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Sound money, monetary freedom, and the government

Testimony for the Subcommittee on Domestic Monetary Policy and Technology, on “Sound Money: Parallel Currencies and the Roadmap to Monetary Freedom, Thursday, August 2, 2012.

The gold standard alone is what the nineteenth-century freedom- loving leaders (who championed representative government, civil liberties, and prosperity for all) called “sound money.” The eminence and usefulness of the gold standard consists in the fact that it makes the supply of money depend on the profitability of mining gold, and thus checks large-scale inflationary ventures on the part of governments.

– Ludwig von Mises

To discuss a possible roadmap to monetary freedom in the United States requires us to first determine what may be viewed as a “sound” or “unsound” money. Through most of the first 150 years of U.S. history, “sound money” was considered to be one based on a commodity standard, most frequently either gold or silver. In contrast, the history of paper, or fiat, monies was seen as an account of abuse, mismanagement and financial disaster, and thus “unsound” money.

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10 comments to Sound money, monetary freedom, and the government

  • “In the absence of government regulation and monopoly control, a free monetary and banking system would exist; it would not have to be created, designed, or supported. A market-based system would naturally emerge, take form, and develop out of the prior system of monetary central planning.”

  • when you say “sound” you should have first determined what is money and what is credit in the sense of what can be corrupted by external intervention and what is simply expression of individual actions perfectly legitimated by contractual liberty (call it outside and inside money?).
    As long as the debate on fractional reserve banking persists, I see no Austrian consensus to lead to a consistent proposal.

    • Paul Marks

      Leonardo IHC (by the way, interesting name – did your parents name you that, or did you change your name?).

      I think agreement is possible.

      No bailouts.

      No Central Banking (no Bank of England, Federal Reserve, European Union Central Bank….) abolish it – and abolish it NOW.

      And no other interventionism – including no “suspension of cash payments”.

      Then let things pan out as they may.

      Agreed?

      Please note that I have not said “ban fractional reserve banking” in any of the above.

      • IHC is the name of my site in short (Ideas Have Consequences), got no intentions to change my name as it *lol*

        I do agree with your essential proposal.

        The point I wanted to stress refers to those who intend to fix a certain monetary aggregate (be it M1 or M2 or so) as a way to insulate money from any central interventionist intention. Such a proposal can be implemented once we agree in what part M1 (or M2 and so on) are of exogenous or endogenous origin.
        In my view, the only esternal money is the monetary base, which should kept out of government control, while letting all other aggregate swell or shrink as expression of individual propensity/will to offer credit. Your proposal then fits my framework, as today is up to the Central Bank to “print” and “vary” the monetary base.

        • Paul Marks

          “Offer credit”.

          If people who offer to lend money actually have the money they are offering to lend, then lending does NOT increase the money supply (however measured). All that happens is that the real SAVINGS of the money lenders (or the savers they represent) are moved from savers to borrowers.

          The savers no longer have the money, the borrowers now have the money – net increase of the money supply = ZERO.

          However, if “offer credit” does not mean lend out real savings, if it means lending out a CREDIT BUBBLE (book keeping tricks), then there is indeed an increase in the “broad” (i.e. credit) money supply.

          This lending out of money that DOES NOT REALLY EXIST (i.e. “money” that no one really exists and is simply made up of book keeping tricks) will indeed increase the money supply (in the sense that it creates a credit bubble).

          However, this credit bubble “boom” inevitably leads to a BUST in which the malinvestments (i.e. the projects generated by the low interest rates – and creating lower interest rates is the BASIC POINT of credit bubble expansion, it is about getting “money” to lend at a lower interest rate than real savers would demand) are liquidated.

          If you want to avoid boom-bust then you must avoid “credit expansion”. And the bigger the credit expansion the bigger the BUST inevitably is.

          However, Central Banking does not deal with the problem of credit expansion – on the contrary it makes credit expansion WORSE.

          Central Banks have no legitimate function (even if one believes in fiat money it can be created without any need for Central Banks) and the Bank of England, the Federal Reserve, the European Union Central Bank (and on and on) should be abolished – and aboilished at once (today – they should not open their doors tomorrow morning).

          “But Paul that would mean the financial system would collapse”.

          If that is true it is admission that the banks (and other suh) are dependent on a drip feed of subsidy (most of it hidden) from the Central Banks (i.e. from the government) – if that is true, then the banks and so on are not really legitimate private business enterprises.

          By the way…….

          “Offer credit” (in the sense of offering to lend out money when YOU DO NOT HAVE THE MONEY, THE REAL SAVINGS, TO LEND) should not be a confused with “offer credit” in the sense of letting people have goods “on credit”.

          If one has goods (i.e. one legitimately owns them) then (of course) one can hand them out “on credit” – i.e. let people have them in the hope of future payment.

          That is nothing to do with creating a credit bubble – it is just a transfer of goods from their existing ouwners to other people.

          Of course when a store (a store that lets people have stuff “on credit”) needs to restock the shelves – it has better hope the customers (the customers it let have stuff on credit) actually PAY for what they have taken.

          Otherwise the shop will not have the money to restock its shelves (or to pay any other bills) and will go out of business.

          • at least you have spared me from the usual blockquoting from rothbard

            • Paul Marks

              My dear Leonardo – have had many arguments with Rothbardians (over many subjects).

              And (as Brian M. has pointed out) I (unintentionally) insulted the late M.N. Rothbard….

              By spelling his first name “Murry” (not “Murray”) – for some thirty years.

  • Paul Marks

    Indeed.

    As (without government intervention – such as the “suspension of cash payments”) unsound banks (and so on) would go bankrupt.

    People (buyers and sellers) should choose what money they wish to make contracts in – what to use as a store of value.

    Experience tends to show that people tend to pick (when they are allowed to) gold and silver. Of course the exchange rates between commodites (such as gold and silver) must NOT be rigged (“fixed”).

    As for borrowing – this must be from REAL SAVINGS (not credit bubbles).

    If people try to finance lending by book keeping tricks (credit bubbles) rather than real saving (in order to lend out more money at lower interest rates than real savers would demand) then such credit bubbles should be allowed to lead to their natural result – bankruptcy.

    No “suspension of cash payments” or other government interventionism.

    • That way we’d soon learn the real risks of paper-money, banking and investment. Even now, people would do well to reflect on what the ‘l’ in ‘plc’ means.

      • Paul Marks

        I have no problem with voluntary limited liability IF there really has been “reflection” upon it.

        That is why I am troubled (to say the least) by the modern practice of companies dropping the “Ltd” (or, in the United States, “Inc”) from their names.

        If one agrees to do business with a limited liability enterprise that means that the shareholders (not just the “little old lady in ….” but millionaires also) walk off untouched if the enterprise fails.

        That is fine IF one really has voluntarily agreed to it – but there has to be reflection upon it in advance.

        And dropping any indication of limited liability from the name of an enterprise (in signs, paperwork and so on) does not aid this reflection.

        Of course even without limited liabilty – credit bubble finance (trying to lend out “money” that no one really saved – in an effort to privide more loans at a lower rate of interest than real savers would demand for their money) would still NOT work.

        Credit bubble “booms” would still lead to busts.

        But at least the owners of banks would be hit by the consequences of the actions of these banks.