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The Case Against the FED

The Case Against the FED

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Published by Rajat K Bose

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Published by: Rajat K Bose on Nov 23, 2010
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Counterfeiters are generally reviled, and for good reason.
One reason that gold and silver make good moneys is that
they are easily recognizable, and are particularly difficult to
simulate by counterfeits. "Coin-clipping/' the practice of
shaving edges off coins, was effectively stopped when the
process of "milling" (putting vertical ridges onto the edges
of coins) was developed. Private counterfeiting, therefore,
has never been an important problem. But what happens
when government sanctions, and in effect legalizes, counter-
feiting, either by itself or by other institutions? Counterfeit-
ing then becomes a grave economic and social problem
indeed. For then there is no one to guard our guardians
against their depredations of private property.

Historically, there have been two major kinds of legal-
ized counterfeiting. One is government paper money. Under a
gold standard, say that the currency unit in a society has
become "one dollar," defined as 1/20 of an ounce of gold. At
first, coins are minted with a certified weight of gold. Then,
at one point, the first time in the North American colonies in

The Ludwig von Mises Institute • 27

The Case Against the Fed

1690, a central government, perhaps because it is short of
gold, decides to print paper tickets denominated in gold
weights. At the beginning, the government prints the money
as if it is equivalent to the weight of gold: a "ten dollar" ticket,
or paper note, is so denominated because it implies equiva-
lence to a "ten-dollar" gold coin, that is, a coin weighing 1/2
an ounce of gold. At first, the equivalence is maintained
because the government promises redemption of this paper
ticket in the same weight of gold whenever the ticket is
presented to the government's Treasury. A "ten-dollar" note
is pledged to be redeemable in 1 /2 an ounce of gold. And at
the beginning, if the government has little or no gold on
hand, as was the case in Massachusetts in 1690, the explicit
or implicit pledge is that very soon, in a year or two, the
tickets will be redeemable in that weight of gold. And if the
government is still trusted by the public, it might be able, at
first, to pass these notes as equivalent to gold.

So long as the paper notes are treated on the market as
equivalent to gold, the newly issued tickets add to the total
money supply, and also serve to redistribute society's income
and wealth. Thus, suppose that the government needs
money quickly for whatever reason. It only has a stock of $2
million in gold on hand; it promptly issues $5 million in paper
tickets, and spends it for whatever expenditure it deems
necessary: say, in grants and loans to relatives of top gov-
ernment officials. Suppose, for example, the total gold
stock outstanding in the country is $10 million, of which $2
million is in government hands; then, the issue of another
$5 million in paper tickets increases the total quantity of
money stock in the country by 50 percent. But the new funds

28 • The Ludwig von Mises Institute

Murray N. Rothbard

are not proportionately distributed; on the contrary, the new
$5 million goes first to the government. Then next to the
relatives of officials, then to whomever sells goods and serv-
ices to those relatives, and so on.

If the government falls prey to the temptation of printing
a great deal of new money, not only will prices go up, but the
"quality" of the money will become suspect in that society,
and the lack of redeemability in gold may lead the market to
accelerated discounting of that money in terms of gold. And
if the money is not at all redeemable in gold, the rate of
discount will accelerate further. In the American Revolution,
the Continental Congress issued a great amount of non-re-
deemable paper dollars, which soon discounted radically,
and in a few years, fell to such an enormous discount that
they became literally worthless and disappeared from circu-
lation. The common phrase "Not worth a Continental" be-
came part of American folklore as a result of this runaway
depreciation and accelerated worthlessness of the Continen-
tal dollars.

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