Money and the Law


(Original Italian publication: Movimento Libertario, L’Indipendenza)

The modern (or totalitarian) State is founded on two frauds: the fraud of law and the fraud of money. The wielders of political power have replaced the law and money with things they called by the same name but which have nothing at all to do with them. These two frauds paved the way for totalitarianism, both the ‘old’ (nazism, fascism, communism) and the ‘new’ (contemporary social democracy). They have destroyed the market economy and created long-term economic decline, all for the benefit of those in power (the so-called political caste) and, in the short term, of those who allowed the caste to buy them off (with money expropriated from others) in order to obtain specific privileges.

Yet, because of their magnitude (and because they lack the necessary tools), few people manage to perceive these two frauds, and even fewer manage to see the causal relationship between them.

It is not surprising that the objects of these two frauds were the law and money. Indeed, they share a common characteristic that makes them intolerable to those in power: like all social institutions that are not the product of rational human design, both the law and money are the result of a spontaneous and dispersed process of cultural selection of successful customs and conventions. In other words, the law and money are two spontaneous orders and consequently constraints: things that those in power cannot change overnight at will.

The law prohibiting theft, for example, is the result of a spontaneous process of cultural selection of customs and conventions which began with the observation that the convention of distinguishing what belongs to Tom from what belongs to Harry reduced conflict within a society, which therefore prospered because of this convention and grew stronger than other societies that did not introduce it. This process ‘ended’ with the slow and gradual transformation of the convention (introduced initially for reasons of interest) into a moral, and therefore general and abstract, principle (which, as such, must be respected per se, regardless of questions of interests). This principle is the law.

What makes the law a binding constraint, even and especially for those who wield political power, is the way in which it came into being: the fact that it was not decided, that it is independent of anybody’s will, even and especially of the authorities. It is not hard therefore to understand why political power holders were anxious to free themselves of the law. In order to be able to ‘print’ all the ‘laws’ they wanted, the law (the general and abstract principle, the limit on power) was replaced by its antithesis (the special measure, the instrument of power). Naturally, when doing so the political powers gave it the same name (‘law’) so that people, believing they were complying with the law, would obey its commands like sheep (decent people are the mainstay of totalitarianism).

Once the law had been replaced by its antithesis, political power became unlimited and, unimpeded, could ruin and destroy individuals and the economy in pursuit of its own interests and/or of an arbitrarily defined ‘interests of the country’ (it must be admitted that, at least in this, Mario Monti excels).

Money is also the result of a process of cultural selection of successful customs and conventions. In the barter economy, if Tom wanted some apples, he had to give Harry, who had apples to sell, a certain number of eggs in exchange. The spontaneous process of cultural selection of customs and conventions which led to money began with the observation that a commodity existed (cattle, for example) which not just Tom and Harry but everyone at the time, or almost, wanted (in the words of Menger and of Mises, respectively, the “most saleable” or the “most marketable” good). Tom found it much easier to obtain the apples he wanted if used that commodity instead of his eggs, (because it meant no longer having to seek out someone with surplus apples who specifically required eggs). This process comes to an ‘end’ when the more marketable good is generally agreed upon and used and corresponds to the needs of a particular era. In our day, the commodity with the characteristic of greatest marketability, i.e. the capacity to act as money (if its use as a medium of exchange were not prohibited by the authorities), is probably gold.

Like the law, and for the same reasons, money too is a constraint. Gold, for example, cannot simply be printed as desired: its extraction has a cost and in any event, except in extraordinary cases, its quantity does not vary very quickly, or at least not arbitrarily. So where the medium of exchange is only money (gold, for instance, or – which comes to the same thing – banknotes corresponding to a fixed quantity of gold that can be converted into gold at any time simply by presenting them at a bank, without the risk of finding the corresponding amount of gold unavailable), political power is limited. If those who wield it wish to finance a war, or newspapers, infrastructure, cinema, research, exhibitions, concerts, the Olympics, or the salaries and annuities of parliamentarians or the hundreds of millions of euros spent each year on the Italian Presidential Palace, etc. … if they want to finance all this and more but find it impossible to increase taxes and the public debt any further because the limit has been reached in both cases (any reference to the Italian situation being purely intentional), then they cannot do so.

Consequently, it is not difficult to understand the reasons why the State, significantly in Europe at the beginning of the First World War, was anxious to get rid of money, i.e. to abandon the gold standard. As in the case of the law, this enabled it to print as many banknotes as it pleased and thereby increase taxes on citizens even further, without them realising it, through inflation. As Gary North stated in What is Money, if the European States had not got rid of money, they would not have been able to finance the First World War and thus it would not have happened (and neither would the Second): “[…to finance these wars] Governments wanted to inflate, and the gold coin standard hampered this. So, politicians and central bankers abolished it by fiat”.

However, the economically destructive effects of abandoning money (that is, of replacing it with a piece of paper, and now not even that, since the use of cash is being outlawed in order to facilitate the further expansion of the totalitarian State), go well beyond inflation. They consist principally of a misdirection of production: in other words, of the allocation of capital. By printing money, the political authorities (or their agents, the so-called ‘independent’ central banks appointed by the political authorities and holders of a legal monopoly granted to them by the latter) have produced erroneous information, in particular regarding interest rates (every time a price, in this case the price of financial capital, is arbitrarily fixed, i.e. outside of the free market, erroneous information is produced which sets in motion a process of economic destruction). On the basis of this erroneous information bad investments were made. The recession is the way in which the spontaneous order of the market economy tries to cleanse itself of these misguided investments. However, if printing money (and, more generally, economic interventionism by the State) and therefore the production of misinformation continue to be possible, the economic cycle and the decline will not end (regardless of the wishes of those who would like to ‘halt the decline’ without tackling the frauds that produced it). As Friedrich von Hayek concisely expressed it in Monetary Theory and the Trade Cycle, “[changes in the quantity of the money supply due to the central banks printing legal currency or to credit expansion which, because of the mechanism of fractional reserve banking, does not require increasing the interest rate, ed.] cause a certain price, the rate of interest, to deviate from the equilibrium position [in which there is equality between savings and investments, ed.] … and deviations of this kind necessarily lead to such changes in the relative position of the various branches of production as are bound later to precipitate the crisis”.

Thus both fiat ‘law’ and fiat ‘money’ serve to allow the State to ‘govern the economy’, that is, to destroy it. All those economists (few, unfortunately) who endorse the analysis of the Austrian School today understand the destructive economic effects of counterfeiting money and, more generally, of State economic interventionism very well. But not all take into due consideration the fact that counterfeiting money and, more generally, economic interventionism are made possible by counterfeiting the law and that in consequence, if the first is to be prevented, so necessarily must the second.

In the words of Bruno Leoni in Freedom and the Law, “Even those economists who have most brilliantly defended the free market against the interference of the authorities have usually neglected the parallel consideration that no free market is really compatible with a law-making process centralised by the authorities”. Referring to the printing of legal tender, Gary North rightly argues that, “[governments] are all counterfeiters, and they deeply resent an invasion of their turf. Laws against counterfeiting in today’s world are a form of gang warfare. ” But if counterfeiting can be legalised today in certain particular cases determined by the authorities (in the same way that the violation of equality before the law – think progressive taxation – theft or any other breach of the law understood as principle can be), this is due only and solely to the fact that the law is not understood today as a limit on arbitrary power (the general and abstract principle existing independently of the will and decisions of the authorities) but instead as the tool of arbitrary power (the special measure decided by the authorities). In other words, if counterfeiting (for example) is permitted today in certain specific cases (permitted to the State which just happens to hold the monopoly on violence), this is ultimately due to the fact that political power (the power to approve special measures) is not separate from and limited by legislative power (the power to discover, preserve and defend the general and abstract principles that apply to everyone, the State included: always, without exceptions, in exactly the same way).
To defeat the totalitarian State, producer of poverty – in other words, the modern State and so-called social democracy – action must be taken simultaneously on several fronts, not only the economic. Keynesian (but also monetarist) policies cannot be fought only in economic terms: what makes them possible is an abstract idea of the law that those who defend these policies are unable to defend. An integrated approach is what is needed.

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