“If is worth recalling that money did not originate in the laws or decrees of kings and princes. Money, as the most widely used and generally accepted medium of exchange, emerged out of the market transactions of a growing number of buyers and sellers in an expanding arena of trade. Commodities such as gold and silver were selected over generations of market participants as the monies of free choice, because of properties that better facilitate the exchange of goods in the market place.
For almost all of recorded history, governments have attempted to gain control of the production and manipulation of money to serve their seemingly insatiable appetite to extract more and more of the wealth produced by the ordinary members of society. Ancient rulers would clip and debase the gold and silver coins of their subjects. Modern rulers — whether despotically self- appointed through force or democratically elected by voting majorities — have taken advantage of the monetary printing press to churn out paper money to fund their expenditures and redistributive largess in excess of the taxes they impose on the citizenry.
Today the process has become even easier through the mere click of a mouse or a tap on a computer screen, which in the blink of an eye can create tens of billions of dollars out of thin air.
Thus, monetary debasement and the price inflation that normally accompanies it have served as a method for imposing a hidden taxation on the wealth of the citizenry. As John Maynard Keynes insightfully observed in 1919 (before he became a “Keynesian”!),
‘By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and. while the process impoverishes many, it actually enriches some…
… The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million is able to diagnose.’ (The Economic Consequences of the Peace, pp. 235-236)
It is the corrosive, distortive, and destructive effects from monetary manipulation by governments that led virtually all of the leading economists of the nineteenth century to endorse the anchoring of the monetary system in a commodity such as gold to prevent governments from using their powers over the creation of paper monies to cover their budgetary extravagance. John Stuart Mill’s words from the middle of the nineteenth century are worth recalling:
[No] doctrine in political economy rests on more obvious grounds than the mischief of a paper currency not maintained at the same value with a metallic, either by convertibility, or by some principle of limitation equivalent to it….
… All variations in the value of the circulating medium are mischievous: they disturb existing contracts and expectations, and the liability to such changes renders every pecuniary engagement of long date entirely precarious…. Great as this evil would be if it [the supply of money] depended only on [the] accident [of gold production], it is still greater when placed at the arbitrary disposal of an individual or a body of individuals; who may have any kind or degree of interest to be served by an artificial fluctuation in fortunes; and who have at any rate a strong interest in issuing as much [inconvertible paper money] as possible, each issue being itself a source of profit. Not to add, that the issuers have, and in the case of government paper, always have, a direct interest in lowering the value of the currency because it is the medium in which their own debts are computed….
Such power, in whomsoever vested, is an intolerable evil. (Principles of Political Economy [1909 ed.], Bk III, Ch. XIII, pp. 544 & 546)
Austrian Economics & Public Policy, pp. 337-339, Richard Ebeling