Chapter Overview: 20


“Money would be better supplied by competition among private issuers than by the state.”
—Arthur Seldon 


 Money is one of the great inventions of humanity, along with such other developments of human ingenuity as agriculture, art, contract, insurance, language, law, markets, music and science. Money evolved gradually through usage, tradition, and imitation, in the same manner as the evolution of language, law, and markets. 2

The principal characteristic of money is that it is a medium of exchange. Ideal money would be acceptable as payment anywhere in the world; it would hold its value, and would be a reliable unit of account for recording the assets and liabilities and the profits and losses of individuals and businesses.

As early as ancient Greece and Rome, rulers seized upon the fact that monopoly control of money enabled the state to expropriate property of their subjects in order to augment taxation.

It is widely believed that society cannot have money unless it is issued by political states for example England, Japan, and the United States of America. Nothing could be further from the truth, as this chapter undertakes to demonstrate. Non-state issuers of money have existed at various times and places in the past.

In the 21st century, the only thing stopping private issuers from offering money has always been the jealousy and coercive power with which the state guards its money monopoly.

This chapter posits that state monopoly issues of money are in process of becoming discredited by constant over-issuance and consequent depreciation; and that eventually, and probably sooner than later, people will reject state issued monies in favor of monies issued by competing, non-state issuers who will keep the supplies of their monies so limited and safe as to retain purchasing power value over the long term.


Money in trade to facilitate barter; the division of labor

Before the development of money, commerce occurred by means of barter—the direct and immediate exchange of goods or services. With the advent of agriculture there arose the division of labor by which, for example, some people were farmers while others would make tools to facilitate labor. Money became essential to the development of the division of labor. Without money people would be stuck in a barter economy, which is characterized by extreme poverty.

An 1874 newspaper illustration from Harper's Weekly, showing a man engaging in barter: offering chickens in exchange for his yearly newspaper subscription.

An 1874 newspaper illustration from Harper’s Weekly, showing a man engaging in barter:
offering chickens in exchange for his yearly newspaper subscription.

Metal coin money

A 640 BC electrum coin from Lydia

A 640 B.C.E. electrum coin from Lydia

Relatively early in the history of money, metal coins became the most useful money because, unlike foodstuffs or commodities in common use, which had been used as money, metal is not perishable and retains its utility for a long time. The first metal coins known in history appeared in the kingdom of Lydia in ancient Greece about 600 years B.C.E.

Paper money 

Paper, printing from movable blocks and paper money were all invented in China between the first century B.C.E. and the 11th century C.E. 3 Knowledge of the use of paper money in China was communicated to Europe by Marco Polo (1254-1324) in his famous book, The Travels of Marco Polo (ca. 1300).

A Yuan dynasty printing plate and banknote

A Yuan dynasty printing plate and banknote

Once paper money became widely acceptable as a medium of exchange, it had a beneficial effect on trade and commerce. Paper money eliminated the problems of dealing with coins in bulk. It was during this time that bills of exchange came into use. A bill of exchange was a written document stating that a specified amount of money was to be paid at a stated time and place.

During the renaissance in northern Italy, bills of exchange were issued by bankers in exchange for a deposit of metallic money, such as florins of Florence or the ducats of Venice. The bills of exchange became a medium of exchange—that is money—when they became so widely accepted as being as good as gold or silver money that they were traded among merchants. 4

Digital electronic money

In the early 21st century, in economically developed societies, money is transferred in exchanges most often in digital electronic form, by inter-bank transfers, electronic payments by depositors from their accounts, debit cards and credit cards. Mobile telephones have become “smart phones” that include digital computer capacity to access money in a bank account.

Mobile telephone banking—making banking available to poor people

Banks and banking have either been unavailable or impractical for the poorest of the world’s people who constitute some 40% of global population as of the early 21st century. The amounts of money that pass through the hands of the poor ordinarily are so small that it is uneconomic for a bank to provide accounts for them.

M-Pesa agent in Tanzania

M-Pesa agent in Tanzania

Mobile telephony and digital electronic banking began changing this sad picture for the better in the first decade of the 21st century. The costs of banking via mobile telephone technology are so low that banks in some less developed countries are beginning to welcome this kind of business.

For example, M-Pesa (for mobile, pesa is Swahili for money) is a mobile-phone based money transfer and micro financing service for Safaricom and Vodacom, the largest mobile network operators in Kenya and Tanzania. Currently the most developed mobile payment system in the world, M-Pesa allows users with a national ID card or passport to deposit, withdraw, and transfer money easily with a mobile device.


Inflation rising tide

Banks and inflation

The word “inflation” has come to mean the rate of increase in producer and consumer prices. However, price inflation is the consequence of state inflation of the money supply. Absent state inflation of the money supply there would be no price inflation.

In his lectures, Andrew Galambos stated that American banks were lackeys of the state. That statement is true. The largest of American banks are the primary means of selling U.S. Treasury debt and are used by the Federal Reserve as instruments of inflating the nation’s money supply. The full text of this chapter offers a more thorough description of this phenomenon.

Since the creation of the U.S. Federal Reserve System in 1913 inflation of the money supply by the Fed has eroded the value of the U.S. dollar by 96% in terms of the Consumer Price Index and by over 98% in relation to the market price of gold.

The image below shows that $100 in the year 1900 would only be worth $3.48 in the year 2010.

Money Purchasing Power of U_S_ Dollar

Economist John Maynard Keynes described monetary inflation as follows: “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.” 5

Boom and bust: state-caused depressions

The great economist Ludwig von Mises explained that the unchecked issuance of paper money and extension of bank credit, whether by the state or by private banks was bound to stimulate repeated boom and bust cycles.  6

Every depression in U.S. history is attributable in whole or at least significant part to the U.S. expansion of money and credit beyond what would ever have occurred in the absence of the state.

For example, in America’s financial crisis of 2008, according to John D. Taylor, “starting in 2003-05, [the Federal Reserve] held interest rates too low for too long and thereby encouraged excessive risk-taking and the housing boom. It then overshot the needed increase in interest rates, which worsened the bust.” 7


There is good money and bad money. For purposes of this chapter, good money is a medium of exchange that is also a reliable store of value, while bad money is a medium of exchange that is not a reliable store of value.

Historically, money issued by a political state has been bad money because the state continually debased and depreciated its money. In comparison, money issued by non-state issuers has often been good money.

Private issue money

There is a long history of privately issued money; that is money not issued by a political state.

In renaissance Italy, starting in the 14th century, paper bills of exchange came into use. The bills of exchange were private issue money, backed by gold coins, the florin among others, issued by a city-state. Bills of exchange were used to facilitate the transfer of money from customer to shipper, from lender to borrower and from borrower to lender. The bills of exchange were widely accepted by merchants as being as good as gold.

The Florentine florin gold coin, struck from 1252 to 1533, played a significant role in commerce. Many Florentine banks were international super-companies with branches across Europe; consequently, the florin became the dominant trade coin of Western Europe for large scale transactions. In the fourteenth century, a hundred and fifty European states and local coin issuing authorities made their own copies of the florin. 8

Florin, found as part of the Sroda Treasure which was a hoard of coins and precious gems from the 14th century, discovered in what is now the Czeck Republic in the 1980's.

Florin, found as part of the Sroda Treasure which was a hoard of coins and precious gems from the 14th century, discovered in what is
now the Czech Republic in the 1980s.

Historically, the paper currency of countries was often handled entirely by private, commercial banks. Within a particular country many different banks or institutions might issue banknotes, which were accepted as a form of money.

English and Scottish banks issued banknotes from 1694 to 1844. Scottish bank money issuance was almost totally unregulated. There were many competing banks issuing notes for £ 1 and above. 9

An example of a provincial English banknote: a £1 note issued in 1814 by the Gloucester Old Bank.

An example of a provincial English banknote: a £1 note
issued in 1814 by the Gloucester Old Bank.

In 1787, Birmingham was England’s second largest city and a center for manufacturing. Matthew Boulton (1728-1809) of Birmingham was a manufacturer of metal buttons and a business partner of Scottish engineer James Watt of steam engine fame. Because of a shortage of coin money issued by the Royal Mint of Britain, in order to pay his workers, Boulton decided to issue copper coins bearing the markings of his firm. By innovating new technologies Boulton made coins of very high quality. Eventually Boulton made millions of coins for Britain and other countries, and even supplied the Royal Mint with up-to-date equipment.

1792 portrait of Matthew Boulton (1728-1809)

1792 portrait of Matthew Boulton (1728-1809)

Throughout much of Britain other English manufacturers followed the lead of Boulton and produced a multitude of copper coins, and even some silver coins, until the British Parliament suppressed private issuance of coinage in 1821. Then, starting in 1844, in order to achieve a complete money monopoly the British state suppressed the freedom of private banks to issue notes in England, Scotland, and Ireland. 10

Until 1863, during the Civil War, there was no national money of the United States. Money was either gold and silver coins or banknotes issued by state banks. For details  see the full text of this chapter.


Before paper money came into use and the money of a country was metallic coins, rulers established a monopoly of the minting of coins. The monopoly status of the ruler’s money issuance was signified by the sovereign’s image stamped upon coins.

Wherever a strong, centralized state existed, eventually the rulers would use their monopoly of money issuance to  steal from the people by seigniorage, debasement, and inflation of money.

Murray Rothbard in the mid-1950's.

Murray Rothbard in the mid-1950’s.

Murray Rothbard explained seigniorage as follows. “. . .[T]he mint melted and recoined all the coins of the realm, giving the subjects the same number of ‘pounds’ or ‘marks,’ but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses . . . The profits of [such] debasement were . . . claimed as a ‘seigniorage’ by the rulers.” [Ref] Quoted from Rothbard, Murray N. What Has Government Done to Our Money? (1961), page 32 [/ref]

With the advent of paper money, rulers used their money monopoly to issue paper money and to require that the state’s paper money be accepted as the only money of the realm. That requirement is the source of the term “fiat money,” in which the word “fiat” comes from the medieval Latin word meaning “let it be done,” which was synonymous with the decree or commandment of a ruler. 11

The fiat money status of U.S. currency, Federal Reserve Notes, is signified by the legend “legal tender for all debts public and private” that is printed on all Federal Reserve Notes. The U.S. Legal Tender Act of 1862, authorized issuance of paper money by the U.S. to finance the Civil War without raising taxes. The paper money depreciated in terms of gold and became the subject of controversy, particularly because debts contracted earlier could be paid in this cheaper currency. The U.S. Supreme Court initially held the Legal Tender Act to be unconstitutional, but soon reversed itself and upheld the legality of the Act. 12

Note to the left of George Washington's image the verbiage, "This note is legal tender for all debts public and private."

Note to the left of George Washington’s image the legend stating that
“This note is legal tender for all debts public and private.”

The creation and mandatory use of state-issued fiat money freed political states from the restraints of redeeming their monies in gold and enabled them to inflate the money supply at will as a means of augmenting the state’s revenues from taxation.

State suppression of privately issued money

Once a strong, centralized, political state possesses a well-entrenched money monopoly, it will suppress competition to its money. Historical examples are provided in this chapter. In 2009 there was introduced a non-state money payment system called Bitcoin and an accompanying form of digital, electric money. Agencies of the U.S. federal state asserted jurisdiction to control operation of Bitcoin, and in 2013 seized assets of Mt. Gox, a bitcoin exchange based in Tokyo, Japan. 13

A brief history of state money fiascos

Volumes of history have been written on debasements and inflations. We present here only a few more notable examples and their consequences.

A piece of the original edict of Diocletian.

A piece of the original edict of Diocletian.

Rome: The silver Denarius was in daily use as the principal money of the Roman Republic and the Roman Empire (509 B.C.E. to 476 C.E.). During a fifty-year period in the third century C.E. the rulers of Rome reduced the silver content of the Denarius to one five-thousandth of its original level. 14 This caused tremendous hyperinflation, during which the state blamed merchants for high prices resulting from debasement of the Denarius. In 301 C.E. the Emperor Diocletian issued an edict fixing the prices of thousands of items in an effort to stop rising prices. The edict imposed the death penalty for selling or buying above the legally fixed price. To avoid losses merchants stopped offering goods for sale and farmers stopped raising food for sale, limiting their production to just what they needed for themselves. To combat the shortages of everything subject to price controls, the edict of Diocletian imposed punishment by death for withholding farm products and other goods from the market. The edict caused so much havoc that it was repealed, but not before a great deal of blood was shed both in civil strife and in enforcement of the edict.

John Law (1671-1729), Scottish economist

John Law (1671-1729), Scottish economist

France: In 1716 John Law of Scotland persuaded the rulers of France that issuance of paper money could pay off massive debts of the monarchy and restore prosperity in France. Paper money issued in France starting in 1716 became worthless by 1720. The money hyperinflation of this time caused financial ruin to all but those clever enough to use the paper money to buy real assets. People began to shun the paper money and resort to the gold and silver coins (specie) that they trusted. The regents then ruling France issued an edict making it illegal to use specie.

Consequently all specie disappeared from circulation and with no money of any value in circulation the commerce of France descended into chaos and economic depression with people going hungry even amidst the country’s abundant farmlands. 15

Another devastating inflation occurred in France during the French Revolution of the late 18th century. Price controls, known as The Law of the Maximum, were instituted to combat rapidly rising prices for the necessities of life. Farmers and merchants charged with violation of the wage and price controls were sent to the guillotine for execution during the Reign of Terror of 1793-1794.

Germany: In 1914, immediately before World War I, the national money of Germany, the mark, had an exchange value of 4.2 marks to the U.S. dollar. Following Germany’s defeat in WW I violent political revolutions erupted that were suppressed with military force. Out of this turmoil there emerged in 1919 something new for Germany, a political democracy known as the Weimar Republic.

In 1920 Germany’s central bank embarked on a policy of printing ever-increasing amounts of paper money based on the premise that this would stimulate the economy and fend off high unemployment. The unrestrained money printing caused a hyperinflation that climaxed in 1923 with German paper money becoming worthless, just after the exchange rate between the U.S. dollar and the Mark had fallen to 4,200,000,000,000 (4.2 trillion) to one, culminating the most sensational, but not the largest, monetary hyper-inflation in world history.

A man who lived through the years 1920-1923 in Germany described some of the effects of the hyperinflation as follows.

Anyone who had savings in a bank or bonds saw their value . . . obliterated . . . [A] salary of sixty-five thousand marks brought home the previous Friday was no longer sufficient to buy a packet of cigarettes on Tuesday . . .” 16

The hyper-inflation together with the Great Depression of the 1930s discredited democracy in Germany and predisposed many of the German people to look for a strong man to lead their country. German dictator Adolf Hitler seized this opportunity to take power over Germany in 1933.

Argentina: From 1967 to 1991 the cumulative rate of inflation was 2.1 billion percent (2,100,000,000%). In 1992 the Argentine state tried to eschew printing-press inflation by pegging the Argentine peso to the U.S. dollar. This required drastic cuts in state spending and government employment. Hyper-inflation was eliminated only to be succeeded by hyper-unemployment and social unrest. The state’s pension system went bankrupt at the climax of the inflation of 1967-1991. Starting in 1994 the system was changed to one of individual retirement accounts (IRAs) funded by workers’ payroll deductions. In 2001 the state took a large share out of these IRAs to pay international debts, replacing the confiscated assets with Argentine state bonds, which themselves became virtually worthless by 2008.

After eight years, 1991-1999, on a fixed exchange rate of one to one with the U.S. dollar, inflation re-emerged and quickly became a hyper-inflation climaxing with a 26,000% increase in prices in just thirteen months in 1999-2000. 17

At the peak of the Argentine hyperinflation in 1999-2000 the state’s fiat money lost purchasing power so rapidly that people rushed to spend their wage and salary payments on something of real value, such as food, as soon as they were paid.

By 2001 the state’s credit was exhausted. To continue its spending, the state expropriated three-fourths of the bank accounts and individual retirement savings of Argentines. This was done in a most deceitful way. In the early 1990s the state encouraged people to hold U.S. dollars in bank accounts and in their individual retirement savings, apparently to stem the flight of capital out of the country. Then in 2001-2002 the state forced these U.S. dollar assets to be converted into a new Argentine peso worth only one-fourth as much as the dollar assets it replaced.

Depositors protesting frozen accounts for fear they might lose value, or worse. February 2002.

Depositors in  a leading Argentine bank protesting frozen accounts February 2002.

By 2002 a quarter of the Argentine population was unemployed; and over half the population had incomes below the official poverty line. Rioters were looting supermarkets. People would fight over carcasses of cows when cattle-trucks overturned. Cash disappeared since only limited bank withdrawals were allowed. Barter was rampant in private transactions. The entire banking system was bankrupt.

Long ago, those Argentines who could do so moved out of the country as much of their assets as possible. 18

High inflation and increasing poverty returned to Argentina in the second decade of the 21st century. 19

The full text of this chapter includes discussion of state money fiascos in Zimbabwe, ancient China, England, and the United States.


In the United States, the massive buildup of debt at the federal and state levels could have dire consequences similar to those in other countries whose misfortunes are described in this chapter.  Such consequences are not inevitable, but they will be unavoidable unless America’s political and intellectual elite experience the political equivalent of an epiphany such as occurred in Germany in 1948 when Ludwig Erhard and Konrad Adenauer took the decisive steps towards economic freedom that launched West Germany’s postwar economic miracle. 20

Clash of Generations coverEconomics professor Lawrence J. Kotlikoff together with co-author Scott Burns has written a book entitled The Clash of Generations (2012) in which the first chapter is entitled “The United States is Bankrupt.” 21 Kotlikoff and Burns state: “Thanks to six decades of incredibly profligate and irresponsible . . . policy . . . the United States is bankrupt. . . You won’t learn this by looking at [the] nation’s official debt [called Public Debt of the U.S.] . . .  Unfortunately, the trillion official debt is but a small fraction of our nation’s true 1 trillion indebtedness . . . [which is] the value in the present (the present value) of all [U.S.] future spending obligations . . . net of all future tax receipts [or]. . . twenty-two times the official debt . . .” 22

In the U.S., unless corrective measures are taken to turn away from constant deficits, Americans could suffer all of the following consequences:

▪       rapidly escalating producer and consumer prices
▪       wage and price controls and consequent shortages of goods, including food
▪       crushing taxes on people at every level of income
▪       bankruptcy of the banking system
▪       breakdown of the system of payments which are bank-centered
▪       extremely high unemployment,
▪       widespread bankruptcies in state and local governments

When commerce has come to a virtual standstill because the only legally permitted money is worthless, human ingenuity will produce new, privately-issued monies that keep their value, that serve as a reliable medium of exchange, that make saving meaningful rather than an exercise in futility.

From 2010-2012, protests, riots, and demonstrations erupted in Greece in response to the government’s plans to cut public spending and raise taxes in order to deal with the nation’s financial problems. While it may seem that such events are far off for America, the reality is that spending at the federal and state levels is out of control, and unless there is a major course correct, we are headed in the same direction.

From 2010-2012, protests, riots, and demonstrations erupted in Greece in response to the government’s plans to cut public spending and raise taxes in order to deal with the nation’s financial problems. While it may seem that similar turmoil would not occur in the U.S., federal and state deficits and debts are so out of control that the U.S. is headed in that direction, absent a major course correction.


The full text of this chapter  includes analysis of the forms that good money of the future could take. In the meantime, a few things seem certain, or at least likely, about the future of money.

  • Eventually most of humanity will realize that a monopoly of money by a politically coercive state produces bad money which is used to steal from the people.
  • People will reject bad money and choose good money when they are free to do so.
  • Competitive private issuance of money will have a renaissance.
  • When and where there is competitive issuance of money, good money will prevail and bad money will go out of use and out of circulation.
  • Competitive issuers of money will succeed in having people use their money only if they back the money with valuable assets. Good money of the future could have ample backing of valuable assets, a topic discussed in the full text of this chapter.
  • Digital money seems likely to make it easier than it ever was in the past to deal with money, so easy that people of modest means will be using digital money as much as the more affluent. As of the year 2012 that was already happening for poor people in India and parts of Africa, for example, where digital, electronic transfers of money were enabling rapid, low cost banking to eliminate most of the risks and costs of dealing with paper money. 23
  • Digital technology will not turn bad money into good money. The U.S. dollar, the Euro, and the Japanese Yen, for example, are all fiat monies. Just because they can be used digitally does not make them good monies. Electronic digital technology could actually speed up the state’s destruction of its money, because the amount of money issued by a state can be multiplied much more rapidly by digital and electronic means than by the printing press, paper and ink.


It is foreseeable that in every political democracy the ideological pressure for perpetual inflation will lead to destruction of all fiat monies. Not until that happens will the political rulers of democracies give up, however unwillingly, their monopoly of money. As this chapter posits, if and when political money monopolies end, the people of the world already have the knowledge to establish dependable, asset-backed private-issue monies. That eventuality would be a monumental step forward in the ascent of mankind from slavery to freedom.


  1. This is Seldon’s summary statement of an idea of F. A. Hayek
  2. The sentence to which this note is appended is an observation of human progress expressed by F.A. Hayek (1899-1992) in his book The Fatal Conceit: The Errors of Socialism (1988), pages 9-10
  3. The Invention of Paper, Robert C. Williams Paper Museum, Georgia Institute of Technology (Georgia Tech) Wikipedia, List of Chinese Inventions, and Weatherford, Jack, The History of Money: From Sandstone to Cyberspace (1997), pages 125-126
  4. Weatherford, Jack, The History of Money: From Sandstone to Cyberspace (1997), pages 74-76
  5. Quoted from pages 235-236 of Keynes’ book The Economic Consequences of the Peace (1919), reproduced at The Every Day Economist, 
  6. Mises, Ludwig von, Human Action: A Treatise on Economics (3rd rev. ed. 1966), Chapter XX entitled Interest, Credit Expansion, and the Trade Cycle
  7. Quoted from “The Dangers of an Interventionist Fed,” by John D. Taylor, The Wall Street Journal, Op-Ed, March 29, 2012, John D. Taylor is a professor of economics at Stanford University. 
  8. Bernstein, Peter L., Against the Gods: The Remarkable Story of Risk (1996), pages 93-94; Weatherford, Jack, The History of Money: (1997), pages 74-76; Wikipedia, Florin (Italian Coin),
  9. Quoted from White, Free Banking in Britain cited above, at page 85.
  10. White, Free Banking in Britain cited above, at page 85.
  11. See “Fiat” in the Online Etymology Dictionary,
  12. See Wikipedia, The Legal Tender Cases,
  13. See Wikipedia, Bitcoin, and 
  14. Schuettinger, Robert and Eamonn Butler, Forty Centuries of Wage and Price Controls (1979), p. 21
  15. Mackay, Charles, Extraordinary Popular Delusions and the Madness of Crowds (2nd ed. 1852), Chapter 1, which is still the best account of the John Law paper money fiasco
  16. Haffner, Sebastian, Defying Hitler (2000), pages 54-58.
  17. Rojas, Maurcio, The Sorrows of Carmencita: Argentina’s Crisis in Historical Perspective (English language edition 2002, originally published in Spanish under the title Historia de la Crisis Argentina
  18. The foregoing is based primarily on Rojas, Mauricio, Historia de la Crisis Argentina (2nd ed. 2004), published in English under the title The Sorrows of Carmencita: Argentina’s Crisis in a Historical Perspective (2002). See also Acemoglu, Daron and James A. Robinson, Why Nations Fail: The Origins of Power, Prosperity and Poverty (2012), pages 383-384; and Wikipedia, Argentine Debt Restructuring,; “A Tear for Argentina’s Pension Funds,” by P. S. Srinivas, The Hindu Business Line, July 4, 2012,
  19. See “The ‘Walking Dead’: Dealing with the economic collapse in Argentina,” by Veronique de Miguel
  20. At the time West Germany, though a democracy, was still occupied by the U.S., British and French military. East Germany was under East German communist rule and the ultimate control of the communist Soviet Union dominated by Russia.
  21. Lawrence J. Kotlikoff is a professor of economics at Boston University; Scott Burns is a financial journalist and financial advisor.
  22. Quoted from Kotlikoff and Burns, The Clash of Generations, page 3
  23. See Wolman, David, The End of Money (2012), chapter 7
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