L.A. Liberty

On ‘Denationalising’ Money

Yes, I am with Hayek, and actually, I responded to you in May on this very subject not only expressing my disagreement with Milton Friedman (in which I wrote: ”Free banking > gold (commodities) standard > fiat currency.”), but I also posted a video of Hayek himself disputing Friedman’s monetarism.

Additionally, I said in a previous post (about education, incidentally): “a gold standard would be far superior to the fiat currency of Federal Reserve banking but still inferior to free banking.”

I’ve also, in another instance, explained that, as an Austrian, I disagree with Milton Friedman on monetary policy.

Still, I can agree with Friedman that in a sense, a gold standard would be “a government-fixed price for gold” - but only in relation to the government’s currency. Gold, as a proven asset and historically and independently recognized money, would - just as it does now with completely fiat currency - have a real price, or value, in relation to commodities and other products. And, since on a gold standard any changes in convertibility rates (the aforementioned ‘standard’) must be declared, inflation becomes far more visible and open - unlike our current system in which the fed’s secret circulation of brand new currency constitutes an “invisible tax.” As such, the general populace would be more cognizant of the strength of its currency. And, as Jim Grant explained, a gold standard is the “people’s system - if you didn’t like the currency, you could exchange your paper for gold and that sent a message.” So this, in turn, would put some pressure on the government to maintain said strength in order to keep domestic investments from heading toward greater stability elsewhere.

And without fiat currency fostering malinvestments, the speculative bubbles and booms that ultimately lead to busts and crashes would be smaller, less widespread, and more easily responded to. This is because, to quote Stephen Horwitz, “expansionary monetary policy cannot cure recessions, it is their cause.”

Also, 2011 Nobel Laureate Tom Sargent explained, a government on a gold standard is much more likely to keep balanced budgets (after all, inflation hurts creditors and helps debtors). As Ludwig von Mises said, sound money is “an instrument for the protection of civil liberties against despotic inroads on the part of governments.”

On fiat currency, the gold standard, and Milton Friedman, here’s Murray Rothbard:

[F]iat currency is inherently the money of absolute statism. Money is the central commodity, the nerve center, as it were, of the modern market economy, and any system that vests the absolute control of that commodity in the hands of the State is hopelessly incompatible with a free-market economy or, ultimately, with individual liberty itself.

Yet, Milton Friedman is a radical advocate of cutting all current ties*, however weak, with gold, and going onto a total and absolute fiat dollar standard, with all control vested in the Federal Reserve System. Of course, Friedman would then advise the Fed to use that absolute power wisely, but no libertarian worth the name can have anything but contempt for the very idea of vesting coercive power in any group and then hoping that such group will not use its power to the utmost. The reasons that Friedman is totally blind to the tyrannical and despotic implications of his fiat money scheme is, once again, the arbitrary Chicagoite separation between the micro and the macro, the vain, chimerical hope that we can have totalitarian control of the macro sphere while the “free market” is preserved in the micro. It should be clear by now that this kind of a truncated, Chicagoite micro-“free market” is “free” only in the most mocking and ironic sense: it is far more the Orwellian “freedom” of “Freedom is Slavery.”

*[this was written before Nixon ended Bretton Woods and the gold-exchange standard altogether]

Ron Paul’s The Case for Gold further explains the merits of a gold standard in a more cogent and thorough way than I ever could.

So a gold standard would be drastically, dramatically superior to our current system. But because a gold standard would still maintain even a small element of governmental control, it would nonetheless be inferior to free banking (which would, in most instances, be based on gold).

Hayek explains:

The gold standard requires a constant observation by government of certain rules which include an occasional restriction of the total circulation which will cause local or national recession, and no government can nowadays do it when both the public and, I am afraid, all those Keynesian economists who have been trained in the last thirty years, will argue that it is more important to increase the quantity of money than to maintain the gold standard. …

[T]he gold standard is a partly effective mechanism to make governments do what they ought to do in their control of money, and the only mechanism which has been tolerably effective in the case of a monopolist who can do with the money whatever he likes. Otherwise gold is not really necessary to secure a good currency. I think it is entirely possible for private enterprise to issue a token money which the public will learn to expect to preserve its value, provided both the issuer and the public understand that the demand for this money will depend on the issuer being forced to keep its value constant; because if he did not do so, the people would at once cease to use his money and shift to some other kind.

And Hayek’s masterpiece “The Denationalisation of Money,” which you mention, is crucial reading with regards to the dangers of central banking and the merits of free banking.

With free banking, individuals - not a monopoly currency with its crony banking system - hold the power. As I’ve said, “Imperfect man will never find economic perfection, but by vesting control of economic decisions into fewer hands as central banking does (no matter how intelligent or well-meaning those hands may be), the economy becomes less pliable and self-healing. … [Financial and monetary] risks are better responded to and contained - and thus minimized - when control is dispersed among all individuals making mutually beneficial exchanges as opposed to being concentrated in a coterie of politicians and plutocrats.”