The Review of Austrian Economics

, Volume 7, Issue 2, pp 49–74 | Cite as

How is fiat money possible? — or, the devolution of money and credit

  • Hans-Hermann Hoppe
Articles

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References

  1. 1.
    See on the following, in particular Carl Menger,Principles of Economics (New York: New York University Press, 1981); idem,Geld, in Carl Menger,Gesammelte Werke, vol. 4, F. A. Hayek, ed. (Tübingen: Mohr, 1970); Ludwig von Mises,Theory of Money and Credit (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1971); idem,Human Action: A Treatise on Economics (Chicago: Regnery, 1966).Google Scholar
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    Friedman, “The Resource Cost of Irredeemable Paper Money,” p. 646; also idem,Money Mischief: Episodes in Monetary History (New York: Harcourt Brace Jovanovich, 1992), chap. 10. Among the suggestions for an alternative fiat money “anchor” recently considered by Friedman, the “frozen monetary base rule” deserves a brief comment (see Friedman, “Monetary Policy for the 1980s,” inTo Promote Prosperity, J. H. Moore, ed. [Stanford: Hoover Institution, 1984]). In one respect this rule represents an advance over his earlier 3 to 5 percent monetary growth rule. His advocacy of the latter rule was based essentially on the erroneous—proto-Keynesian—notion that money constitutes part of social capital, such that an economy cannot grow by 3 to 5 percent unless it is accommodated to do so by a proportional increase in the money supply. In contrast, the frozen monetary base rule indicates a recognition of the old—Humean—insight that any supply of money is equally optimal or, in Friedman's own words, that money's “usefulness to the community as a whole does not depend on how much money there is” [Friedman,Money Mischief, p. 28). Yet otherwise the proposal represents no advance at all. For how in the world can a monopolist be expected to follow a frozen monetary base rule any more than a less stringent 3 to 5 percent growth rule? Moreover, even if this problem were solved miraculously, this would still not alter the monopoly's character as an instrument of unilateral expropriation and income and wealth redistribution. For the monopolist, apart from offering depositing and clearing services (for which his customers would pay him a fee), would also have to perform the function, to customers and non-customers alike, of replacing old, worn-out notes—one-to-one and free of charge—with new, identical ones (otherwise, who would want to replace a permanent commodity money by a perishable fiat money?). Yet while the costs associated with this task may be low, they are definitely not zero. Accordingly, in order to avoid losses and recoup his expenses, the monopolist cannot butincrease the monetary base—and hence one would essentially be back at the older monetary growth rule.Google Scholar
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    On the following see in particular Murray N. Rothbard,The Mystery of Banking (New York: Richardson and Synder, 1983); idem,The Case for A 100 Percent Gold Dollar (Auburn, Ala.: Ludwig von Mises Institute, 1991); Mises,Theory of Money and Credit; idem,Human Action; also Walter Block, “Fractional Reserve Banking: An Interdisciplinary Perspective,” inMan, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, Walter Block and Llewellyn H. Rockwell, Jr., eds. (Auburn, Ala.: Ludwig von Mises Institute, 1988); J. Koch,Fractional Reserve Banking: A Practical Critique (Master's thesis, University of Nevada, Las Vegas, 1992).Google Scholar
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    For a critique of White and Selgin as misinterpreting the fundamental thrust of Mises's theory of money and banking see Joseph Salerno, “The Concept of Coordination in Austrian Macroeconomics,” inAustrian Economics: Perspectives on the Past and Prospects for the Future, Richard Ebeling, ed. (Hillsdale, Mich.: Hillsdale College Press, 1991); idem, “Mises and Hayek Dehomogenized,”Review of Austrian Economics 6, no. 2 (1993): 113–46.Google Scholar
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    White,Currency and Competition, p. 157; Selgin,The Theory of Free Banking, p. 137.Google Scholar
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    See Block, “Fractional Reserve Banking: An Interdisciplinary Perspective,” p. 30.Google Scholar
  25. 28.
    For a critique of this error see Rothbard,America's Great Depression, pp. 39–43; Hans-Hermann Hoppe, “Theory of Employment, Money, Interest, and the Capitalist Process: The Misesian Case Against Keynes,” inThe Economics and Ethics of Private Property, Hoppe, ed. (Boston: Kluwer, 1993), pp. 119–20, 137–38.Google Scholar
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    Selgin,The Theory of Free Banking, p. 54–55.Google Scholar
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    Ibid., pp. 61–62.Google Scholar
  28. 31.
    See Friedman and Schwartz, “Has Government Any Role in Money?”Google Scholar

Copyright information

© The Ludwig von Mises Institute 1994

Authors and Affiliations

  • Hans-Hermann Hoppe
    • 1
  1. 1.the University of NevadaLas Vegas

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