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.This further severed the ties between the various parts of the worldmarket, further sundering one country from another, and disrupting the internationaldivision of labor.Yet, purely hard money did not leave too much scope forgovernmental inflation.There were limits to the debasing that governments couldengineer, and the fact that all countries used gold and silver placed definite checkson the control of each government over its own territory.The rulers were still held incheck by the discipline of an international metallic money.Governmental control of money could only become absolute, and itscounterfeiting unchallenged, as money-substitutes came into prominence in recentcenturies.The advent of paper money and bank deposits, an economic boon whenbacked fully by gold or silver, provided the open sesame for government's road topower over money, and thereby over the entire economic system.[10] The use of foreign coins was prevalent in the Middle Ages and in the United States down to themiddle of the 19th century.III.Government Meddling With Money7.Permitting Banks to Refuse PaymentThe modern economy, with its widespread use of banks and money¦substitutes,provides the golden opportunity for government to fasten its control over the moneysupply and permit inflation at its discretion.We have seen in section 12, page 20,that there are three great checks on the power of any bank to inflate under a "freebanking" system: (1) the extent of the clientele of each bank; (2) the extent of theclientele of the whole banking system,i.e., the extent to which people use money-substitutes, and (3) the confidence of the clients in their banks.The narrower theclientele of each bank, of the [69] banking system as a whole, or the shakier thestate of confidence, the stricter will be the limits on inflation in the economy.Government's privileging and controlling of the banking system has operated tosuspend these limits.All these limits, of course, rest on one fundamental obligation: the duty of thebanks to redeem their sworn liabilities on demand.We have seen that no fractional-reserve bank can redeem all of its liabilities; and we have also seen that this is thegamble that every bank takes.But it is, of course, essential to any system of privateproperty that contract obligations be fulfilled.The bluntest way for government tofoster inflation, then, is to grant the banks the special privilege of refusing to paytheir obligations, while yet continuing in their operation.While everyone else mustpay their debts or go bankrupt, the banks are permitted to refuse redemption of Murray N.Rothbardtheir receipts, at the same time forcing their own debtors to pay when their loans falldue.The usual name for this is a "suspension of specie payments." A more accuratename would be "license for theft;" for what else can we call a governmentalpermission to continue in business without fulfilling one's contract?In the United States, mass suspension of specie payment in times of banktroubles became almost a tradition.It started in the War of 1812.Most of thecountry's banks were located in New England, a section unsympathetic to America'sentry into the war.These banks refused to lend for war purposes, and so thegovernment borrowed from new banks in the other states.These banks issued newpaper money to make the loans.The inflation was so great that calls for redemptionflooded into the new banks, especially from the conservative [70] nonexpandingbanks of New England, where the government spent most of its money on wargoods.As a result, there was a mass "suspension" in 1814, lasting for over twoyears (well beyond the end of the war); during that time, banks sprouted up, issuingnotes with no need to redeem in gold or silver.This suspension set a precedent for succeeding economic crises; 1819, 1837,1857, and so forth.As a result of this tradition, the banks realized that they needhave no fear of bankruptcy after an inflation, and this, of course, stimulated inflationand "wildcat banking." Those writers who point to nineteenth century America as ahorrid example of "free banking," fail to realize the importance of this cleardereliction of duty by the states in every financial crisis.The governments and the banks, persuaded the public of the justice of theiracts.In fact, anyone trying to get his money back during a crisis was considered"unpatriotic" and a despoiler of his fellowmen, while banks were often commendedfor patriotically bailing out the community in a time of trouble.Many people,however, were bitter at the entire proceeding and from this sentiment grew thefamous "hard money" Jacksonian movement that flourished before the Civil War.[11]Despite its use in the United States, such periodic privilege to banks did notcatch hold as a general policy in the modern world.It was a crude instrument, toosporadic (it could not be permanent since few people would patronize [71] banksthat never paid their obligations) and, what's more, it provided no means ofgovernment control over the banking system.What governments want, after all, isnot simply inflation, but inflation completely controlled and directed by themselves.There must be no danger of the banks running the show.And so, a far subtler,smoother, more permanent method was devised, and sold to the public as ahallmark of civilization itself Central Banking.[11]See Horace White, Money and Banking (4th Ed., Boston: Ginn and Co., 1911), pp.322-327.III.Government Meddling With Money8.Central Banking:Removing the Checks on InflationCentral Banking is now put in the same class with modern plumbing and good roads:any economy that doesn't have it is called "backward," "primitive," hopelessly out ofthe swim.America's adoption of the Federal Reserve System our central bank in1913 was greeted as finally putting us in the ranks of the advanced "nations."Central banks are often nominally owned by private individuals or, as in theUnited States, jointly by private banks; but they are always directed by government-appointed officials, and serve as arms of the government.Where they are privately What Has Government Done to Our Money?owned, as in the original Bank of England or the Second Bank of the United States,their prospective profits add to the usual governmental desire for inflation.A Central Bank attains its commanding position from its governmentallygranted monopoly of the note issue.This is often the unsung key to its power.Invariably, private banks are prohibited from issuing notes, and the privilege isreserved to the Central Bank.The private banks can only grant deposits.If theircustomers ever wish to shift from deposits [72] to notes, therefore, the banks mustgo to the Central Bank to get them.Hence the Central Bank's lofty perch as a"bankers' bank." It is a bankers' bank because the bankers are forced to do businesswith it.As a result, bank deposits became not only in gold, but also in Central Banknotes.And these new notes were not just plain bank notes
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