Let Us Deprive Governments or Their Monetary Authorities of ALL Power to Protect Their Money Against Competition

 About a year after being awarded the Nobel Prize in economics in 1974, he [Hayek] delivered a lecture on “International Money” in September 1975 at a conference in Switzerland. In early 1976, it was published in London as a monograph under the title Choice in Currency: A Way to Stop Inflation. He explained that under the influence of Keynes and Keynesian domination of monetary and macroeconomic policy, governments were invariably guided by short-run goals in the service of various special-interest groups. The consequence was the constant abuse of the printing press and a resulting price inflation to feed the seemingly insatiable demands of privileged and politically influential groups. 

Hayek now concluded that some method had to be found to free the ordinary citizen from the government’s monopoly control of the medium of exchange. The answer, he suggested, was allowing individuals the freedom to use whatever money they chose, instead of their being captives of the increasingly depreciated monetary unit imposed on the market by the government:

There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence. Nor could there be a stronger inducement to governments to ensure the stability of their money than the knowledge that, so long as they kept the supply below the demand for it, that demand would tend to grow. Therefore, let us deprive governments (or their monetary authorities) of all power to protect their money against competition: if they can no longer conceal that their money is becoming bad, they will have to restrict the issue.

    Make it merely legal and people will be very quick indeed to refuse to use the national currency once it depreciates noticeably, and they will make their dealings in a currency they trust.

    The upshot would probably be that the currencies of those countries trusted to pursue a responsible monetary policy would tend to displace gradually those of a less reliable character. The reputation of financial righteousness would become a jealously guarded asset of all issuers of money, since they would know that even the slightest deviation from the path of honesty would reduce the demand for their product.

Hayek’s proposal was for people to have the option to competitively select among the various currencies issued by governments.

—Richard M. Ebeling, “Friedrich A. Hayek and the Case for the Denationalization of Money,” in Monetary Central Planning and the State (Fairfax, VA: Future of Freedom Foundation, 2015), Kindle e-book.

Between Sept. 2008 & June 2014, the Monetary Base Has Increased by OVER 440% As Excess Reserves Sit at the Fed Earning Interest

What was the Federal Reserve’s response in the face of the busted bubbles its own policies helped to create? Between September 2008 and June 2014, the monetary base (currency in circulation and reserves in the banking system) has been increased by more than 440 percent, from $905 billion to more than $4 trillion. At the same time, M-2 (currency in circulation plus demand and a variety of savings and time deposits) grew by 35 percent. 

Why haven’t banks lent out more of this huge amount of newly created money, and generated a much higher degree of price inflation than has been observed so far? It is partly because, after the wild bubble years, many financial institutions returned to the more-traditional creditworthy benchmarks for extending loans to potential borrowers. That has slowed down the approval rate for new loans.

But more important, the excess reserves not being lent out by banks are collecting interest from the Federal Reserve. With continuing market uncertainties about government policies concerning environmental regulations, national health-care costs, the burden of the federal debt, and other government unfunded liabilities (Social Security and Medicare), as well as other political interferences in the marketplace, banks have found it more attractive to be paid interest by the Federal Reserve rather than to lend money to private borrowers. And considering how low Fed policies have pushed down key market lending rates, leaving those excess reserves idle, first under Ben Bernanke and now under Janet Yellen, has seemed the more profitable way of using all that lending power.

—Richard M. Ebeling, “Federal Reserve Policies Cause Booms and Busts,” in Austrian Economics and Public Policy: Restoring Freedom and Prosperity (Fairfax, VA: The Future of Freedom Foundation, 2016), Kindle e-book.

The Intl. Monetary Order of the 19th Century was the Creation of a PLANNING Mentality; Even the Gold Standard Was a Government-Managed System

In his 1942 book, This Age of Fable, German free-market economist Gustav Stolper pointed out:

Hardly ever do the advocates of free capitalism realize how utterly their ideal was frustrated at the moment the state assumed control of the monetary system. . . . A “free” capitalism with government responsibility for money and credit has lost its innocence. From that point on it is no longer a matter of principle but one of expediency how far one wishes or permits governmental interference to go. Money control is the supreme and most comprehensive of all government controls short of expropriation.

Even in the high-water mark of classical liberalism in the 19th century, practically all advocates of the free market and free trade believed that money was the one exception to the principle of private enterprise. The international monetary order of the 19th century, of which Wilhelm Roepke spoke in such glowing terms, was nonetheless the creation of a planning mentality. The decision to “go on” the gold standard in each of the major Western nations was a matter of state policy. 

A central-banking structure for the management and control of a gold-backed currency was established in each country by its respective government, either by giving a private bank the monopoly control over gold reserves and issuing banknotes or by establishing a state institution assigned the task of managing the monetary system within the borders of a nation. The United States was the last of the major Western nations to establish a central bank, but it finally did so in 1913. 

That even the gold standard was a government-managed monetary system was succinctly explained by economist Michael A. Heilperin in his book Aspects of the Pathology of Money (1968).

—Richard M. Ebeling, “The Gold Standard as Government-Managed Money,” in Monetary Central Planning and the State (Fairfax, VA: Future of Freedom Foundation, 2015), Kindle e-book.

The Interference in the Money Market by the Central Bank Completely Changes the Process of Interest Rate Formation

Some economists argue that it is not the central bank but market participants who determine longer term credit rates. This view is influenced by the classical economic theory where the interest rate equilibrates saving and investment. As argued above, without interference from the outside, the market rate may well converge to the natural rate which equilibrates saving and investment. But the interference in the money market by the central bank completely changes the process of interest rate formation. Now it is no longer the preferences of market participants but the expected action of the central bank that is pivotal in the formation of interest rates. But can the central bank not derive the natural interest rate by carefully analyzing economic developments? Unfortunately, no model designed by an economist is capable of capturing the cumulated knowledge in the heads of all economic actors needed to calculate the correct natural interest rate. It can only emerge from their exchange in the market. Hence, despite their technical refinements, all the models used by central banks to steer the market rate to the natural rate must be inadequate and lead to errors in interest rate formation.

—Thomas Mayer, Austrian Economics, Money and Finance, Banking, Money and International Finance 8 (London: Routledge Taylor & Francis Group, 2018), 68-69.

Governments Engage in “Disguised Absolutism” When They Arrogate to Themselves the Right to Cover Deficits by Issuing Notes

The socialistic or semi-socialistic state needs money in order to carry on undertakings which do not pay, to support the unemployed, and to provide the people with cheap food. It also is unable to secure the necessary resources by means of taxation. It dare not tell the people the truth. The state-socialist principle of running the railways as a state institution would soon lose its popularity if it was proposed, say, to levy a special tax for covering their running losses. And the German and Austrian people would have been quicker in realizing where the resources came from that made bread cheaper if they themselves had had to supply them in the form of a bread tax. In the same way, the German government that decided for the “policy of fulfillment” in opposition to the majority of the German people, was unable to provide itself with the necessary means except by printing notes. And when passive resistance in the Ruhr district gave rise to a need for enormous sums of money, these, again for political reasons, were only to be procured with the help of the printing press.

A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, that is, of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism. 

—Ludwig von Mises, The Theory of Money and Credit, trans. H. E. Batson (Indianapolis: Liberty Fund, 1981), 254-255.