Inflation: The Economics of Addiction
Inflation: of all the dangers to the free market economy, historically
and theoretically, the greatest is this one, yet it is one of those
subjects that remain wrapped in mystery for the average citizen.
This elusive concept must be understood if we are to return to the
free market, for without a thorough comprehension of inflation's
mechanism and its dangers, we will continue to enslave ourselves to
a principle of theft and destruction.
This essay is an attempt to compare the process of inflation to a
more commonly recognized physiological phenomenon, that of drug
addiction. The similarities between the two are remarkable, physically
and psychologically. Nevertheless, it must be stressed from the
outset that any analogy is never a precise scientific explanation. No
analogy can claim to be so rigorously exact as to rival the accuracy
of the original concept to which it is supposed to be analogous. It
is, however, an excellent teaching device, and while it is no substitute
for carefully reasoned economic analysis, it is still a surprisingly
useful supplement, which can aid an individual in grasping the
implications of the economic argument.
Before beginning the comparison, it is mandatory that a definition
of inflation be presented, one which can serve as a working basis for
the development of the analogy.
One workable definition has been offered by Murray N. Rothbard,
who is perhaps the most reliable expert on monetary theory:
inflation is "any increase in the economy's supply of money not consisting
of an increase in the stock of the money metal." An even
better definition might be this one, adopted for the purposes of exposition
in this study: "any increase in the economy's supply of
money, period." Thus, the level of prices is not the criterion in determining
whether or not inflation is present. The only relevant factor
is simply whether any new money is being injected into the system,
be it gold, silver, credit, or paper.
Unfortunately, many economists and virtually the entire population
define inflation as a rise in prices. The more careful person will add
that this rise in prices is a rise in the overall price level of most goods
in the economy, one which is not due to some national disaster, such
as a war, in which the rise can be attributed to an increase in aggregate
demand as a result of changed economic expectations. Other economists,
even more precise, attempt to define inflation as an increase
in the money supply greater than the increase of aggregate goods and
services in the economy. Professor Mises himself, in his earliest
study on monetary theory, employed a definition involving comparisons
between the aggregate supply of money and the aggregate "need
for money." But in later years, he abandoned this definition, and
for very good reasons, as he has explained:
There is nowadays a very reprehensible, even dangerous, semantic
confusion that makes it extremely difficult for the non-expert to
grasp the true state of affairs. "Inflation," as this term was always
used everywhere and especially also in this country, means increasing
the quantity of money and bank notes in circulation and
of bank deposits subject to check. But people today call inflation
the phenomenon that is the inevitable consequence of inflation,
that is, the tendency of all prices and wage rates to rise. The result
of this deplorable confusion is that there is no term left to signify
the cause of this rise in prices and wages. There is no longer any
word available to signify the phenomenon that has been up to
now called "inflation." It follows that nobody cares about inflation
in the traditional sense of the term. We cannot talk about
something that has no name, and we cannot fight it. Those who
pretend to fight inflation are in fact only fighting what is the
inevitable consequence of inflation. Their ventures are doomed to
failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy which which must
necessarily make them soar. As long as this terminological confusion
is not entirely wiped out, there cannot be any question
of stopping inflation.
What about the inflation caused by increases in the supply of
money metals? How does this come about? There are at least two
ways this could happen: (1) new sources of gold and silver might be
discovered; (2) a new and more efficient technical process for producing
one of the metals more cheaply could be found. This would
tend to inject new supplies of circulating media into the economy,
but the use of the metals as money could be offset through their
consumption in industrial use (silver, for example, is widely used in
the photography industry), and as jewelry and ornamentation. Then,
too, costs of mining are not any lower, nor profits any higher, in the
long run, than in any other industry. Because of these and other
limitations on the use of precious metals as money, changes in their
supply are relatively insignificant as inflationary or deflationary devices.
It must be admitted that the inflation which stems directly
from the increased supply of precious metals proceeds in exactly the
same fashion as the inflation from other sources, but this kind of inflation
is usually on such a vastly smaller scale that it is far less
dangerous than the other types, and is therefore of less concern to
this study. Since it takes place in the free market, in distinction from
both mass credit and currency inflation, its effects are more predictable
and less harsh. Free market inflation and deflation, caused
by the fluctuation in the supply of money-metals, are inescapable in
this imperfect world, but their burden is light. Their evils are compounded
sevenfold if men, in their drive for a radical, State-enforced
perfectionism, attempt to eradicate this mild inflation or deflation
through the imposition of State controls over the money mechanism.
In contrast to the expense and difficulty of the production of precious
metals, consider how gloriously simple it is for a government to print
a treasury note, or for a bank to issue a paper deposit certificate.
The treasury of any nation can begin by promising to redeem all of
its notes in stated weights and fineness of a precious metal, proceeding
to buy the metals from producers and issuing the notes in
payment. In the beginning, the treasury note, like the bank note or
bank credit slip, is a legal IOU, a receipt for goods stored, goods that
are payable on demand with the presentation of the receipt. So far, so good, but the matter never rests here. The treasury officials realize what the banking leadership realized hundreds of years ago, that few
people ever call for their gold or silver. Those who do are normally
offset by new depositors, and so the vast stores of money metals are
never disturbed. The paper IOU notes are easier to carry, store more
easily, and because they are supposedly one hundred percent redeemable
from supposedly reliable institutions, these notes circulate as
easily as the gold or silver they represent, perhaps even more easily,
since the paper has so many useful properties. These paper notes
have the character of money -- they are accepted in exchange for
Treasury officials now see a wonderful opportunity for buying
goods and services for the government without raising visible taxes:
they can print new bills which have no gold reserves behind them,
but which are indistinguishable from those treasury notes with one
hundred percent reserves. The new, unbacked notes act exactly the
same as the old ones; they are exchanged for commodities just as
easily as the honest IOU notes are. Governments print the notes in
order to increase their expenditures, while avoiding the necessity of
raising taxes. The nasty political repercussions associated with tax
increases are thereby bypassed. The State's actions are motivated by
the philosophy that the government can produce something for nothing, that it can create wealth at will, merely through the use of the
printing press. Government attempts to usurp the role of God by
becoming the creator of wealth rather than remaining the defender
of wealth. The magic of money creation, in its modern form, makes
the earlier practice of metal currency debasement strictly an amateurish
beginning. If private citizens engage in paper money creation,
it is called counterfeiting; if governments do it, it is called progressive
monetary policy. In both cases, however, the end is the same: to
obtain something valuable at little expense. The result is the same:
inflation. In the private realm, with the notable exception of banking,
counterfeiting is prosecuted by the government because it is theft.
but in the public sphere it is accepted as a miracle of enlightened
Banking practice is quite similar to treasury policy, and the State,
realizing that the banks are an excellent source of loans, permits and
even encourages bankers to continue this fraudulent counterfeiting.
A bank, assuming an enforced legal reserve limit of ten percent
(which is about average), can receive $100 from a depositor, permitting
him to write checks for that amount, and then proceed to loan
$90 of this money to a borrower, virtually allowing him to write
checks on the same deposit! Presto: instant inflation, to the tune of ninety cents on the dollar. This, however, is only the beginning. The borrower takes the $90 to his account, either at the same bank or at
another one. This second deposit permits the bank involved to issue
an additional $81 to a third borrower, keeping $9 in reserve, and the
process continues until a grand total of $900 comes into circulation
from the original $100 deposit. This practice is commonly known as
"monetization of debt," and the banking system which practices it is
called "fractional reserve banking." Then, too, there is the problem
of the original $100. If it should be in the form of treasury notes,
then the currency already has been heavily inflated through the government's
counterfeiting practices. If, on the other hand, it is in the
form of a check, then it is backed up by only ten percent of some
earlier depositor's $111.11. In any case, the economy is faced
with an ever-pyramiding structure of credit inflation, only the pyramid
is inverted, with an ever-tinier percentage of specie metals at its base.
Money buys less and less as prices soar. Anyone who doubts the
magnitude of the effects of this combined bank and treasury note inflation
should pause and consider the fact that in the years 1834-1859,
the highest per capita total of currency, deposits, and specie
in the United States was under $18, and in the low year it was just
over $6 per person! In the high year, 1837, there was only $2 of
specie to back up the $18, and the banks had to suspend payment,
so even in this period the nation was plagued by a money mechanism
based upon unbacked IOU notes.
It should be pointed out, just in passing, that the traditional debate
over the so-called "wage-price spiral" misses the mark completely.
The unions blame management for the increasing costs of all manufactured
goods, while business blames the unions as the cause of the
price hikes, since added labor costs force management to pass along
the wage increases to the consumers. Both groups are wrong. Without
the counterfeit, unbacked credit money produced by fractional
reserve banking, and without the unbacked treasury notes, neither
labor nor business could continually force up prices. Labor would
price itself out of the market, forcing management to fire some of the
laborers. Businesses would price their products too high, and the
public would shift to their competitors. No, the wage-price spiral
is only a symptom of the inflation; it is a direct result, not the cause,
of inflation. Admittedly, government coercion backing up labor's
demands have made the unions a major source of the pressures
keeping costs rising continually, as Henry Hazlitt argues in chapter 42 of his little book, What You Should Know About Inflation. But
this should not blind us to the original causes: the treasury's counterfeiting
and the government-protected fractional reserve banking
What, then, are the effects of this inflation on the economic system?
It is my hope that the answer to this question will be grasped
more quickly through the use of the analogy of the dope addict. The
nation which goes on an inflation kick, such as the one the United
States has been on for well over a century, must suffer all the attending
characteristics which inescapably accompany such a kick..
In at least six ways, the parallels between the addicted person and
the addicted economy are strikingly close.
1. The "Junk" Enters at a Given Point
This is an extremely important point to understand. The new
money does not appear simultaneously and in equal amounts, through
some miraculous decree, in all men's pockets, any more than equal
molecules of the drug appear simultaneously in every cell of the
addict's body. Each individual's bank account is not increased by
$5 more than it was yesterday. Certain individuals and firms, those
closest to the State's treasury or the banks' vaults, receive the new
money before others do, either in payment for services rendered or
in money loaned to them. Inflation enters the economy at a point
or points and spreads out; the drug enters an addict's vein, and this
foreign matter is carried through his system. In both cases, the "junk"
enters at a point and takes time to spread.
There are several differences, though, which cannot be ignored.
The spread of inflation is far more uneven than is the spread of the
drug. The first individuals' incomes are immediately swelled, and
they find themselves able to purchase goods at yesterday's less inflated
prices. They can therefore buy more than those who have
not yet received quantities of the new, unbacked currency, and this
latter group is no longer able to compete so well as the possessors
of the counterfeits. Since yesterday's prices were designed by the
sellers to enable them to sell the entire stock of each commodity at
the maximum profit, the firms or individuals with the new money will
either help deplete the stock of goods first, leaving warehouses empty
for their competitors who desire to purchase goods at the given price,
or the new money owners will be in a favorable position to bid up
the prices so that the competitors will have to bow out. The first
group gains, undoubtedly, but only at the expense of the second
group -- the group which can no longer compete successfully through
no fault of its own. The latter group bears the costs, costs which are hidden, but which are nonetheless there. This latter group is made
up of those individuals who have relatively fixed incomes (pensioners,
civil servants, small businessmen), and who are forced to
restrict purchases due to the now inflated prices.
As the inflation spreads, it increases rapidly because of the fractional
reserve banking process described earlier. Prices rise unevenly,
depending on which industries receive the new funds first,
while the unsuccessful businesses, those without the new money,
begin to contract and even to go out of existence.
The inflationary process clearly does not create wealth. It merely
redistributes it, from the pockets of those who were successful before
the inflation began, into the pockets of those who are successful once
its starts. The government can supply its needs without raising the
visible tax rate; the banks can make more loans without raising the
interest rate (in the short run, although not in the long run). The
government, by inflating, imposes an invisible,' unpredicted tax upon
those who cannot pay the new prices, and who must restrict their
purchases; the banks, by inflating, force the non-recipients of bank
credit to consume their capital by having to pay higher prices, and
this tends to bring more people and businesses to the credit department
of the banks. In either case, someone pays the costs. The
redistribution (and ultimately the destruction) of wealth continues.
All this results from the fact that the spread of inflation is uneven,
and because all inflation must enter at certain, favored, points.
2. The "Junk" Produces a Sense of Euphoria
The addict experiences a series of strange sensations, some of
which may be painful, such as nausea, but which are more than offset
by the pleasant results, however temporary these might be. Things
seem more secure to the addict, less harsh than before. The drug
may produce dizziness, an imbalance, and it certainly distorts the
addict's sense of reality. He moves into a false world, but one which
he prefers to the real one, and which he may even mistake, at least
temporarily, for the real one, until the effects of the drug have begun
to wear off.
Inflation does precisely the same thing to an economy. Prices rise
spasmodically, in response to the inflated money injected into certain
points of the economy. Money is "easy," and profits appear to be
available in certain favored industries, those industries in which,
prior to the inflation, further investment would have produced losses.
The entrepreneurs pour capital, in the form of money and credit,
into these newly profitable ventures. The inevitable happens: good, solid, formerly profitable businesses that had been beneficial to both
buyers and owners in the pre-inflation period now begin to lose
money. Costs are rising faster for certain industries than are profits;
capital is being redirected into other industries; laborers are moving
into areas where higher wages are present. Firms which had just
barely broken even before the inflation (marginal firms) may now
go under and be forced to declare bankruptcy. They are bought out
by the favored industries, and a centralization of production begins,
with the favored industries leading in expansion and growth. The
marginal firms were not destroyed through honest competition, i.e.,
because they were unable to offer services equal to competitors, but
because some members of the economy have been given access to
counterfeit money and are thus enabled to compete with an unfair
Capital -- raw materials, human labor, production machinery -- has
been redirected, and in terms of the pre-inflation conditions, misdirected.
Efficient firms can no longer compete, so they fold up;
as inflation progresses, they fold up even faster. Supplies, initially
stimulated, may begin to fall as the more efficient firms (in terms of
a non-counterfeit currency) collapse. Prices, the guideposts of a
free market, have been distorted by the injection of the new money,
exactly as the addict's senses are distorted by the drug, and the
economy reels drunkenly. Paper profits appear, followed by rising
costs, which may wipe out all the gains. Businessmen are thrown into
confusion, as are laborers, housewives, and professional business
forecasters: where to invest, what is sound, where will rising costs
lag behind increasing profits? Investments go where the profits are,
but the profits are measured by a mixed currency: part specie metals
and part counterfeit promises to pay specie metal. Counterfeit profits
stimulate the creation of "counterfeit industries," while Wiping out
formerly productive enterprises. The redistribution of wealth results in
the destruction of wealth, and the consuming public is injured: some
have become rich, but the majority pays for its new-found prosperity.
By fouling up the price mechanism, the inflationary drug has helped
to paralyze industry. The economy fares no better than the addict.
By ignoring reality, i.e., the true conditions of supply and demand, the
inflationist economy helps to destroy itself just as surely as the addict
destroys himself by trying to escape.
3. The Body Adjusts to the "Junk" and More Is Demanded
The addict's body eventually adjusts to the drug that has entered
his system, compensates for its destructive' effects, and then attempts to heal its malfunctioning organs. Much the same thing takes place
in the economic system. Sellers and buyers adjust their purchases
to the new prices and the new wages. But the damage, in both cases,
has already been completed. Old cells in the addict's body, and old
businesses and entrepreneurial plans in the case of the economic
system, have been eliminated. Things can go forward again, but not
at the same rate or in the same direction as they did before. Nevertheless,
the organisms are still alive and functioning once again, provided
that no new "junk" enters either system.
That, of course, is the danger. The "benefits," the pleasant euphoria
in the addict's case, and the apparently limitless opportunities
for gain in the inflated "boom" conditions of the economy, act as a
constant temptation to both to return to the old ways. The successes
were too apparent, and the losses so invisible. Who misses a few
dead cells, or a few bankrupt businesses? Cells and businesses die
every day! But not, normally, healthy cells and productive businesses,
and this is what the addict and the inflationists ignore. If healthy cells
are destroyed in a human being, sickness is present. The same holds
true for the economy.
The addict is tempted, and the second step is always easier than the
first; moral and physical resistance is now much lower than before,
and so is the initial fear. The resistance to further inflationary pressures
is also lower; many in the economy have been made rich by
it, and without further inflation their positions of supremacy are
threatened. These vested interests do not owe their position to their
successful competition; they are indebted to the counterfeiting agencies
which have provided them with the additional funds. The counterfeiting
agencies do not wish to cease inflating the money supply
either. So the addict returns to the pusher, and the economy returns
to the banks, and stands, hat in hand, at the treasury's doors. A
new round of inflation begins.
There has been a change, however. Both the addict and the
economy require ever-increasing doses of the "junk" in order to
obtain the same "kick." The addict's body develops a tolerance
for the drug, and if the same amount of it is injected into his system,
he will begin to lose the old euphoria, and eventually he will experience
physical discomfort. In the market, forecasters expect
further inflation, and they prepare their plans more carefully, watching
for rising costs, and are more ready to increase prices. The paper
profits are smaller unless larger quantities of the counterfeit claims
are injected into the money supply. The addict's body continues to decline, and the economy also deteriorates. New bankruptcies, soaring
prices, disrupted production are everyday occurrences. The price
mechanism is less and less responsive to the true conditions of supply
and demand, i.e., "true" apart from monetary inflation.
Another fact that is not generally realized is that the price level
may remain somewhat stable while inflation is going on. Just as the
addict can take a small quantity of a drug and still seem normal, so
the productive economy can seem healthy. Both addict and economy
are filled with the foreign matter, whether the signs show or not.
Take away the drug, and both the economy and the addict would be
different. The laymen, and a considerable number of economists,
forget that in a productive economy, the general level of prices
should be falling. If the money supply has remained relatively
stable, the increased supply of goods will force down prices, if all the
goods are to be sold. In fact, the free market should generally be
characterized by increasing demand prompted by falling prices,
with increasing supplies due to increased capital investment. If
prices remain stable, then the economy is very likely experiencing
inflationary pressures. The public has erred in thinking that an increasing
or even stable price level is the sign of "normalcy."
4. The Habit Cannot Go on Indefinitely
The addict will usually run out of funds before he can reach the
limit of his body's toleration. If he has the funds, and if he escapes
detection, then he will eventually kill himself. Normally, legal and
financial considerations will prevent this.
Not so in the economy's case. The legal restrictions on the circulation
of inflated bank credit are not restrictions at all: they are
licenses, virtual guarantees to permit fraud. Demanding ten percent
reserves is licensing ninety percent counterfeiting. Demanding a
twenty-five percent gold backed dollar, is permitting seventy-five
percent fraud. The legal limits are off; the addicted economy can
supply itself almost forever with its phony wealth. It cannot, however,
escape the repercussions.
The addict has greater restrictions upon his actions, but he can
die. The economy does not die, for it is not a living creature, though for the sake of the analogy it is treated as such. Continuous inflation
will, however, spell the death of the circulating media that is used.
Eventually, the market will be forced to shift to some new means of
price measurement, to some new device for economic calculation.
If the inflation is permitted to progress to this point, the social and
economic results can be devastating. Economies do not die, but the
social order can be replaced. The classic example is Germany in
1923. The effects upon individual members of the society could
lead to chaos, leaving large segments of the population spiritually
The habit cannot go on forever. It will either be stopped, or else
the addict will die, in the case of the human, and the monetary system
will collapse, in the economy's case. The thought of the latter
alternatives turns one's attention to the former one: stopping the
inflation and stopping the drug.
5. Shaking the Habit
Withdrawal -- the most frightening word in the addict's vocabulary.
Depression -- the most horrible economic thought in the minds
of today's citizens. Yet both come as the only remedies for the
suicidal policies entered into.
To the addict, withdrawal means a return to the normal functioning
of the body, a return to reality. The path to normalcy is a decidedly
painful avenue. Withdrawal will not restore him to his pre-addiction
condition, for too much has already been lost -- socially, physically,
financially, spiritually. But he can live, he can survive, and he can
make a decent life for himself.
For the inflationist economy, a cancellation, or even a reduction,
of the inflation means depression, in one form or another. This is
inevitable, and absolutely necessary. Prices must be permitted to
seek their level, production must rearrange itself, and this will mean
losses to some and gains for others. The inflationary effects of the
monetization of debt, the pyramiding of credit, are then reversed.
The man who deposited the $100 is pressed for payment by creditors,
so he withdraws his money. The banks are faced with either heavy
(and unfulfillable) specie demands, or at least with credit and currency
withdrawals. The bank calls in its loans, sells its property,
and begins to liquidate. The man who bad borrowed the $90 now must pay up, with interest. He goes to his bank, takes out the $90, and
his bank has to call in the $81 it had loaned out. The $900 built on
the original $100 disappears, again as if by magic. This is the process
of demonetization of debt, and it is clear why there would be a drastic
decline in prices, and why a lot of banks would be closed, some of
The suffering imposed by depression is unfortunate, but it is the
price which must be paid for survival. If the consequences of runaway
inflation are to be avoided, then this discomfort must be borne.
The depression, lest we forget, is not the product of a defunct
capitalism, as the critics invariably charge. It is the restoration of
capitalism. Free banking, even without the legally enforced one
hundred percent reserve requirement, can never develop the rampant
inflation described here. The inflation came as a direct result
of State-enforced policies, and the State must bear the blame. Sadly,
it never does. It accepts responsibility for the politically popular
"boom" conditions, but the capitalists cause the "busts."
6. The Temptation to Return to the "Junk"
The analogy ends here, as far as I am concerned, with only one
unfortunate addition. The reformed addict, I am told, never completely
loses his desire to return to the "junk." The lure of the old
euphoria, the days of junk and roses, always confronts him. The
temptation to inflate once again is likewise always with us, and especially
during the transition (depression) period. America's 1929
depression is the best historical footnote to the unwillingness of an
economy to take its medicine and stay off of the "junk."
This much is certain, the deliberate inflating of a nation's circulating
media is an ancient practice which has generally accompanied a
decline of the national standards of morality and justice. The prophet
Isaiah called attention to the coin debasing of his day, including it in
a list of sins that were common to the society. They are the same
social conditions of our own era.
How is the faithful city become an harlot! it was full of judgment;
righteousness lodged in it; but now murderers. Thy silver is become
dross, thy wine mixed with water: Thy princes are rebellious,
and companions of thieves ... (Isa. 1:21-23a).
Debased currency is a sign of moral decay. In the final analysis, inflation is not just a question of proper economic policy. Above all,
it is a question of morality. If we should permit the State to continue
its fraud of indirect taxation through inflation, then we would have
little argument against what is clearly the next step, the final removal
of all natural resistance to inflation through the establishment of a
world banking system. Mises warned half a century ago that the
establishment of a world bank would leave only panic as the last
barrier to total inflation.
In the realm of practical recommendations, at least two seem
absolutely imperative. The first is simple: completely free coinage
as a right of private property, with the government acting as a disinterested
third party ready to step in and prosecute at the first sign
of fraud on the part of the private firms. Any debasement of these
private coins would be prosecuted to the limit of the laws. The private
mints would therefore find it advantageous to keep continual watch
over each other's coinage, calling the State's attention to any sign of
fraud. By eliminating the present State monopoly of coinage, private
competition could act as a barrier to monetary fraud. Without
this mutual competition, the State's monopoly of coinage can continue,
with only minor checks on debasement. Private coinage would
never eradicate personal greed, of course, but mutual avariciousness
would tend to place checks on the fraudulent practice of theft through debasement.
The second recommendation, free banking, is similar to the first
one of free coinage. The banks must be made to gain their profits
from the charging of storage costs, clearing house operations for
checks, and the investment of private trust funds. When banks
create credit (and the power of credit creation is precisely what defines
a bank, as distinguished from a savings and loan company),
they charge interest on loaned funds which have been created by
fiat. There are no gold or silver reserves backing this money, yet the
banks profit by lending it. It involves fraud, and it is therefore immoral.
The practice must be hindered.
Mises argues that free banking will keep bankers honest.
Mutual competition will tend to destroy banks that are insolvent
because of their heavy speculative policies of credit creation. Bank runs
will tend to drive the less conservative banks out of business. There may
be some credit creation, but very little in comparison to that which
exists today, when the governments support fractional reserve fraud.
He fears a law which would require one hundred percent reserves for
banks, however, for the power of the State to demand one hundred
percent reserves implies the power to demand ninety-nine percent
reserves, ninety-five percent reserves, fifty percent reserves, or ten
percent reserves. It is safer, he argues, to leave government out of
the picture completely, given the past failures of government to keep
the banking system honest. Fractional reserve banking is too tempting
to governments as a source of ready loans. Mises, in short, does not
trust the government bureaucracy when it comes to the regulation
of banking. I tend to agree with him on this matter.
Rothbard argues cogently for a State-enforced one hundred
percent reserve requirement for all banks. Any bank not abiding by
this must be prosecuted. It must be stressed that Mises is not absolutely
hostile to this recommendation, since he admits that "Government
interference with the present state of banking affairs could be
justified if its aim were to liquidate the unsatisfactory conditions by
preventing or at least seriously restricting any further credit expansion."
Mises is willing to let some regulation in on the grounds
of expediency; things are so bad today that any restrictive legislation
would be an improvement. Rothbard is arguing, however, in terms
of principle. Fraud is involved in fractional reserve banking, so it
must be eliminated by law. It is a strong argument. Unfortunately,
Rothbard sacrifices its cogency by his philosophical anarchism. If
there is no State to enforce the provision, how will his one hundred
percent reserve banking scheme be different, operationally, from
Mises' free banking?
In addition, Rothbard argues, the State must not be permitted to
extend beyond its own sphere into the economic realm by means of
the printing press. The government must not continue to hoard the
gold, which originally belonged to its citizens. The people must be
given the right to claim their gold. Preferably, the government
must not have the power to store gold and silver or to print receipts
(IOU's); this so-called "free" service, i.e., gratuitous service, is not
really one without costs. It must be paid for, either by direct taxation
or by the indirect taxation of counterfeit receipts. Invariably, the
temptation to print State counterfeits is too great, especially during
the crisis of war. Even the most moral of statesmen gives in. What
President can resist the possibilities of "taxation without legislation"
that greenbacks provide?
The coinage power must be left to private citizens who are subject
to competition from other citizens and to the enforcement by the
government of the private coins' stated weights and fineness. Logically,
one might argue, this would hold true for government enforcement of 100 percent reserves in banking, too. Perhaps so, but in any
case, the benefits of free banking, with or without the 100 percent
reserve law, would provide a remarkably sound monetary system.
And either way, the "withdrawal" pains -- depression -- could not be
Unless men and women are ready to face the consequences of the
necessary "withdrawal" period and the sufferings that accompany it,
unless they take a moral stand against this fraudulent and suicidal
drug of inflation, demanding that the government cease its efforts
to promote the "boom" conditions, then the end of civilization as we
now it now is in sight. Either we destroy the fraud of unbacked
paper currency and unbacked bank credit, or the fraud will destroy
us -- morally, economically, politically, and spiritually.
[I wrote this in 1965. It was published as a pamphlet. I reprinted it with minor changes in my book, An Introduction to Christian Economics in 1973. The book is online here. I have removed the footnotes.
To see what a dollar bought in 1965, use the inflation calculator of the Bureau of Labor Statistics. It is here.]