by Thomas E. Woods, Jr.

Recently
by Thomas E. Woods, Jr.: Ron
Paul’s Task: Build Up the Remnant

So IÂ’m
minding my own business on Twitter – where you can follow me
@ThomasEWoods,
by the way – and some guy starts suggesting that the Austrian
School economists are just shills and apologists for the bankers.

I restrained
myself from asking which Austrian books and authors he had read,
since IÂ’m not inclined to pose questions to which I already
know the answers. I noted to him that no one was more opposed to
the bailouts than the Austrian economists, and that this failure
to support rescues of financial institutions seems like odd behavior
for shills and apologists for those same financial institutions.

I asked him
if he thought the present banking system, one of the most regulated
and controlled industries in the country, was a free-market one.
He replied,
“How is existing banking system diff than a gold backed currency
issued by private banks? Isn’t that Austrian monetary utopia?”
(He then said he favored the nationalization of the Fed – the
FedÂ’s problem evidently being that it isnÂ’t socialistic
enough – and the issuance of money by the federal government
directly.)

Well, for one
thing, the Austrians simply describe the phenomena of money and
banking, and leave it to individuals to draw out the implications
of the analysis.

Money emerges
on the market as the most highly marketable commodity. This is how
society moves from barter to a money economy. People value the most
saleable good not just for its use value but increasingly for its
exchange value. In other words, gold – or whatever – is
valued not just for its ornamental and industrial uses, but also
because it can fetch you the goods you want. People want it, so
if you can get it, you can acquire the things you want from them.

Irredeemable
paper money could not possibly have emerged this way. It is not
a saleable good. No one values pieces of paper with politiciansÂ’
faces on them, so they would not be the most marketable commodity
in society.

Moreover, no
one can engage in economic calculation using a paper money introduced
ex nihilo by the state. With gold (or whatever the spontaneously
chosen money commodity happens to be), people can recall the exchange
ratios that existed under the latest stage of barter – one
gold unit for ten hats, three dozen oranges, or 100 pencils. But
with pieces of paper printed by the state and simply imposed on
people, how can anyone know how many of them ought to fetch a hat,
an orange, or a tomato? Another reason no one would spontaneously
adopt this system.

The system
my critic wishes to impose must be imposed via the police.
It could never emerge voluntarily. He doesnÂ’t see this
as an indication that something might be wrong with it.

The position
on money that seems to make the most sense in light of Austrian
analysis is not a gold-coin standard – though that would be
a vast improvement on what we have now – but the production
of money on the market according to the normal laws of commerce
and contract. Professor Jeff Herbener describes this system here.
Guido Hulsmann defends it
in The
Ethics of Money Production, which makes both a moral and
an economic case for it. No fiat-paper advocate has refuted Hulsmann.

Under such
a system, there would be no monopolistic legal-tender laws, no monopoly
of the mint, no special privileges of any kind.

The tendency
under such a system, nevertheless, would be toward a single commodity
money in use throughout society and indeed around the world. Money
emerges in order to lift society out of barter conditions. A situation
of multiple monies is a case of partial barter, and thus undermines
the very purpose of money. Hence it would gradually give way –
as people apprehended the facility with which they could consummate
their transactions by using the most marketable commodity as money
– to a single, universally accepted money.

The situation
that exists now, by contrast, involves

(1) a coercively
imposed monopoly on the production of money;

(2) monopolistic
legal tender laws, which artificially privilege the money issued
by the government-established central bank;

(3) a central
bank with the monopoly power to create legal-tender money out
of thin air, a power granted to it by the government, and with
a mandate to manipulate the money supply in the purported service
of maximizing output and minimizing unemployment and price inflation;

(4) interest
rates influenced by a monopoly monetary authority instead of by
the free market;

(5) implicit
and explicit bailout guarantees for large financial institutions;

(6) artificially
low borrowing costs for large institutions, since the public knows
these institutions will be bailed out;

(7) artificial
protection of the banks, in the form of government deposit insurance
and various Federal Reserve mechanisms, thereby keeping afloat
a fractional-reserve system that would be radically different
under a free market; under the existing system the banks will
therefore create more money out of thin air than they otherwise
would.

This is just
off the top of my head. A free-market banking system would have
no central bank and no “monetary policy.” It would not
rely on politicians to print up “interest-free money.”
It would not require any guns or badges. It would preserve the purchasing
power of peopleÂ’s money, as it did even under the classical
gold standard. It would make entrepreneurial profit-and-loss calculation
far easier, without the white noise introduced by the monetary manipulations
of the government or its privileged central bank.

ThatÂ’s
kind of different from the system we have now, isnÂ’t it?

But this critic
thinks we Austrians, of all people, defend the present system! It
is he who defends it. Oh, sure, he is against the Fed, but for trivial
reasons. He thinks there is a net social benefit to producing money
out of thin air. He just thinks the banks today are doing a bad
job of it.

Which of us
has the more fundamental critique of the present system? This is
an exercise for the student.

Reprinted
with permission from TomWoods.com.

June
26, 2012

Thomas
E. Woods, Jr. [send him
mail; visit his
website], a senior fellow of the Ludwig von Mises Institute,
is the creator of Tom
Woods’s Liberty Classroom, a libertarian educational
resource. He is the author of eleven books, including the New
York Times bestsellers Meltdown
(on the financial crisis; read Ron Paul’s foreword)
and The
Politically Incorrect Guide to American History, and most
recently Nullification
and Rollback.

Copyright
© 2012 Thomas
Woods

The
Best of Thomas Woods