The Monopoly of Money Production

The current economic crisis has led to unprecedented action by governments across the globe. Government intervention has been drastic even in economies which are looked at as the most free and open, such as the United States. The consensus among many government officials and other talking heads, is that what led us into this crisis was a failure of the free market and as a result the only way to return to prosperity is through an increase in government regulation, spending, and overall involvement in the economy. However, these assumptions about the failure of the free market could not be further from the truth, as in fact the American economy, while more free then many, is still extremely far from what can truly be considered a free market. Apart from the existence of numerous regulations, laws, and layers upon layers of government institutions, the primary reason that a free market does not exist in the USA is because of the monopoly that exists over the production of money. The fact that money, one of the most important elements of an economy, is not allowed to freely adjust and adapt to market conditions, but instead is manipulated by the Federal Reserve (Fed) for the government's benefit, alone discredits any argument that a free market is what led us to our current economic situation, as a free market does not even exist. Furthermore, the absolute power the Fed has over the production of money and its manipulation of the supply of money, causes massive economic distortions, decreases in productivity, and an overall lowering of the wealth of American citizens.

Money was a free market innovation, brought about not by a government or ruler, but created freely in multiple societies throughout history. The reason for human's innovation of money was because before money, humans used barter (trade) to obtain the goods and services they desired from others. However, barter has two primary flaws, the first being the double coincidence of wants and the second the problem of divisibility. The double coincidence of wants is a problem that arises because of the fact that in order to obtain a good or service from another individual, you must own something that they want and will accept in return. This often made exchange among individuals difficult, as two parties did not always have goods or services that both desired. The second issue with barter is the problem of divisibility, and can be understood through the following example; let us assume that a person only owns a horse but wants to obtain a few fish from another individual. It will be very difficult for a trade to take place between these two individuals as it is not very easy to divide up a horse without the horse losing its value, and obviously the owner of the horse will not want to trade the entire horse for a few fish. So with barter, unless an individual has a good in the correct amount that is desired by the other person, trade will not be possible and for these reasons barter is a very inefficient means of commerce. As a result of the difficulties associated with barter, as time passed and economies progressed, people discovered certain goods which overcame these problems and these goods became what is known as a commodity money/currency. A commodity money was a good which was in high demand among most individuals in the community, had a relatively high supply, was easily divisible, durable, and held its value. People found that by accumulating this specific good, exchange became much easier as for any good or service they required they could just obtain it using the commodity money. Throughout history different cultures have used many items as a commodity money, things such as fish, sea shells, beads, barley, and most prominently and successfully, gold and silver.

When money was created and maintained in a free market as a commodity currency, it was a very efficient medium of exchange and allowed economies to reach unseen levels of prosperity. With commodity currencies, such as gold and silver, money played a simple role; it allowed for the exchange of goods to take place among more individuals, allowed people to accumulate (save) money in a more efficient manner, and ultimately led economies to faster and higher growth rates. However, money's role drastically changed when it moved from being a commodity currency to that of a fiat currency. In the United States this process started in the 1800s, however, it was ultimately completed with the creation of the Federal Reserve (1913) and the abolition of the gold standard. A fiat currency can be defined as "a money declared by government as legal tender". The paper bills which constitute the fiat currency in the USA are printed by the government and backed by nothing more than the government's word. Instead of being chosen by the free market as the money of choice, a fiat money is instead forced by rule of law on a society, and citizens have no choice but to use this currency as doing otherwise can be considered breaking the law. A fiat currency is very desirable to a government as its supply can easily be increased or decreased to meet the needs of those in power, however, the benefits of a fiat currency ultimately end with those in and connected to the government. To realize just how harmful a fiat currency is one needs to understand the true effects that the manipulation of a currency has on the economy as a whole. While the talking heads want you to believe that the constant increases in the money supply implemented by the Federal Reserve are beneficial, as they result in an increase in money flowing through the economy which magically results in an increase in the overall level of wealth, this is simply not the case. Instead an increase in the money supply results in inflation and a transfer of wealth away from private hands to government control.

Inflation can be defined as an increase in the money supply which subsequently leads to a decrease in the relative purchasing power of each dollar. It should be noted that this definition is different from the common perception of inflation, that being an increase in the price of goods, or an increase in the Consumer Price Index (CPI ). However, it is crucial to understand that an increase in the price of goods is a consequence of inflation, but not the cause of it. It is actually possible to have inflation but not necessarily see an accompanied rise in the price level, or to have an increase in the price level but not have any inflation (this can be further understood by reviewing this article on the topic). So when governments print more dollars what happens is each existing dollar loses value (or in other words purchasing power) as it creates a situation of a greater supply of dollars competing for an unchanged level of goods and services. It is through the inflation of the money supply that governments, in a relatively quiet manner, are able to transfer wealth away from private citizens.

As was mentioned earlier money is a medium of exchange, it allows people to exchange goods and services among each other without the hassles involved with barter. In a free market, people obtain this medium of exchange (money) through the production of goods and services. So for example, if a person want to obtain more money for the purchase of a big asset, such as a house, in a free market this means that they need to increase their contribution to the economy by producing more good or services. However, in the US while the aforementioned means of obtaining more medium of exchange may be true for most parties, it certainly does not apply to the government. In other words, the government does not produce more goods and services in order to obtain more money. When the government decides that they need more money, either they increase tax rates or they just turn to the Fed, who increases the supply of money by whatever amount is demanded by those in power. Since the government does not increase the wealth of society by producing more goods or services to obtain the money they want, whenever they increase the supply of dollars they are in effect transferring wealth away from private hands, which is reflected by the decrease in purchasing power that results from the inflation. While this process is bad enough, the fact that the transfer of wealth does not effect everyone equally but instead most severely effects those who are the least economically fortunate, people such as pensioners and those on a fixed incomes, reveals just how dangerous it is to leave the control of money in the hand of one entity.

When the government prints money, those who have first access to the new dollars benefit tremendously at the expense of those who access the money later on, or who have no access to the new funds at all. The reason for this is because when new dollars are introduced into the economy, prices do not automatically adjust to account for an increase in the medium of exchange that has seen no accompanied increase in the level of goods and services. As a result the government and the lucky entities who first receive these new dollars from the government (banks, special interest groups etc...) benefit twofold. First, they obtain money by simply transferring it away from private hands (as they have not increased their production of goods or services), and secondly the new dollars they obtain have not yet lost any of their purchasing power as prices have not had enough time to reflect the increased supply of money. This unfair situation is made even worse as an inflation of the money supply is most damaging to those at the bottom of the economic ladder. When the government prints more money the only effect it has on the lower class is to lower the purchasing power of their already limited wealth, as realistically they have little access to any of these newly created dollars. Even if some of these people end up receiving an increase in their pension, for example, because it is tied to the CPI, by the time they receive their small increase in payment, prices have already adjusted and each dollar is worth less making them no better off. However, the reality is most people in the lower class do not see an increase in their limited incomes due to inflation, and even if they do it is usually only increased by the government reported CPI, which does not truly reflect the decrease in purchasing power brought about by the massive increases in the money supply.

The harmful effects of inflating the money supply do not stop at the lower class, increases in the money supply do further damage to the economy by removing wealth and capital from productive free market actions, and directing it to unproductive actions. As was mentioned earlier because the government does not produce goods and services to obtain money, they are in effect transferring wealth and capital away from private hands into their control. Unfortunately, but not surprisingly, the government does not then direct the capital which it has diverted away from the private sector into productive and growing sectors, but instead to the areas of the economy which those in power "believe" need help. Or in other words, the government directs these funds to failing sectors (banks, car companies, insurance companies etc...), failing government institutions (Freddie Mac, Fannie Mae etc...), as well as other special interest groups, many of whom receive funds through hidden amendments to things such as emergency "stimulus" bills. Instead of leaving money in private hands where individuals will look to find areas to invest in that are most likely grow, prosper, and create a return on the money invested, the government diverts it away from the private sector through an action (inflating the money supply) which is misunderstood and in many cases falsely presented to the public as being a beneficial and essential means of returning an economy to growth. However, how can an action which basically boils down to an entity, the Fed, increasing the government's share of wealth, by decreasing the private sector's share, which the government then diverts to unproductive, wasteful, and failing entities (AIG, GM, Freddie Mac, Fannie Mae, Citigroup etc...), be beneficial for an economy. One needs to remember that while the private sector is motivated primarily by profits, governments and politicians are more motivated by lobbyist, constituents, special interest groups, and above all by the need for survival. And this fact alone makes it easy to see why money should be left under the control of private hands as they will move money throughout the economy in a far more beneficial manner then governments ever will.

To conclude, while the majority of people have falsely been brought to believe that the Federal Reserve and its monopoly control over America's fiat currency is an essential and beneficial tool for the prosperity of the economy, reality shows differently. When one actually examines its true effect, it becomes obvious that the Fed's ability to increase the money supply to any degree required by those in power, only has negative consequences for the growth and prosperity of the economy as a whole. The continued and frequent increases in the money supply during the current economic crisis are certainly not the answer to what ills the economy and instead will only result in a decrease in the overall productivity of the economy, as well as an unfortunate but often ignored decline in wealth of those most vulnerable. Furthermore, the monopoly control of money removes any validity from the argument that it was the free market that brought us into this mess, because when one of the most essential elements of an economy is controlled and manipulated for the benefit of those in power, a free market is certainly not in existence. Until the role of money returns to the use that it was originally intended for, as an efficient medium of exchange, and not used to further empower those in government, the economic situation in the long-run will only further deteriorate. As historian Robert Higgs so aptly put it, believing that simply increasing the money supply will increase the wealth of a nation, is like the belief that by taking water from the deep end of a pool and pouring it into the shallow end the water level will rise.