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Samizdata quote of the day

“When one studies the history of money one cannot help wondering why people should have put up for so long with governments exercising an exclusive power over 2,000 years that was regularly used to exploit and defraud them.”

F.A. Hayek, Denationalisation of Money: The Argument Refined. Page 33. Published by the Institute of Economic Affairs and Ludwig Von Mises Institute. The book is quite challenging and complex in some of its arguments, but I find the broad thrust of it – that competition is good for currencies as it is for other aspects of economic life, to be unanswerable.

16 comments to Samizdata quote of the day

  • John B

    An excellent quote. It is amazing how obvious common sense is.
    In fact what bothers me about most economics and definitions of what money should be, is that it seems to be a lot of people trying to make reality fit the model they hold dear in order to validate their power structure and maintain a sort of “priesthood” with jargon included. Whereas the reality is if free exchange occurs everything will be established at its value simply by what someone will pay for it. Even currency units.
    But then we wouldn’t need anyone to try and tell us what we ought to do and they would be without a free living and the satisfaction of power.

  • An interesting research project would be an Austrian history of monetary policy in China. That monetary mismanagement contributed to the collapse of the later dynasties seems almost certain on my reading, but (perhaps unsurprisingly) I haven’t seen any great attention paid to this in the English-language Chinese history books.

  • Nuke Gray

    If you study the history of money, this becomes obvious. BUT, most people don’t have time to study the history of money, they just use it. Perhaps these writings should be made more widely available?

  • Nuke: if you search for it (Denationalisation Of Money), you’ll find it’s available as a free download. Other than calling attention to it through blog postings like this, “more widely available” would surely mean making it required reading on economics courses – which, let’s face it, isn’t going to happen without teachers willing to scrap to be allowed to do so. And where are such teachers?

    From time to time, when opportunity presents itself in conversation with customers or colleagues, I’ll stop them in their verbal tracks with the question of why does each country seem to have only one currency – and then pop the next few bubbles they mouth for answers, like “stability”.

    Structurally, the central bank, the legislature and the state system of “education” do more for the growth of the democratic State than anything else. I never allow other people to go unchallenged when they mention either of these things in my presence.

  • Competition is indeed good for currencies, which is why the Libertarian Party agrees that it is the least-worst means to ensure that the State and its Bank behaves itself through sound money policies over time.

    Once people begin to use multiple currencies the ability of future (non Libertarian) governments to misbehave or withdraw the freedom (to then misbehave) is all the harder.

    Of course this will not prevent a future administration to turn a blind eye and permit a massive screw up to give an excuse for the withdrawing of the right to issue currency as per the oft-used strategy of “let it fail so it can be ‘fixed'”.

    mike: The “Gold Yuan” of the 1930’s Nationalist China is, IMHO, a classic example of the State using its monopoly powers to utterly shaft the population, even to the extent of making people hand over actual gold in exchange for the soon-to-be worthless paper. I read that some time ago and the injustice burnt into my soul, making a no-brainer the concept of competing currencies.

  • Paul Marks

    I have just written a long comment on Brian’s post on these matters – so I will not go into a lot of things twice.

    For those interested “Money, Bankcredit and Economic Cycles” is a good read.

    As for China – an old style Chinese merchant could tell the weight of a gold or silver coin (and its purity) just by holding in his hand. The words on the coin were of no importance (nor should they be).

    As for “competition”.

    It depends what it is competition in.

    If it competition in credit expansion – then that is no better than competition in tax “farming” or in protection rackets.

    However, it one means different private mints – then competition is a good thing.

    One would go to them with one’s good or silver (or whatever) and they (for a small percentage of the commodity) turn it into coins.

    Their REPUTATION would be what mattered to them above all – and, history (for example early 19th century American history) shows that this would keep them honest (far more honest than government – which can impose bans and demand taxes).

    As for banking – that should be nothing to do with the “production of money”.

    A bank should be a safe keeper (in the sense of safe depositer keeper – FOR WHICH DEPOSITES IT WOULD CHARGE A FEE) and an investor.

    Of course money a bank invests (lends out) is NOT “deposit” money – because it is NOT “on deposit” in the bank, it is lent out.

    People who hand their money to bank for interest are accepting that it is NOT “on deposit” – it is going to be lent out.

    If they want their money “on deposit” they must PAY for that.

    By the way such safe deposits are the only thing that can really be “insured” – insured against bank robbery, earthwquake or whatever.

    Insuring against BAD BUSINESS JUDGEMENT (i.e. insuring against the bank lending money to people who do not pay it back on time) is demented – it simply can not work.

    Almost needless to say – a “levy” to pay for such “insurance” is demented (as well as opening the door to world government sillyness).

    Davos makes no sense.

    Which is like saying “water is wet”, but most people seem to think water is dry.

  • “The “Gold Yuan” of the 1930’s Nationalist China is, IMHO, a classic example of the State using its monopoly powers to utterly shaft the population..”

    Yes absolutely. I think an Austrian reading might also be made of earlier events though… I had in mind the early 17th century fall of the Ming dynasty. I’d like to know what happened to common prices in copper after the restriction of silver imports from the Americas and Japan. My guess is inflation, but I don’t know…

  • Hugo

    The Austrian theory of money, roughly Carl Menger’s, is that there can only be one money. Money becomes more valuable the more it is used (more demand), so if there are two monies, if one of them starts to be used more, this causes a snowballing effect. People rush to convert their savings into the money that seems to be winning, causing it to win even more. Historically, gold was used for large transactions and silver for “small change”.

    What does this tell us about Hayek’s “Choice in Currency”?

    1. If we do get a new currency, it won’t be a load of competing currencies. It will only be one. Hopefully it will be gold, and we will have competing mints/coiners.

    2. The incumbent always has an advantage. Only if they *really* mess it up (a la Zimbabwe) will people drop it. (The dollar almost demonetised in the 30s – people would have moved to gold if FDR hadn’t quickly confiscated all of it.) So we’re not going to stop using pounds any time soon, unless there’s some sort of shock, or a government gets in that decides to switch to gold.

  • Hugo

    Readers may be interested in this speech by the Earl of Caithness: http://www.publications.parliament.uk/pa/ld200809/ldhansrd/text/90205-0003.htm#09020540000096

    We really need a think-tank to release a practical plan for remonetizing gold. Because of the incumbency principle, it will have to involve the clout of the government.

    Stage one: create a gold banking framework in parallel with the existing one. Legislation to remove the common law acceptability of fractional reserve banking. Separation of money storage companies and money investment companies. Stage two: the government starts paying its employees in gold. Stage three: the government starts demanding taxes in gold. Stage four: remonetisation.

    Hopefully the Cobden Centre will get well known enough to do this. The IEA (with its “Shadow Monetary Policy Committee”) still believe in central banking, and the ASI wouldn’t touch it.

  • Hugo

    A government that did this could claim to have finally abolished boom and bust, and inflation, and could say that they are imposing “new banking regulations” which will actually work (it’s called simply enforcing property rights).

  • From my perspective the best (only?) thing that needs to be done re gold is remove/repeal legislation hindering its use.

    That said, gold does not really solve the issue for a State as you have to buy it with something (your existing currency – duh) and that something does not disappear. The State currency will not go away but will devalue, so raising issues about existing depositors during any transition.

    Maybe I am missing something here, but a systematic attempt to rapidly move a State currency en mass (with all the volumes required) to gold would be logistically challenging to say the least and I am struggling to see how “the little guy”s who still have holdings of the old notes do not get torn a new one. You simply cannot buy enough gold to snap across and even if you tried, imagine the price gradient as you do so – buying it, as you must, with paper that is rapidly about to become worthless… I, for one, shall become a temporary seller of wheelbarrows (price AU0.1toz, natch).

    Those in at the start win big time and those at the end lose out massively. Now, someone remind me where have I heard that before?

    FWIW I see MasterCard and VISA being well placed for the new currency game as they already have the infrastructure to electronically conduct most transactions without the need for physical scrip.

  • Paul Marks

    “There can never be more than one money” – not so Hugo.

    As long as EXCHANGE RATES ARE NOT FIXED gold does not drive out silver and silver does not drive out gold.

    For example, the Kingdom of Hannover did not fix (RIG) exchange rates till the 1850s.

    Contracts would simply specifiy what people agreed to pay in.

    What matters is the clear agreement – on what commodity one wishes to be paid in and how much of the commodity (including its PURITY) that one is to be paid in or to pay.

    People get hung up on the NAME of the money “the Pound, the Dollar,…….” or whatever.

    But what matters is WHAT THE MONEY IS.

    Is the money silver?

    If so what percentage of purity?

    Ditto for gold – or for anything else.

    I wish we could do away with these NAMES (Pound, Dollar, Ducket, Crown, whatever) – they just confuse everthing.

  • Hugo

    “the best (only?) thing that needs to be done re gold is remove/repeal legislation hindering its use”

    Does anyone know which laws these are, exactly?

    (On a completely unrelated note, does anyone know what laws it would be necessary to repeal to give company shareholders back their rights against the managers?)

  • A deliberate challenge to government with integrity to individual freedom cannot selectively focus on monetary reform alone. The central bank, the democratic legislature and state education complement one another as the chief mechanisms of state control. A deliberate challenge must at least encompass the removal/reform of each of these, considering them as one problem rather than three.

    Incidental challenges to the current form of government will surely be dictated by events, the will of the political class for government to survive, and the pitiable condition of the electorate. Any attempt at establishing a gold standard or other serious monetary reform under those conditions is going to be too late.

    Waiting around for a Tory government to wise up to the preachings of a Baxendale or other such seems to me to underestimate the sheer weight of history on Tory shoe laces, and the sheer weight of stupidity on Tory shoulders.

  • Paul Marks


    On companies – on shareowners.

    First the tax treatment of individuals gives institutional inverstors the advantage.

    Obviously in terms of inheritance tax – but also as regards captial gains tax (and no Mr Brown – you do not fix that by increasing the tax on institutional investors as you did with the pension funds in 1997, thus causeing the present private pensions crises).

    However, yes, there are special laws that hit shareowner power in relation to managers (as well as tax laws that undermine the scale of indivdual share ownering – preventing even formal control).

    I seem to remember something called the Dodd Act in 1967 (father of present Senator Dodd?).

    That was aimed at evil “asset strippers” – i.e. it was aimed at making it difficult for shareholders to sell their shares and easy for corporate managers to undermine the company to protect their own position.

    “Corporate raiders” evolved because it bacame so difficult to take over a company (against the will of the corporate managers) unless one could buy the company all at once.

    And that requried lots of money – normally financed by debt.

    In the old days a big shareowner might start at 1% and gradually build their share up – then get allies, and in total have 51% of the votes in a shareowners meeting – and then kick out the mangers.

    Not so easy now.

  • Paul Marks

    Almost needless to say – the SEC (there to “protect investors”) has been pro corporate manager and anti shareowner (investors) since it was set up back in the 1930’s.

    “If we did not have the SEC we would have great frauds”.

    Like Bernie M…. – errrr, accept that…….