“If advocates of freedom were to make a list of New Year’s resolutions on December 31, one of the most important items should be ending government’s monopoly control over money. In a free society, people in the marketplace should decide what they wish to use as money, not the government.
For more than 200 years, practically all of even the most free-market advocates have assumed that money and banking were different from other types of goods and markets. From Adam Smith to Milton Friedman, the presumption has been that competitive markets and free consumer choice are far better than government control and planning — except in the realm of money and financial intermediation.
That belief has been taken to the extreme over the last 100 years, during which governments have claimed virtually absolute and unlimited authority over national monetary systems through the institution of paper money.
At least before the First World War (1914–1918) the general consensus among economists, many political leaders, and the vast majority of the citizenry was that governments could not be completely trusted with management of the monetary system. Abuse of the monetary printing press would always be too tempting for demagogues, special-interest groups, and shortsighted politicians looking for easy ways to fund their way to power, privilege, and political advantage.
The Gold Standard and the Monetary “Rules of the Game”
Thus, before 1914 the national currencies of practically all the major countries of what used to be called the civilized world were anchored to market-based commodities, either gold or silver. That was meant to place money outside the immediate and arbitrary manipulation of governments. Any increase in gold or silver money required private individuals to find it profitable to prospect for it in various parts of the world; mine it out of the ground and transport it to where it might be refined into usable forms; and then mint part of any new supplies into coins and bullion, with the rest made into various commercial and industrial products demanded on the market.
The paper currencies controlled by governments and their central banks were supposed to be issued only as claims to — as money substitutes for — quantities of the real gold or silver money deposited by members of the society in banks for safekeeping and the convenience of everyday business in the marketplace.
Government central banks were meant to see that the society’s medium of exchange was properly assayed and minted, to monitor and police private banks, and to make sure that the “rules” of the gold (or silver) standard were properly followed.
Bank notes were to be issued or deposit accounts increased in the banking system as a whole only when there had been net additions to the quantity of the commodity money within the economy. Any withdrawals of the commodity money from the banking system were to be matched by a decrease in the total quantity of bank notes in circulation and in deposit accounts payable in money.
Did governments always play by these rules? Unfortunately, the answer is, “No.” But, by and large, in the half-century or so before the beginning of the First World War, governments and their central banks managed their national currencies with surprising restraint. If we look for a reason for their restraint, a leading one was that for a good part of that era the predominant set of ideas was that of political and economic liberalism. But we need to remember that at that time “liberalism” meant an advocacy and defense of individual liberty, secure private property rights, free markets, free trade, and limited constitutional government under impartial rule of law.
But, nonetheless, national currencies were government-managed paper monies linked to gold or silver by history and tradition, and more or less left fairly free of direct and abusive political manipulation, owing to the prevailing political philosophy of the time, which considered governments as protectors of individuals’ rights to their lives, liberty, and honestly acquired property.“
Austrian Economics & Public Policy, pp. 328-329, Richard Ebeling