It is time we address some fundamental issues about money. First, money didn’t originate with government. It originated amongst people who needed a way to exchange their goods indirectly, instead of through direct barter all the time. One could make a hat and want a basketball, and trading a hat for a basketball might even work, but one quickly finds that having a practical medium will make the myriad of exchanges so much easier. So money is that medium of exchange that gives rise to complex economies. Historically it has been many things, including seashells, berries, gold and silver. Interestingly, only with a pre-existing or inherited array of barter prices (relative sense of assessed value unique to the given society) are people able to substitute money for barter. Money moreover is a useful commodity in its own right and must be, to function effectively as a medium. While paper per se might be close to worthless, the paper money replaces or substitutes for a preexisting commodity money through government fiat and legal tender laws. In our case, Federal Reserve Notes replaced gold and silver, but even then the paper money was redeemable for a given weight of the actual commodity for most of our history. Indeed, a successful paper system will always insist on the paper money being redeemable in its commodity version. Only in this way can the money retain its assessed value and confidence be assured.

Secondly, precious metals work well as money because they are durable, inherently valuable, and easily divisible. Gold is so valuable that most daily transactions people make would be in silver coins—copper for smaller transactions. Private bank notes or checks would represent the same thing. That is, if our paper were tied to its original commodity version! The U.S. government, however, severed that connection, not surprisingly because it favors the ability to increase money without restraint. In so doing, the dollar has lost 95% of its value. Under a commodity standard, if the government needs money it would have to resort to borrowing or taxation. These are obvious and transparent to the people. By de-linking the paper money supply from gold and silver, the government prints money and so skirts political and fiscal accountability through the means of inflation.

Third, as the great economist Joseph Schumpeter said, only the gold standard is compatible with freedom precisely because it places restriction on the government’s ability to expand credit unabated and hence, places natural limit on the government’s ability to seize power. Schumpeter considered gold to be a kind of economic check and balance, more effective than the political sort, because he knew if we lost having our paper currency tied to the commodity then government would be able to deceive all political checks and balances. The Federal Reserve Act of 1913 was special interest legislation at its worst, conceived to favor the class of bankers and politicians. This favoritism comes at the direct expense of the people. The Fed controls the money supply and also moves interest rates up or down. It operates as a lender too (nice when you control interest rates), and it can purchase literally any kind of asset it wants; albeit, the Fed normally buys up government bonds—hence underwriting the government’s design on unrestricted power, indeed with a profit motive to do so!

Fourth it is the Federal Reserve System, which is exclusively responsible for price inflation—by definition this is true, because only the Fed can increase the money supply. Moreover, inflation is the Fed’s great game not only giving rise to boom and bust, but also producing profits for a favored few by exploiting the broader society. When the government inflates the money supply, new money enters the economy at discrete points. The earliest recipients include politically favored constituencies, i.e., banks and firms with government contracts—actually, wherever the government spends its money. These parties receive the money before inflation pushes prices upward. In effect the economy doesn’t know how much the money supply has been increased, so prices haven’t yet adjusted. Of course, by the time the new money makes its way through the economy, prices will have risen—but not until the privileged firms make purchases at the previously existing price level and silently loot those they buy from. When the average person gets his new money, through higher wages or lower borrowing costs, the prices have already risen. The value of his money was diluted before it reached him.

To continue along these same lines, consider that the money in your possession is actually compensation for a good or service you provided. If you buy a dozen apples, you do so with proceeds from a good or service you provided in the past. Indeed, you can only buy apples or anything else, because you provided someone else something they needed. However, in the case of a privileged business firm or bank with new money courtesy of the Fed, it comes out of thin air and not from the sale of a previous good or service. So when they spend new money, they actually take from the existing stock of goods without providing anything in exchange. They are benefited as it were, at the expense of the rest of society. As economic historian Thomas E. Woods, Jr., puts it, "The analogous case under a system of barter would be one in which, instead of trading my bread for your orange juice, I just take your orange juice!"

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