PDF Summary:What Has Government Done to Our Money, by Murray N. Rothbard

Money is something we all use daily, yet few understand its origins and the forces shaping its value. In What Has Government Done to Our Money, author Murray N. Rothbard explores the history and nature of money—how currencies develop naturally in an unregulated free market, and how governments have exerted control over money supplies.

Rothbard argues that government interference, including the establishment of central banks and the unchecked expansion of paper currency, disrupts the stable value of money and fosters economic instability. He examines the strengths of the gold standard, where currencies were backed by gold reserves, and critiques failed efforts to establish stable global currency systems.

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The government creates revenue by diminishing the money's ability to buy goods, thereby causing inflation.

In an economy driven by market forces, individuals are required to produce and sell goods or services to earn income, while governments often resort to coercive means such as taxation to secure revenue. Rothbard emphasizes that governments have found a more insidious and detrimental method of commandeering resources through initiating currency inflation. Governments can enhance their fiscal capabilities indirectly, not relying solely on overt taxation, by creating additional currency, which can lead to a dilution of the existing money's value or an expansion in the quantity of paper money distributed. Rothbard contends that inflation acts as a hidden tax which facilitates the growth of government power and self-enrichment, simultaneously fostering a false sense of prosperity among the populace.

Governments abuse their sole power to produce money and create monetary units.

Rothbard outlines the chronological progression of how governments established and abused their control over the monetary system.

Exclusive authority in the creation of money: The first step taken was to consolidate the minting of coins under a central authority, ostensibly to ensure uniformity in the currency. Governments gained control over the creation and allocation of currency, secured a monopoly on its production, profited from the minting process, and, most importantly, diminished the value of the currency in terms of its ability to buy goods and services.

• Debasement: The practice of reducing the precious metal content in coins while maintaining their face value is referred to as debasement. Governments often devalued currency by recasting coins with less precious metal content and seizing the excess value, effectively creating money out of thin air. Historically, the funding for governmental activities and the support for their expenditures have come from imposing taxes on the citizens. Governments enforced the use of designated currencies for debt resolution to strengthen their control of the financial system. Following subsequent legislation, the enhanced perceived worth of debased currency led to a situation in which less valuable money becomes more prevalent in circulation than its higher-valued counterparts.
• Outlawing Rival Currencies: Governments further solidified their dominance by banning the circulation of currency minted by foreign or private entities within the country's economic system.
• Replacing Weight with Tale: By severing the link between a currency's stated value and its actual precious metal content, governments enabled the distortion and reduction of money's worth, promoting the idea of currency as an abstract measure of value. Employing general terms like "dollar" or "franc" concealed the true value of the currency, facilitating the introduction of policies that resulted in inflation. Shifting towards banknotes and maintaining account balances: The development of bank deposits and paper currency, while potentially beneficial in a market maintaining complete reserves, inevitably led to heightened government surveillance and a surge in inflation. The government assumed authority over the issuance of paper currency and utilized a centralized banking system to manage and shape the monetary landscape.

Inflation not only redistributes wealth but also distorts the methods for assessing economic health and induces instability within the business sector.

Rothbard emphasizes that inflation, despite its deceptive appearance of prosperity, has a range of devastating economic consequences:

• Redistribution of Wealth: Inflation does not create new wealth; rather, it redistributes the existing wealth, giving an advantage to those who first receive the newly minted currency at the expense of those who get it later. This capricious reallocation of resources disproportionately benefits certain industries, often those closely connected with the halls of political power or financial entities, whereas segments like employees, pensioners, and creditors see the value of their savings erode. Disturbance of financial assessment: Inflation distorts the market's signals, making it more challenging for companies to accurately assess their costs and profits. This impedes the effective distribution of capital and results in poor investment choices, ultimately requiring difficult adjustments manifested as economic downturns. Rothbard argues that the persistent economic oscillations, referred to as business cycles, primarily stem from banks' credit expansion, facilitated by the collaborative actions of the government and the central banking system. The unsustainable investment ventures that begin due to the false sense of wealth generated by expanding credit are inevitably doomed to failure, leading to economic downturns and significant contractions.

The establishment of a central bank eliminates restrictions on the expansion of bank credit.

Rothbard contends that the primary mechanism for expanding government control over monetary policy and enabling unchecked inflation is a central banking system.

Central banks have the capacity to accelerate and direct the inflationary process.

Central banks, instituted by governments, hold the sole privilege of distributing the country's official currency in the form of banknotes. Governmental support, coupled with legal mandates for the utilization of certain currencies, led to these notes becoming the predominant currency for daily transactions, overtaking gold coins. Central banks possess the authority to oversee the management of banking reserves, which enables them to regulate credit expansion and drive inflation.

They achieved this by the following means:

• Controlling Bank Reserves: Central banks can inject new reserves into the banking system by buying assets, such as government securities, from commercial banks. These new reserves then act as a base for further credit expansion by the banks, multiplying the initial increase in reserves.
• Setting Reserve Ratios: Central banks can encourage an expansion in credit and elevate the general price level by lowering the mandatory reserves that banks are required to hold. Central banks possess the capability to supply the necessary reserves for commercial banks, typically at an interest rate known as the "rediscount rate." Rothbard argues that the influence of managing the overall reserve supply significantly outweighs the consideration typically given to alterations in the reserve ratio.

The resilience of the entire banking network, including the Central Bank, is bolstered by the trust that the public invests in it.

Central banking institutions often enjoy a significant level of confidence from the public, which is largely attributed to governmental backing and the prevalent perception of their dependability. They leverage this trust to enhance the stability of the financial network. By serving as a safety net for financial institutions, central banks encourage these entities to engage in more speculative activities, knowing that they are likely to be backed in times of financial distress, which in turn expands the accessibility of credit. Governments bolster trust in financial institutions by guaranteeing the safety of the funds that banks hold, even when those deposits are not backed by tangible assets.

In a system where banking operations are free from governmental oversight, the natural regulatory mechanisms, such as the cautionary impact of possible bank failures and the necessity to keep sufficient reserves in relation to debts, become compromised due to state assurances and the activities of central banking institutions. The banking system is able to expand credit and augment the money supply beyond the levels that would occur in an unregulated market, thanks to the backing of the central bank.

The global financial structure has deteriorated over time.

This section of the narrative examines the transformation of the international monetary system, which moved from a stable and prosperous era under the gold standard to a contemporary era characterized by volatile state-backed monetary units and the constant threat of global inflation.

Adherence to a gold-based monetary system in the classical era fostered economic stability and bolstered global trade.

Rothbard underscores that the apex of global economic steadiness was reached in the 19th and early 20th centuries, an era marked by the widespread adoption of a gold-backed monetary framework. In this structure, specific amounts of gold were equivalent to the value of national currencies, resulting in consistent and efficient currency conversion rates, similar to how one pound is equal to sixteen ounces. He argues that the worldwide adoption of a currency system anchored in gold markedly improved the interconnectedness of global economies by providing a reliable and consistent foundation for international commerce, investment, and travel through ensuring consistent values of currency.

The gold standard served as an inherent check on the proliferation of inflation. Should France expand its money supply, it would encounter higher prices and an unfavorable balance of trade. Foreign nationals would exchange their excess French francs for gold, leading to a reduction in France's gold reserves and forcing the government to contract the previously inflated money supply. The market dynamics inherently drove this autonomous framework, ensuring that countries involved maintained strong financial policies, thus preserving the stability and reliability of their monetary units. Despite certain governmental actions undermining its effectiveness, the conventional monetary system, which was founded on a gold-based standard, provided a robust basis for enduring economic steadiness and worldwide fiscal cooperation.

Global conflicts and official strategies disrupted the established global financial system.

Rothbard assigns the demise of the classical gold standard not to any shortcomings of the metal itself, but to governments' inability to honor their monetary pledges and maintain the convertibility between currency and gold. World War I's demand for substantial monetary support led to widespread inflation, which forced countries to abandon their currency's gold standard. Similar patterns emerged during World War II.

The introduction of unbacked paper currency precipitated instability and upheaval in the economic sphere.

The transition away from the Gold Standard marked the beginning of an era marked by fluctuations in the currency's stability. Nations resorted to creating paper money without any backing, resulting in fluctuating values between different countries' currencies and intentional devaluation of their monetary units, leading to the formation of currency groups and the implementation of trade obstacles, which transformed a previously collaborative global marketplace into an arena of conflicting currency regimes and isolationist economic strategies. International cooperation in manufacturing encountered barriers, which resulted in the cessation of economic growth and heightened worldwide tensions. During this era, the absence of a uniform worldwide monetary system contributed to the onset of the Great Depression, which in turn precipitated the outbreak of the Second World War.

Attempts to restore stability in the value of different currencies have invariably failed.

After World War I, efforts were undertaken to stabilize the system that managed the valuation of different currencies. However, these proved largely unsuccessful. In the 1920s, following the establishment of a system where gold served as a secondary reserve, and subsequent to the Second World War, under the Bretton Woods system, a multitude of currencies were pegged to the US dollar and British pound, which were then the principal currencies in circulation. Governments' accumulation of significant amounts of the US currency ultimately contributed to the collapse of these systems, resulting in a widespread loss of confidence in the major currencies.

The transition from the established system of fixed exchange rates known as Bretton Woods to the Smithsonian Agreement, and eventually to the modern period of fluctuating fiat currencies.

The Bretton Woods system's failure stemmed from issues identical to those that caused the demise of its predecessor. The persistent expansion of its monetary supply by the United States, a consequence of the dollar's role as the predominant reserve currency, has undermined confidence in the dollar, resulting in substantial outflows of gold. In 1971, the collapse of the system was cemented as President Nixon decisively disconnected the dollar from its gold backing, signaling the definitive end of the international monetary framework established in Bretton Woods.

Attempts to restore consistent exchange rates, exemplified by the 1971 Smithsonian Agreement, failed due to the absence of a reliable benchmark within the global monetary framework, coupled with persistent inflationary pressures, which thwarted these efforts. The worldwide financial structure underwent a transformation, leading to fluctuating rather than fixed exchange rates. The previously regarded effective method has now given rise to a new set of complications.

The introduction of a global paper currency could potentially lead to widespread inflation.

Many government officials persist in their efforts to establish a single paper currency worldwide, to be overseen by a central banking institution. Rothbard argues that while this method may prevent crises associated with international payment imbalances, it could also lead to unchecked inflation across the globe. A worldwide central banking authority would have the ability to create money at will, free from the limitations imposed by a gold standard or a market with competing currencies, with no significant checks on the unchecked expansion of the money supply. According to Rothbard, rampant inflation on a worldwide scale could have catastrophic effects. He champions the restoration of a dependable monetary system based on a freely exchanged commodity like gold, considering it the only lasting solution to the chronic issues plaguing the world's financial system.