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Book Review: Money and the Nation State

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Money and the Nation State
edited by Kevin Dowd and Richard H. Timberlake Jr. (New Brunswick, N.J.: Transaction Publishers, 1998); 453 pages; $24.95.

For the entire 20th century, governments have fought a world war against gold as an international monetary standard. In its place, governments have imposed a system of monetary nationalism, with each government controlling and managing its own paper-money currency.

For thousands of years, people had chosen through their market transactions to use commodities such as gold and silver as the preferred media of exchange. They were commodities in wide and high demand by many of the participants in the market; they were relatively easy to transport and readily divisible into sizes and amounts to facilitate transactions at agreed-upon terms of exchange. But most important, they were limited in supply and not easily reproduced; to get more gold or silver, men had to devote scarce resources and labor to discover it and mine it out of the ground. Greater supplies would be forthcoming only if the market forces of demand suggested that it was profitable to dig more of it out of the earth rather than use those scarce resources and labor to manufacture other things consumers might prefer to have instead.

Precisely because money is the medium through which people trade and have access to each other’s goods and services, governments soon realized that control over the production and supply of money would enable them to acquire the wealth and riches that others in the society had produced through their productive labors. From early in recorded history, governments claimed the right to mint coins, declared their monopoly monies as legal tender, and punished those who violated their edicts. They used their power over money to clip and debase coins and to devalue the market prices of the coined money their subjects were forced to use and accept. They plundered peaceful, hard-working people to benefit those who controlled the state or who received favors and privileges from the political authorities.

In Money and the Nation State, a group of distinguished free-market economists explain the process by which state control over money has come about and what forms it has taken, especially in the 20th century. In “An Evolutionary Theory of the State Monopoly Over Money,” David Glazer traces the origin of government control of money from ancient times. Glazer suggests that governments originally sought monopoly control over money as a method of national defense against those inside and outside their territorial domain who might try to use financial resources to overthrow the existing political order. With the emergence of banking and financial intermediation, governments soon realized that a new avenue had developed that would give them even greater access to the wealth of others. Banks could create credit and lend it to the state for various domestic and imperialistic purposes.

In “Gold Standard Policy and Limited Government,” Richard Timberlake Jr. explains that even though the gold standard of the 19th century was managed by governments, the rule that there would be no issuance of additional currency notes in circulation unless there was a certain amount of additional deposits of gold in banks as extra reserves served as a crucial check on monetary expansion and abuse. But the emergence of central banks in the 19th century compromised the functioning of the gold standard system as reserve requirements on banks were lowered and political expediencies resulted in various breakings of the gold standard rules. As Timberlake points out, “The specie [gold] standard by its very nature is self-regulating. Clearly, a self-regulating system is incompatible with any kind of a policy-inspired manipulation. What is needed to maximize individual freedoms and economic productivity is a market-directed monetary system completely free from any possible governmental intervention.”

Murray N. Rothbard offers a detailed historical analysis of “The Gold Exchange Standard in the Interwar Years.” During the First World War, all the leading belligerent powers had gone off the gold standard in order to finance their war expenditures through monetary expansion. When the war ended and postwar inflations were brought to a close, the major powers did not return to the prewar gold standard. Instead, they established a “gold-exchange standard.” Under this system only two major nations officially were gold-reserve countries, the United States and Great Britain. Other nations held some gold, but mostly they held claims to U.S. dollars and British sterling as the reserve bases of their own national currencies. But because of the political manipulations and irrational economic policies the United States and Britain followed in the 1920s, the system was doomed to failure. And it finally collapsed, first with Britain in 1931 and then the United States in 1933 going off the gold standard.

In an essay on “Monetary Nationalism Reconsidered,” Lawrence H. White shows that government-managed monetary systems are incompatible with a fully integrated and smoothly functioning international economic order. He compares the workings of even the best managed national monetary systems with a fully free, private, and international monetary and banking order, and demonstrates the superiority of the latter.

Steve H. Hanke and Kurt Schuler discuss “Currency Boards and Free Banking.” Under a currency board, a nation’s central bank may not arbitrarily increase the amount of money and credit in circulation. A relatively stable foreign currency is selected as the reserve currency to back up the nation’s own monetary system. That nation’s money supply can expand or contract only on the basis of whether there is a one-to-one increase or decrease in the amount of the reserve currency held in the vaults of that nation’s central bank. Thus, a currency board is supposed to operate much like the gold-exchange standard was meant to function in the 1920s. The only difference is that the foreign money chosen as the reserve currency is not redeemable into anything else, such as gold. They argue that for some countries in Africa, Asia, and South America, currency boards have limited inflation and monetary manipulation almost as successfully as did the old gold standard in the 19th century.

Along with contributions by Thomas Cargill, Alan Reynolds, Leland Yeager, and others, Money and the Nation State offers valuable theoretical and historical analyses of the workings of the gold standard and the continuing danger from government control of the monetary system.

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    Richard M. Ebeling is a professor of economics at Northwood University. He was formerly president of The Foundation for Economic Education (2003–2008), was the Ludwig von Mises Professor of Economics at Hillsdale College (1988–2003) in Hillsdale, Michigan, and served as vice president of academic affairs for The Future of Freedom Foundation (1989–2003).