[From the Summer 2013 issue of The Quarterly Journal of Austrian Economics]
By Nicolay Gertchev
The distinctive feature of modern central banks is their political and privileged position within the economy. Indeed, the very framework in which paper monies are produced and introduced into circulation is fundamentally different from that of commodity monies. Commodity monies, which evolve out of direct voluntary exchanges, are subject to the rules of both horizontal and vertical competition. On the one hand, different commodities can be competing for fulfilling simultaneously the function of a medium of exchange. Additionally, various producers of the same commodity can be competing for offering certification services with regards to the specific monetary objects. On the other hand, and much more importantly, the producers of any of the commodities which serve as media of exchange must compete, in the context of generalized scarcity, with the producers of any other good. This implies that on the market an expansion of the money supply is costly, as factors of production must be bid up from other sectors. Thus, the price mechanism, through its influence on the expected relative profitability of any business venture, naturally regulates the quantity of money in the economy.
This natural regulation of the production and purchasing power of commodity monies also ensures that the entrepreneurs who venture into supplying media of exchange do not benefit from a privileged position. Their income and wealth are positively affected if the demand for money relative to other commodities, including other media of exchange, rises; inversely, a negative income effect occurs if competition intensifies or demand declines. Competitive money producers must cope with the uncertainty related to the management of private property, and could occasionally be driven out of business, exactly as any other capitalist entrepreneurs. Most significantly, the fact that they supply the economy with a medium of exchange does not confer on them any special status that would allow them to claim more of the aggregate output of the economy than what they earn on the market, i.e., what other property owners transfer voluntarily to them through free and mutually beneficial exchanges.
Things are altogether different with paper monies. To begin with, it should be emphasized that the acceptability of paper monies in the daily exchanges is rooted exclusively in the government’s fiat. Given that they have no non-monetary utility, and therefore no alternative source of valuation, the foundation for ever agreeing to hold paper monies comes from the legal certainty that any attempted rejection will be defeated by fiat intervention. Paper monies owe their existence entirely to legal tender regulations, enforced by coercive states. This conclusion is important as it underlines that states and paper monies share a common essential feature, namely their coercive nature. In a sense, states and paper monies are consubstantial.
One implication of this political nature of paper monies is that their production and supply escape the discipline imposed by the market. Competition-driven cost considerations and consumer-determined return expectations are absent from the calculus of paper money producers. Indeed, the costs of producing one or ten units of a given paper money are all identical, which implies that the marginal cost of increasing the money supply is zero. This grants a very special privilege to any paper money producer—namely, the capacity to acquire for free goods and services already produced by others. A paper money producer could “consume without producing, and thus seize the output of the economy from the genuine producers” (Rothbard 1991 , p. 23).9 The supplier of paper money is then involved in nothing else but a special kind of exploitation, which could be labeled monetary exploitation, to be distinguished from exploitation by means of taxation or direct regulation of the economic activity. It is now understandable why paper money production is always legalized, protected, and de facto controlled by the states, which do not admit of any rivalry in the exercise of their local monopoly of expropriation.