Okay, it’s time for the second episode as to why the Fed would never survive in Libertarian North Columbia, which is featured in my book Northern Knights, available at Amazon, iBooks, and Nook, and will soon be coming to Kobo when I get around to uploading the work (I do a lot lol). So, today we’re talking about Rothbard’s take on the Genesis of Money and its Quantum Quantity.
If you missed Part I, you can click here for the read. If you read Part I and are ready to take a look as to why the Fed would never survive in Libertarian North Columbia, nor anywhere in the world for that matter, read on.
Genesis of Money
To understand why fiat currency doesn’t work in my own books and why it will ultimately fail in the real world, let’s take a look at how money works.
Unlike any other commodity, paper money is expected to be accepted everywhere by means of exchange. When we go to the grocery store, we expect our dollars to be accepted. When we go to get our car serviced, we expect our dollars to be accepted. The same goes for entertainment.
But how did money arise?
In all honesty, per Rothbard the genesis of money came about in the free market.
In a free market, we invest in and develop our own commodities to sell in order to gain more commodity. This can be any means of exchange. Say I have no paper but I have a pen and I want to write. If someone else has paper that I need and I have a bottle of water to give them because they’re dying of thirst, then we just traded commodities for one another’s benefit.
But what if the individual with the paper has water and needs food?
What if I have no food?
At this point, an indirect exchange must take place.
Rothbard pits indivisible commodities like tractors versus divisible commodities like butter. Person X has a tractor but needs food, water, and clothes. If all he has to sell is a tractor, he can’t buy each commodity unless the seller possesses them. However, let’s say he trades the tractor for butter, which he can then divide and use to buy what he needs.
Rothbard points to a snowballing effect with any divisible commodity being used as a medium. Since anything divisible can easily be used as a medium, society may adopt such a commodity to be used as a medium. When the commodity being used as the medium becomes particularly valuable, the demand for its use as a medium arises until it affects all portions of society, such as employment.
At that point, the commodity used in medium becomes money.
This also simplifies a transaction. For instance, back to my pen example above. Say I need fifty pieces of paper to brainstorm the next Lord of Columbia book and I exchange my water bottle for the fifty pieces of paper. At this point, the value I placed on my water is fifty pieces of paper. Now say I have a TV I want to sell.
I already charged fifty pieces of paper for the water, but Person Z doesn’t have any paper. But they do have hats. I then make a deal to sell the TV for one-hundred hats, and so on.
With the sole medium commodity, figuring out such exchanges becomes simplified and therefore, money is born and is integrated into society citing the butter as a commodity example I used from Rothbard, allowing every reckoned price to become “money-price.”
So, with butter being the means of exchange, everything would be priced in butter. The bottle of water might be worth one ounce of butter. The TV could be worth fifty ounces.
Another advantage of using a single means of exchange is if one’s a firm, it’s so much easier to calculate their profits and losses. Instead of estimating profits and losses by gaining three blankets, losing three shirts, and breaking even on towels, it’s much easier to use one universal unit, such as butter in this case.
If the commodity is gold, then we can calculate profits and losses in gold. Okay, I spent 400 ounces of gold and gained 600, netting 200 ounces.
One universal commodity became the means of exchange in every society since the dawn of man for this very reason. Rothbard uses examples such as beaver skins in Canada, iron hoes in West Africa, and sugar in the Caribbean, as well as for those early Americans in Maryland and Virginia, tobacco.
Wouldn’t This Argue in Favor of the Fed?
While at first glance it might seem as if Rothbard is arguing in favor of a single universal commodity, and he is, we still need to calculate value.
For this reason, two precious metals have always prevailed in almost every society so long as they were available.
Can you guess what they are?
Gold and silver. Silver and gold.
Copper also became popular in the event gold and silver weren’t available.
So, why gold and silver?
Two reasons: Superiority and scarcity.
Superior in terms of overall looks which Rothbard quotes to be “moneyish qualities,” and scarce enough to maintain value but not so scarce to the point it could be funneled out of use.
Also, gold and silver were highly divisible (think back to the butter example), they were portable, homogeneous, and durable. And when mixed properly, such coins could last thousands of years.
Unlike money, however, gold and silver can’t be printed out of thin air, meaning the value wouldn’t tank as you see in today’s world where the dollar devalues itself by the second. Remember in the last article I stated that for something that would’ve cost a dollar in my birth year of 1991 would cost $1.88 as of October 2019.
Think about what’s going to happen twenty-eight years down the road! At the current rate of the US Dollar, it’ll likely devalue by at least another 88% and if that’s the case we’re looking at the same commodity that would’ve cost one dollar in 1991 cost $3.53 in 2047.
God, I hope 2047 doesn’t get here too fast!
And if it does, I hope I’m traveling the world by that time.
What is the Optimum Quantity of Money?
This is a question many economists tend to ask themselves.
Rothbard states this question as, “What is the optimal quantity of money, what should the total money stock be, at the present time? How fast should it grow?”
However, such a question is absurd.
In any economy, every single resource of value is scarce in relation to human wants, and that includes money. If a good were not scarce, its value drops.
Ever wonder why Ramen noodles are so cheap at the supermarket but filet mignon costs nearly an arm and a leg?
It’s due to scarcity. While the noodles are rather abundant, the high-end steak isn’t.
So, Rothbard asks, “Why does the optimal supply of money even arise as a problem?”
His answer is simple: When certain money is established in the market, it does not and should not increase, as money performs virtually zero other social function rather than as a means of exchange.
See, money works in the opposite manner than goods.
When goods are more abundant, they become cheaper, which raises both purchasing power AND standards of living.
However, when money becomes more abundant, the opposite holds true. It loses its scarcity and therefore loses its value, which raises prices on goods, which will eventually cause the living standard to decrease. Finally, such an exchange medium will no longer be accepted since its abundance has made it essentially worthless in the market.
Now, does that mean we should stop mining gold?
Per Rothbard, of course not, because gold also has uses in a non-monetary role, unlike fiat currency. Gold watches, gold necklaces, gold rings, you name it, something out there is made of gold, and the more it’s used in a non-monetary fashion in the market, it still holds its value as money, but the overall price from a non-monetary standpoint becomes cheaper as in the case if the supply of gold watches were to increase.
Only more gold as MONEY is not needed.
Back to North Columbia
Money can be VERY confusing, which is why I’m talking about this entire issue in bits and pieces, without straying too far ahead.
Anyway, let’s return to North Columbia, where the metals gold, silver, copper, and diamonds are used as means of exchange. As stated above, each of these metals have non-monetary roles, so they can still be mined for other uses. However, in North Columbia, their use as money doesn’t increase, and it’s something the Libertarian North Columbians know quite well.
They also know that the Southpoint Imperial-owned central banks continually decrease the standards of living for their people, wherever in Gaia they’re patrolling, including South Columbia. While hyperinflation and taxation are used to continually fuel Southpoint’s ever-expanding military-industrial complex, the opposite holds true for our non-interventionist North Columbians.
In North Columbia, money is scarce but still abundant enough to be used as a means of exchange. Being that private enterprise goes unregulated by governments and instead is regulated by markets, demand for certain goods and commodities at heightened market competition (much lower production costs due to lack of unnecessary government regulation) allows goods to be sold at lower prices, while at the same time wages and benefits, due to such competition are forced to rise.
And it all starts with knowing how money comes into existence and realizing its optimal supply should halt when it is decided the commodity, in this case, gold and silver, should become used as money.
Source: Rothbard, Muray N. The case against the fed, pp: 8-13