-money-was born.

It was a revolutionary inven tion - the economic counterpart to the wheel-and it made possible trade and a division of labor incon ceivable in a barter economy. It was truly an invention of the market place, of economizing individuals seeking to improve their well-being. All sorts of commodi ties have served as media of exchange at one time or another. Cattle, cowry shells, furs and skins, wampum beads, to bacco, whale's teeth, cigarettes, and even rats are examples. Primitive though these monies may seem, they had the qualities of familiarity and acceptability which made them marketable and hence, candidates for money. In most markets of the world, the precious metals emerged as the pri mary money commodities. Durabil ity, divisibility, high value in small quantities, and relative stability in purchasing power over time were characteristics which no other com modities could match. As early as 650 B.C., coins of gold and silver be came almost singularly synonymous with the term "money" in the trad ing world.

Paper arrived later on the mone tary scene as a "money substitute." It took the form of promissory notes which pledged real money in pay ment for goods. Issued by early banks, for instance, they were re1982 TOWARD RADICAL MONETARY REFORM 241 deemable or convertible on demand into the precious metals they repre sented. Inflation Involves Government Controlover Money Governments, afflicted with an insatiable appetite for revenue, have generated history's inflations by first assuming control over money. Then gold coins became only partially gold or without gold at all. Paper notes, stripped of their "backing," became "fiat"-their value tied to the whims of the inflating authority. Monetary history records no instance of a peo ple voluntarily choosing in the mar ketplace to use unbacked fiat paper as their money! The problem with so much of monetary economics today is that it does not fully comprehend the ines capable conclusion that money is a market phenomenon-that it origi nated in the market, that it evolved in the market, and that the market laws of supply and demand apply to money just as they do to any other commodity traded in the market. I submit that no monetary reform is likely to succeed if it treats money as the invention and exclusive do main of a political monopoly. The essential task of true monetary re form, then, is to find a way to divorce money from politics and make it as much a product of the market as pos sible.

In this vein, the many proposals which call for minor alterations of the government~s monetary function sound a little like rearranging the deck chairs on the Titanic. Simply putting a differ~nt crew in charge of the ship or experimenting with the compass are not radical enough. In this case, the market may be just the lifeboat we should be looking for. The objection may be raised, "Without a central authority, how will anyone kn~w what the supply of money should be?" Well, does anyone know what the supply of green beans sh(j)uld be? How many quarts of milk Should be produced? How many size 36 undershorts there ought to be? How is it that the mar ket is able to ~rovide these things without central planners and in just the right amounts? The answer, of course, is the mar ket's mechanism! of price. When costs are low and price is high, the signal to producers is,! "Make more!" Pro ducers know th~y should not pile up any more when! costs exceed price.

Why shouldn't money respond simi larly? When gold w~s money, this mech anism certainly, did work reasona bly well. As long as it was profitable to mine gold, piroducers did. "Too much gold" on the market caused the value of gold to' fall and the cost of mining to rise~a double whammy that prevented producers from en gaging in a continuous inflation. The supply of money, therefore, had 242 THE FREEMAN < something to do with the real market demand for money. With today's fiat money, the mechanism is short-circuited. Dou ble digit price inflation is the mar ket's way of signaling that there's too much of the green stuff around, but the signal never directly strikes the producer. There's no chance that he will go broke in the process of creating more than the market de mands. For the inflator of fiat money, the incentives are perverse: he grows bigger the more he does the very thing he shouldn't be doing!

It is no sure bet that the debate over monetary reform will deal fun damentally withthis question of po litical versus market money. We Currency Reform have lived for so long with the former and its ruinous consequences that suggesting the radical alternative may be tantamount to the impossi ble task ofteaching blind people what it would be like to see. Once it was believed that witches, warlocks, and demons were the causes of such calamities as bad weather. Elaborate contrivances were devised to drive them away. When men learned that it wasn't so, they looked for more natural, scien tific explanations. Perhaps it is time to relegate to superstition the idea that government should manage money and get on to the task at hand-putting money back in the marketplace where it belongs. , IDEAS ON LIBERTY UNDER present ideological conditions no one could possibly conduct a successful currency reform. To save the United States dollar would re quire a complete reversal of present economic and monetary policies of the United States government. It would not suffice merely to stabilize the currency through credit restrictions and the reduction of spending sufficient to result in balanced budgets. For such a solution· would im mediately throw the American economy, which has more than six mil lion unemployed even during boom times, into severe depression and unemployment. No political party would dare to recommend, much less administer, this medicine for monetary stabilization. Therefore, the cur rency reform necessitates a simultaneous economic reform that reduces the unbearable burden ofgovernment intervention. Business taxes, which are among the highest in the free world, would have to be lowered considerably, and the markets freed from bureaucratic intervention. At the same time, the numerous legal immu~ities and privileges of the labor unions would have to be abolished in order to restore a flexible labor market.

HANS F. SENNHOLZ,Age ofInflation Joseph S. Fulda THE NEW BONDAGE IN a courageous address to the dele gates of the NAACP convention, President Reagan spoke of "a new form of bondage" and offered blacks, as he did all Americans, a greater measure of economic liberty. The New York Times was quick to notice that the selfsame programs respon sible for the new bondage form the President's much-vaunted safety net. But there is no contradiction. The President was making a sensitive point about the nature of govern ment nets. "One moment they're un der you, the next moment they're on top of you," he was reminding us. The realization that dependence on the state invariably leads to subser vience to the state may come hard in countries whose democratic forms often lend themselves to a most misJoseph Fulda is an NSF Fellow at Columbia Univer sity. This analysis is based on a letter to The New York Times (August 2, 1981).