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How the Government Insinuated Itself into Our Money (Audio)

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In a speech delivered at Liberty Fest Houston, Tom Woods explores the concept of money and how it has been corrupted by modern governments. This is a great introduction to economics to share with your friends. Woods covers the history of money, the historical reality of deflation versus inflation, and how the boom/bust business cycle was created by central planning. He explains why Peter Schiff’s prediction of the 2008 financial crisis was based on sound economics, and how interest rate manipulation will continue to distort global economies.

Conceptually speaking, there’s no reason for a government to be involved [in the creation of money]. People can get to this point just by figuring out, ‘I need things and the best way for me to get them is to use a marketable good.’ … This comes about spontaneously. However, it’s money after all, and the government is going to want a piece of this somehow. So little by little, the government is going to insinuate its way into this process. It will do so in ways that will at first seem harmless…”

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Highlights from Woods’ speech:

“You don’t have to assume anything other than people’s self interest. They want to improve their material condition, and they want the institutional setting in which that improvement is most likely to take place. They’re going to figure out eventually that if we have a highly marketable good that we know everybody will want, that eases this situation a bit. So I acquire berries or shells or whatever it is, and I know people want those things. Even if I don’t want them, I know I can get what I want in exchange for them. This is how we get money. Money is a medium of exchange. It is a thing that we use not in and of itself, but so that we can get other things. Typically, though you’re talking about something that starts off with some use value. Gold has use value. You can use it for industrial purposes. You can use it for jewelry. You can use it in all sorts of ostentatious ways. You can have a gold-plated sink on your private plane…

“Primarily people came to use [gold] for exchange. It became the most widely used medium of exchange, which made it money. Strictly speaking, that’s not really quite true when it comes to US history. We talk a lot about the gold standard in US history, but that’s actually a case of government intervention. The government decided that we were going to have this mono-metallic, mono-monetary system. Actually, the primary standard that the ordinary people used was a silver standard. If you look in the US constitution, the word “dollar” is used. And by dollar, they did not mean whatever money the government may arbitrarily choose to call a dollar. The dollar had an actual meaning. It was an existing coin. It was the Spanish Milled Dollar that was in wide circulation in the colonies and then in the United States. So it was a silver coin that people used. But the same principle was in effect – silver has various uses, but most people want silver because it can command other goods in exchange…

“Notice. In none of this process is a government necessary. Conceptually speaking, there’s no reason for a government to be involved. People can get to this point just by figuring out, ‘I need things and the best way for me to get them is to use a marketable good.’ And you don’t want 87 marketable goods. You want the most marketable good, because that will allow you to make the most exchanges with the greatest number of people across the largest expanse of land. This comes about spontaneously. However, it’s money after all, and the government is going to want a piece of this somehow. So little by little, the government is going to insinuate its way into this process. It will do so in ways that will at first seem harmless…

“First they want to monopolize the mint, the service that creates the coins. ‘Alight,’ you think, ‘Big deal. It’ll be standardized, and we’ll all know the coins are of good value. I guess I can go along with that.’ Then they start using – instead of it just being a gold ounce or a gold whatever, they start insinuating into the system the use of national names for the money. I think of a dollar as a 20th of an ounce of gold. I start thinking in dollars instead of gold. There’s nothing strictly wrong with that… But it gets people thinking in national units, instead of in terms of an international money accepted everywhere by people all over the world. You think of the dollar as some American thing, and so you begin to think of money as somehow emerging out of America or France or England. You associate it with a country instead of a worldwide division of labor…

“The final step is the doozy. That’s the one where the government finally takes the commodity backing away from the paper. So now you can’t convert that paper into anything other than new pieces of paper…

“When we look through US history, we look through the period of the early republic all the way up through the early 20th century – we would not say that prices increased very slightly every year, which is happening now. We would say that prices decreased every year. So that’s really what we should be aiming at: is prices falling. We shouldn’t say, ‘Well, it’s good that they’re only rising at a slow pace.’ We should want them to fall. That is terrible heresy from the point of view of monetary orthodoxy… [which says] ‘Deflation is associated with depressions.’ No it’s not…

“It’s interesting to note that the best period we’ve ever had in terms of economic growth in US history was 1870 to 1914. That was a period when the savings rate was very high. So so much for, ‘Saving hurts the economy. You have to go out and spend.’ Oh yeah? Well then how come the best, most sustained period of economic growth – 4% annualized – occurred when savings were really high? Answer? Well, they give you no answer, because they don’t even know that. Or that was when we had a precious metal monetary standard, when supposedly you can’t have economic growth under a monetary standard. We had the best growth ever in US history. Nothing, no response…”

“One study of 30 currencies found that not a single currency freely manipulated by its government or its central bank since the year 1700 had enjoyed price stability for at least a 30 year period. Then, of course, the system we have gives rise to the business cycle… ”

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