Free market money does not need centralized monetary systems imposed from above, just as free trade does not need Free Trade Agreements. Under the fiat money regime, real money is held kidnapped, and free trade agreements between different countries are just part of the conditions imposed by the kidnappers. Free market money is morally superior to fiat money. Moreover, free market money is also of a higher quality than fiat money. This higher quality allows the market to be more efficient and, therefore, allows for greater productivity to be achieved in general terms. This circumstance results in price deflation, which is equivalent to an increase in people's quality of life. Any country that independently and unilaterally decided to back its fiat money with sound money would soon see the great benefits that this would bring to its population (in the same way, people would also benefit if its country decided to accept free trade with the whole world without setting conditions).
Fiat money is regulated and manipulated constantly by perfectly arbitrary central authorities. Although these authorities are supposedly subject to rules, these rules are continually modified at will. The only constant in monetary interventionism is its inflationism (in section 6.5.4, we will explain why monetary interventionism and inflation are immoral). As a consequence of this monetary interventionism, we find ourselves with money that depreciates over time and is unreliable (this leads to entrepreneurial errors). The poor quality of fiat money causes the market to be less efficient and, therefore, a lower productivity is achieved in general terms than that which would be facilitated by free or market money. These circumstances lead to a lack of coordination in the market and to price inflation, which ultimately equate to a relative decrease in the quality of life of people.
As explained in point 4.5 of this work, under conditions of freedom, those economic goods that facilitate the achievement of exchanges to a greater extent (both through space and time) are those that ultimately become money. Over the centuries, gold and silver became the goods most used in the intermediation of exchanges. These precious metals were accepted throughout the world regardless of the coin on which they were minted, since the basis of the value of these coins and the only thing that the minting was intended to ensure was the weight in gold or silver.
To the government's stamp no function was attributed other than to certify the weight and the fineness of the metal contained. Pieces worn by usage or in any other way reduced in weight beyond the very narrow limits of tolerated allowance lost their legal tender quality; the authorities themselves withdrew such pieces from circulation and reminted them. For the receiver of an undefaced coin there was no need to resort to the scales and to the melting pot in order to know its weight and content. On the other hand, individuals were entitled to bring bullion to the mint and to have it transformed into standard coins either free of charge or against payment of a seigniorage generally not surpassing the actual expenses of the process. Thus the various national currencies became genuine gold currencies. Stability in the exchange ratio between the domestic legal tender and that of all other countries which had adopted the same principles of sound money was thus brought about. The international gold standard came into being without intergovernmental treaties and institutions. (Mises, 1949, p. 776)
The culmination of these circumstances took place in the 19th century, the century of laissez-faire par excellence. Economic laws were leading societies towards the use of a single currency. And it was in that century that gold was crowned as the currency of choice in almost all countries. This was made possible by the use of monetary substitutes, the invention of the telegraph and the establishment of clearing houses. Precious metals were stored in the cellars of banks and banknotes began to be widely used as monetary substitutes for the common medium of exchange (immediately convertible into the corresponding metal standard of their presentation). Under these conditions, gold maintained its traditional superiority over silver when it came to maintaining its price in the long term and continued to be the most suitable currency for carrying out large transactions due to its higher price per unit of weight. But, in addition, under these conditions the historical advantages of silver became irrelevant (the lower price per unit of weight of silver made it the ideal money for small payments, as it was possible to divide it into units with low purchasing power). As a result, silver was gradually demonetized, and the number of countries whose monetary system operated on the basis of the Gold Standard spread throughout the world.
However, this monetary system carried within itself the seeds of its own destruction. Monetary substitutes were the Trojan horse that the Gold Standard contained. These monetary substitutes arose as an evolution in the use of money, that is beyond doubt. The issuance of monetary substitutes was economically justified. But in the long term, this evolution can be considered unsuccessful. As long as institutions and societies were respectful of the life and property of individuals (i.e., as long as they were based on laissez-faire) this did not pose any problem. On the contrary, the use of monetary substitutes was very beneficial and had very positive effects. However, the very existence of monetary substitutes opened the door to a development of events that would have very negative effects. Monetary substitutes greatly facilitated the fraudulent monetary inflation of unbacked banknotes by States (i.e., for an amount greater than the gold actually existing in their treasuries).[1] And, once the use of monetary substitutes became a sufficiently deep-rooted custom, this circumstance made it easier for States to definitively withdraw the backing of their banknotes (until then redeemable for gold) and to create fiat money through accomplished facts.
Under the fiat monetary system, free market money is held in the vaults of central banks, while, on the one hand, individuals are forced to use money that is constantly devalued and, on the other hand, under the protection of central banks, banks are allowed to engage in fraudulent activity consisting of keeping only a fractional reserve of the funds deposited by their clients (an activity that ultimately contributes to the creation of new unbacked monetary substitutes and, therefore, to a further devaluation of money). In section 5.10.3 of this work we saw that the purchasing power of the dollar until 2022 had been devalued by 96% since the Federal Reserve existed and by 86% since the United States abandoned the Gold Standard in 1971. Pretending that such money is good money is like pretending that a perishable good is a good store of value. This is not to say that in the short term such money does not work well as a medium of exchange, especially compared to the alternatives, but this is due, among other reasons, to the fact that the dollar is backed by the most powerful country on Earth (i.e., by force of arms). However, if this situation were to change, everyone would see the naked king and the dollar would disappear from the face of the Earth. Therefore, defending the relative superiority of the dollar in the current world monetary regime is equivalent to defending the welfare enjoyed by slaves under a relatively lenient regime of slavery, compared to other absolutely inhuman regimes. It is a utilitarian defense, but an immoral one. And using as justification the fact that many countries abandon their currencies and freely choose the dollar is to deepen the immorality.
The use of different goods as money has been refined throughout history and has undergone an evolutionary process in which the goods used as money increasingly fulfil their function as intermediaries in exchange. This process culminates with the use of gold as money. In fact, gold is the most solid money known to date. This money appeared on the market freely and spontaneously. Once precious metals were already being used as money, different institutions (both States and private institutions) began to mint coins. The minting of coins was in itself very beneficial, as it served to ensure the weight of the metallic standard of the currency. In this sense, gold was the money of the market and minting favoured its use and boosted trade.
However, coinage may not be so beneficial when exercised under a state monopoly, since it entails forced trust in the State, and, as will become evident, forced trust is not trust, but servitude. That trust could be defrauded, and history has shown that this has been done repeatedly. Time and again, States have debased currency. In times past, this activity was carried out by debasing the metal content of coins. And in centuries when the use of monetary substitutes was already a custom, currency debasement has been achieved by creating unsupported monetary substitutes (fiduciary media).
Obviously, it is not only the States that behave fraudulently. Fraud also exists in the market. However, in this area the consequences are borne by the users and, above all, by the institutions that defraud trust (which in many cases cease to exist almost immediately). In the case of the States this does not happen so easily. The coercive power that they exercise over the population allows them to give legitimacy to the fraud carried out by public institutions and by those private institutions that transgress the laws of the market with the connivance of the States. In this sense, throughout history a relationship of mutual convenience has been observed between the States and the most powerful banks. The States usually needed the credit of the banks and the banks resorted to the power of the States to place themselves above the competition and thus avoid the sovereignty of the market.
At a time when there was a favourable predisposition towards the idea of sound money and therefore the metallic standard was respected by public institutions, the devaluation of money was constrained by the limitations imposed by the extraction of the metallic standard itself, as well as by common sense, which restricted the issuance of unbacked monetary substitutes. But, late in the 20th century, the States abandoned both common sense and the metallic standard, launching into an unbridled issuance of fiduciary media and promoting, through the hyper-regulated banking system, a practically unlimited expansion of credit without backing in savings (something that was only possible thanks to the prior establishment of the Central Banks). In this way, the States entered into a delirious phase in which they increased their power without limit while making individuals think that the creation of money out of thin air was something possible, sustainable and, moreover, beneficial.
Today, we are still in this delirious phase, with it becoming increasingly clear that the authoritarian tendency of States and their growing interventionism in each and every facet of life could lead us to the greatest economic and humanitarian crisis in history. This is not a gratuitous exaggeration. A world with eight billion people is only possible thanks to the coordinated functioning of the market (capitalism). This complex coordination that occurs spontaneously in the market is being dynamited by growing authoritarianism, increased interventionism and the suffocating central planning of national and supranational government institutions. The final culmination could be the implementation of the Central Bank Digital Currencies or CBDCs. The crisis that is coming is frightening, as it could mean that a good part of these billions of people simply cannot feed themselves and survive. We are not talking here about just another economic cycle. We are not only facing one of the periodic crises caused by the monetary interventionism of States. The current circumstances in many countries around the world (state dependency, social infantilization, lack of individual initiative, lack of spirit of sacrifice, high time preference...) place us before a crisis that could be of biblical proportions. Unfortunately, the vast majority of people do not see beyond what is inoculated to them by the mass media (pandemic, gender violence, climate change...), while the real world can collapse catastrophically. As Revel said, life “is a cemetery of retrospective lucidities” (1988, p. 480) [own trans.] and the truth is that on many occasions lucidity does not even appear.
But let us return to the idea that we want to convey in this section, which is none other than the difference between free market money and fiat money. We have said that gold is the most solid money ever known. However, adapting this free Market money to the societies that emerged after the Industrial Revolution and to the demands of the 19th and 20th centuries increasingly involved the use of monetary substitutes. Unfortunately, this circumstance carried within it the seed of the destruction of gold as money and, by extension, the disappearance of the incalculable benefits that its status as sound money brought about. These benefits were not only economic; as an example, after the abandonment of the Gold Standard came the most devastating and bloody wars ever known to mankind. Wars whose magnitude was simply unthinkable under the Gold Standard.
The fact that the use of monetary substitutes carried within itself the seeds of destruction of gold as money was not easy to discern while countries were guided by laissez-faire policies or, even without being guided by such policies, while they respected the discretion of people to decide the course of their lives. However, that self-destructive seed became evident when political institutions in particular and societies in general became excessively ideologized and stopped being tolerant of those who thought differently, giving way to a selective transgression of people's lives and property. Under these circumstances, where disrespect for others's projects became the norm, the fraudulent use of monetary substitutes was but one of the many ways in which private property was trampled on.
Once the use of monetary substitutes had become customary, States had little difficulty in enforcing inflationary measures (the issue of unbacked banknotes, i.e. for an amount greater than the gold actually in existence) or in promoting a banking practice that was considered legal but clearly fraudulent, fractional reserve deposits (banks lend a large part of the money given to them to be kept on deposit and immediately available). As will be obvious to anyone who wants to remove the blindfold, the fact that States allowed this banking activity, which is contrary to the general principles of law, can be historically linked to the benefit that governments obtained in exchange for granting such a privilege to banks.[2]
In conclusion, it can be said that gold, as money that in modern times had to be necessarily accompanied by the use of monetary substitutes, had unavoidable weaknesses that ultimately caused it to lose its strength (i.e., its status as sound money, its ability to resist the temptations of governments and their frequent short-term and liberticidal urgencies). Ultimately, the unavoidable submission of gold to the arbitrariness of political power not only made it stop being sound money, but even stopped being used as money. At present and in the foreseeable future, it can be said that only Bitcoin could solve these “unavoidable weaknesses” of gold.
* The doctoral thesis "Bitcoin as Sound Money: An Interpretation of Bitcoin in the Light of the Austrian School of Economics" can be downloaded for free at the following link. https://hdl.handle.net/10115/128557 Currently, it is only available in Spanish. Proposals for translation and publication in English are welcome. Contact me through my X profile: @Joel_Serrano_M_
[1] “If the money reserve kept by the debtor against the money-substitutes issued is less than the total amount of such substitutes, we call that amount of substitutes which exceeds the reserve fiduciary media.” Mises (1949, p. 430)
[2] “When bankers first began using their depositors’ money, they did so shamefacedly and in secret, as shown by chapter 2’s analysis of different historical cases. At this time bankers were still keenly aware of the wrongful nature of their actions. It was only later, after many centuries and vicissitudes, that bankers were successful in their aim to openly and legally violate the traditional legal principle, since they happily obtained the governmental privilege necessary to use their depositors’ money (generally by granting loans, which initially were often given to the government itself.)” Huerta de Soto (1998a, p. 183)