Abolish Legal Tender; D. A.. Mosely

Thereby the advertisement unwittingly pre sents the essential problem of national curren cies in a nutshell. Two magic words are all it would take for the note to become spending money. Surely, monetary policy cannot be that simple? In an age of government-issued currencies, unfortunately it is. Government control of national currencies has not been stable or beneficial to say the least. In the last year, currency crises hit the news fre quently. The resulting lack of confidence in a nation's currency means that international investments will seek more profitable ventures where the fear of devaluation is not so acute. Devaluation follows from governments' inflat ing their currencies through central banks and fractional reserve banking; as money is "created," exchange rates are affected and investors have to reconsider their projects. Traders have long learned to avoid a great part of exchange rate risk by employing cur rency futures and options. Even so, an unan ticipated currency movement can have a dele terious effect on a company's profit forecasts and its investments and employment. The ensuing effects on national economies can be disastrous; yet the cause is not difficult to Alex Moseley teaches economics at the University of Evansville's British campus at Harlaxton Manor.

32 define. It lies with the uncritical acceptance of legal tender rules. By maintaining those rules, national governments permit their central banks to issue base money-effectively paper, although soon it could be electronic cash-at their discretion. Any central bank has the legal power to print a run of million-dollar bills, define them as legal tender, and create new money out of thin air. Rippling Effects The repercussions of legal tender laws are quite visible: by printing paper the central bank inflates the currency. Some of that cur rency will seep into loan markets, affecting interest rates; some will affect particular price ratios in markets, causing economic disloca tions; some will enter the foreign currency markets, reducing the price of the national currency in terms of other currencies. Over all, local prices will rise and the exchange rate will fall. The effects are complicated by the actual paths that the new money takes, but the overall qualitative result can be ascertained resource allocation is distorted and irrevoca ble damage done. It does not matter if the cen tral bank's inflation was anticipated before hand-something that modern macro theory attempts to argue-for no one is in a position to pursue the transactions of every single new note printed. Therefore, no one is in a position to establish the overall quantitative effects until afterwards, at which point the damage has been done.

The Foundation for Economic Education Irvington-on-Hudson,New York 10533 Tel. (914) 591-7230 Fax (914) 591-8910 E-mail:freeman@fee.org Web site: www.fee.org February 1999 Countless Wonders A na recent drive through an afflu ent San Francisco neighborhood boasting truly spectacular homes, I did what almost every ordinary person does in such circumstances: I wondered to myself, "What can I do to earn enough money to be able to afford such a home?" My thinking continued: "To earn such wealth requires that I produce a product that lots of people value more than it would cost me to produce. Okay! Good! I've identified the general formula. Now all I need to do is to think of a product for which people will pay a price higher than my cost .ofproduction." "What can I produce? ... What can I produce? .. What creative idea can I come up with that will earn me a bundle? ... What can I produce? : .. Think, Don: think, think, THINK!"

Melancholy engulfed me as I drew a blank-the same embarrassing blank that I drew on each of the thousand-and-one previous occasions when I tried to think of a new product or service that consumers would value. Fact is, I possess absolutely no such entrepreneurial creativity. None. Zippola. And yet, despite my mind'·s barrenness on this front, how fortunate I am! How amazingly, breathtakingly fortunate-and wealthy-I am! My good fortune is that I live in a soci ety in which I benefit immensely and directly from other people's creative ideas-no one of which I would have dreamed up in several lifetimes. The dis tinguishing feature of a depoliticized free market economyis that it not only inspires creative people to create, but it also inspires these creative people to create things and processes that benefit even me and others who are hopelessly non-creative. Here's what I mean. I'm writing these words somewhere over the State of Utah as I hurtle toward New York City at a speed of 600 miles per hour. Less than a foot from my arm the air temperature is 50° Fahrenheit below zero. And yet I'm cozy, comfortable, and safe as I sip compli mentary gourmet coffee. Two hours ago I was in California; three hours from now I'll be in New York. My thoughts are being recorded (with help from my fingers) on a laptop computer that has more computer power than was on Apollo 11. I can check my e-mail messages by plugging my lap top into the telephone nestled in the seat in front of me.

Each of these wonders-and they are wonders!-is made possible by countless creative ideas of people whom I don't know and who don't know me. I am responsible for none of the ideas that enable me to write on a computer as I fly safely across the continent. But here I am, the happy beneficiary of these astonishing creations. What's more, I'm an ordinary American. I'm not rich by modern American stan dards. But so what? In truth, I'm astound ingly wealthy. I (like nearly all other Americans) can acquire these luxuries in exchange for just a tiny fraction of my work time. Let's tally up the cost to me, today, of the luxuries that I identify above. The round-trip coach airfare is $338. My new laptop, complete with modem and all of the requisite software for word processing and for emailing, costs a total of $2,000. Because I'll probably keep this laptop for at least two years, the daily cost to me of this laptop is no more than $2.74 (which is $2,000 divided by the 730 days that there are in two full years). To check my e-mail will cost me about $35 in telephone charges-a figure calculated on the assumption that I'll be on the air-phone for ten minutes (which is far more connect time than I'll probably need).

So what do we have? All told, it costs me a paltry $375.74 to fly from New York to California and back and to write this col umn en route and to check my e-mail. $375.74-that's all! A mere $375.74 is all that I paid to do what twenty years ago no one at all could do, and what only four or five years ago only the wealthiest of the wealthy could do. Yet today laptop computing on a jetliner is so common in Western society that we take it for granted. My fellow passengers are no more astonished to see me typing on my laptop than they would be to spot a pigeon in Central Park. The 1997 annual report of the Federal Reserve Bank of Dallas is entitled Time Well Spent: The DecliningReal Cost of Living in America.I encourage you to read this remarkable document. (Note: The Dallas Fed is something of a renegade among government agencies. Its leadership and staff of economists rank among the most freemarket-oriented group of scholars in America today.) The report's authorsW. Michael Cox and Richard Alm document how the real cost of living in America has fallen dramatically over the past century, and how it continues to fall.

Cox and AIm measure cost of living by using work time-the amount of time the typical American worker must labor to purchase various goods and services. Almost any good or service you can name costs less work time today than it cost just a few years ago. For example, in 1984 the typical American worker had to work 435 hours to purchase a personal computer. Today, a vastly more powerful computer is available for only 76 hours of work by the typical American worker. A cell phone in 1984 cost 456 hours of the typical American's work time. A much bet ter cell phone today costs a mere nine hours. Of course, many goods and services that we today take for granted could ten years ago be purchased at no price whatsoever such as checking e-mail from a commercial jetliner. The marvels to which we each have daily access are the product of millions of creative minds figuring out how better to please consumers-by producing new or improved products and by reducing the costs of producing existing products.

Many of these creative people earn (and deserve) millions of dollars; some earn (and deserve) billions of dollars; most earn handsome but not princely sums. Everyone, however, in industrial society profits greatly from every market entre preneur's creativity. I need not lament that I, personally, have no creative, productive ideas. I have the great good fortune to live in a society that encourages truly creative people to share the fruits of their creativity with me. My blessings are literally too great to count. Donald J. Boudreaux President FEE Heritage Book Sale T hroughout its history, a number..of notable authors have been associated with the Foundation. This month we highlight that legacy by featuring the works of former FEE staff members and Trustees. In each of these books you'll find a discussion of some important aspect of the freedom philosophy. Moreover, each work reflects the studied inquiry of a lifelong defender of liberty.

AmericanFederalism,George C. Roche III. George Roche is now President of Hillsdale College, but prior to going to Hillsdale in 1971,he was Director of Seminars at FEE. A talented historian and biographer of Bastiat, Dr. Roche is also a uniquely capable advocate of individual liberty and free markets. AmericanFederalismis one of our older publications, but its message remains imper ative. In it, Dr. Roche discusses the intellectual origins of our federal system, how federalism developed in the 19th century and then, sadly, eroded in the 20th. In his concluding remarks, he calls for a return to a decentralized political system and a reinvigorated moral ethic of individual responsibility. This concise pamphlet explains why limited government is the best government an excellent choice for handing out! Paper, 46 pages: $tee Sale: $ .50 Can CapitalismSurvive?Benjamin Rogge. Dr. Rogge was professor of political economy and dean at Wabash College and a FEE Trustee for many years. He is remembered fondly as a much val ued regular lecturer at FEE's Seminars. This truly insightful, clear, and eloquent book is, like AmericanFederalism,one of our older titles but, is it ever good! Starting from Joseph Schumpeter's famous hypothesis that capitalism cannot survive because its success inevitably undermines the social institutions that protect it, Dr. Rogge examines the case for economic freedom, the libertar ian philosophy, and the nature of economics. He looks at several topics in some detail: money, labor, education, and cities. He concludes with a challenging discussion of FEE's role as a dis seminator of these ideas and as a force for change in the United States.

Paper, 329 pages: $T&95 Sale: $5.00 Faith of Our Fathers,Mary Sennholz, ed. Back in the late 1940s and early 1950s Mary Sennholz (then Homan) worked for FEE's founder, Leonard Read. She returned to the Foundation in 1992 with her husband, Dr. Hans Sennholz. From 1992 until 1997 Mrs. Sennholz helped the Foundation with its book publication program. Faith of Our Fathers,published in 1997, contains essays by Clarence Carson, Ridgway Foley, George Roche, F.A. Harper, Ben Rogge, and Ed Opitz, among others. The authors discuss the importance of the natural-rights philosophy for the Founding Fathers while also examining the negative influence of the 19th-century doctrine of positivism. This compilation is a useful resource for all students of history, philosophy, and free dom. Paper, 389 pages: $±6:95 Sale: $7.00 Reflectionand Remembrance,Hans Sennholz. Dr. Sennholz was a longtime Trustee of the Foundation as well as a regular seminar lecturer. From 1992 until 1997 he served as President of the Foundation. Dr. Sennholz is known for his knowledgeable and enthusiastic support of the Austrian School of Economics. This book collects his "Notes From FEE" columns. Grouped into six categories, these essays address first principles, education, the poverty of politics, ideas and policies, a look abroad, and the future. This anthology presents a broad overview of Dr.

Sennholz's unique perspective. Paper, 255 pages: $i'%':95 Sale: $6.00 Postageand Handling: Please add $3.00 per order of $25.00 or less; $4.00 per order of $25.00 to $50.00; $5.00 per order of more than $50.00. Send your order, with a check or money order to FEE, 30 South Broadway, Irvington-an-Hudson, NY 10533. Credit card orders - $10.00 minimum please: Visa, MC, Discover, American Express, or fax orders are welcomed. Please call 800-452-3518,or fax us at 914-591-8910.

THE F,~!~~ 1998 Bound Volume T he 12 issues from January through December 1998 have been gathered into a single volume-sturdily sewn with navy blue cloth cover and gold foil stamping-768 pages, fully indexed for handy reference to the latest literature of freedom.· More than 100 feature articles on topics such as antitrust, education, environment, government regulation and control, health care, individual rights, labor, money, private property, and international trade. Columns by Walter Williams, Mark Skousen, Larry Reed, Dwight Lee, Doug Bandow, and Chuck Baird. Reviews of more than five dozen books and all the 1998 issues of Notesfrom FEE by Don Boudreaux. Available February 15, 1999 $24.95 each Save! Special introductory price: $19.95, through April 30, 1999 A Special Message from the President Help FEE Meet the Challenge ... A rare opportunity for your support to multiply! Late last year it was my privilege to announce that FEE had received a major new challenge grant from two anonymous contributors.

If FEE raises $150,000 in new money (gifts received and deposited by March 31, 1999), these supporters will give FEE an additional $100,000. Put another way, if we meet this challenge every three dollars you help us to raise will yield an additional two dollars! "New money" is any money from people who have never before given to FEE, as well as contributions by existing donors above the level of their last contribution. We are making progress toward our goal-and invite you to be part of this exciting effort. Donald J. Boudreaux President Contributions can be made by telephoning (800) 452-3518 and using your Visa, . MasterCard, American Express, or Discover Card, or by using the reply envelope included in this issue. For those who have recently contributed, a heartfelt thanks from the entire FEE staff and Board of Trustees.

The inflationary policy can only be effec tive if governments decree that the notes be deemed legal tender. Legal tender imposes on traders the requirement to accept the note at its face value. Therein lies the rub. If the gov ernment had to payoff a million-dollar debt but could not stomach a rise in taxation, its central bank could print the necessary legal tender bill, and the newly printed note could discharge the government's debt. Such an action costs the government nothing but the paper and ink the note is printed on, and traders cannot discount the bill except through increasing their prices. Legal tender thus provides national govern ments with a covert method of raising funds without raising taxes. But once the money seeps into the foreign currency markets to pay for increased imports or to payoff debts, the currency must depreciate, for in the interna tional arena traders mark down the value of the currency against others.

It would be otherwise for national traders if legal tender laws were abolished. Under a free tender scenario, traders would use those cur rencies in national and international trade that prove to be useful to them-that is, those that keep their value. Which currency traders would choose is not something that can be determined by legislation or a priori; the choice is fully in the hands of the millions of traders in millions of markets. If legal tender laws were abolished, traders would discount government notes in local as well as international markets, which would remove from government the possibility of earning revenue from inflation (that is, paying off debts with legal-tender devalued curren cy). The resulting effect is the reverse of Gresham's Law, in which bad money drives 33 out the good. Gresham's Law prevails when legal tender rules apply; however, if traders were free to choose between currencies, the good money would drive out the bad, a point noted by EA. Hayek. Ample evidence of the Hayek-Gresham Law can be found in eco nomic history from early American currency history to pre-Revolutionary Russia and to the more recent hyperinflations in which street traders clamor for alternative currencies such as the dollar and deutschmark.

Money Can't Be Invented Legal tender laws effectively have national ized currencies, making them the prerogative of the state. Economics teaches that money cannot be invented or created by decree, that it is very much the result of traders' decisions across many markets and over much time. It is time to return currency to the market. With free choice in currency, traders would converge on the money that best suit ed their needs. In the last two decades econ omists have conjectured what forms such money could take, from electronic cash to redeemable currencies, some redeemable against a basket of goods or even a basket of futures, or against gold and silver. What is certain is that the choice is and should be the market's. No one can predict the media that present businesses would find most useful most probably they will converge onto one medium or onto a few universally accepted media, but the definite result would be an end to the credit creation and inflationism of central banks and national governments.

Central banks would most certainly lose their powers, but currencies would lose their chains. D Small Is Awesome by Max More G iant corporations controlling national governments. Corporate behemoths regimenting their workers, controlling their customers, and obliterating their smaller competitors. The rich get richer and the large get larger until a small handful of megacorpo rations rule the planet. We have heard this warning about King Kong capitalism from Marxists and other sta tists for decades. The future is always about to bring about the death of small companies and individual initiatives. Since the 1980s a new, popular form of science fiction known as "cyberpunk" has reinforced this view in the popular imagination. Books such as William Gibson's Neuromancer suggest that our eco nomic system will become utterly dominated by a few faceless bureaucratic megacorpo rations. One of the great appeals of a free market economy is precisely that it promises to distribute power widely. But the image of the future being pushed at us will undermine that appeal if it goes unchallenged. Ironically, the result will be a call for more intervention by the state-the most monolithic, bureau cratic institution imaginable.