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Source link: http://archive.mises.org/8310/good-money-a-revelation-in-austrian-style-history/

Good Money: A Revelation in Austrian-style History

July 21, 2008 by

This is the true and remarkable story of private coinage and banking in Britain in the early years of the Industrial Revolution (1775-1850). Making money was a business in demand. The needs of business for small denominations were changing. Merchants needed small denomination coins in copper and silver.

The Royal Mint couldn’t be bothered. It made coins to serve the elites, not the new and burgeoning working class. Free enterprise stepped in with a new industry that truly saved the day–before the Crown cruelly stamped it out and ended one of the most beautiful experiences with private money in world history.

It is very likely you have never heard of this episode. You can read dozens of histories of the early years of capitalism and know nothing of this spectacular industry – to say nothing of its lessons for today.

What is going on here? George Selgin, professor at the University of Georgia, has discovered the monetary equivalent of the lost city of Atlantis. He has written a full-scale historical narrative–one that is deeply interesting and engaging–that has been largely unknown, even to scholars of the Industrial Revolution.

It is not only the first full-scale history of this episode ever written. It is likely to maintain a place as the definitive work for many decades. It is 400 pages, but always and everywhere very interesting. It includes 20 pages of color photos. The prose is elegant, and the method of analysis is thoroughly Rothbardian: this is flesh-and-blood history of real human beings.

Selgin tells of the stories of the merchants, the button makers who turned into coin makers, the way the system worked, its wonderful innovations and its evolution, and reveals the cruelty and destructiveness behind the government’s suppression of the industry.

The industry developed to the point at which 20 independent mints were involved in making coins. The private coins served the merchants and the workers, while the government’s currency served the landed rich. The new industry was like capitalism itself: it was designed for everyone to the benefit of everyone.

The private coins tended to be better quality than the government’s coins. Why? Because private merchants could refuse them, and consumers could too. There was competitive control over them and an inexorable tendency for currency to improve in every way. That’s why the book is called “good money.”

And what of Gresham’s Law, the tendency of “bad money” to drive out good money? Selgin’s account demonstrates something striking: it only holds under government system of money which overvalue bad money. In a private system, good money–like good products and services in a free markets–outcompetes the low-quality money. In a market-based money system, there is an inexorable tendency for good money to win out.

The story is riveting in its own right, not only as monetary history but as business history. He has highlighted a fantastic industry that has long gone unnoticed. But beyond that, there is a massively important economic point. What Selgin has done here is help us to understand something critically important: were it not for the state, a wholly private money system would emerge from market exchange. That means private coinage, private weights and measures, market-driven exchange rates between different kinds of monies, and a fully private banking system to go along it with it.

In fact, this is precisely how money originates: from the within the market. Why does the state intervene? The British case is typical. The state wants to control the economy, tax the economy, and control the people. If a fully private system comes about, the state finds its job all-but impossible. That is why the state takes over at the expense of private enterprise.

In other words, the state is not responding here to a market failure but a market success. It is not a “public goods” rationale that leads to state intervention but old-fashioned jealousy over power and wealth. Selgin’s book shows this not through polemics but through a completely new telling of real-life events about which we’ve previously known next to nothing.

The story alone is engaging and entertaining. But readers will have to brace themselves for the conclusion: “The episode compels one to ask, first of all, whether modern governments should be in the coin-making business at all.” He is right that “economists tend to take governments’ monetary prerogative fro granted.” This spectacular book by Selgin could change that forever.

The impact of this book, one of the most important historical narratives ever written by an Austrian economist, will be felt for many years. He has shown us the real history behind what has been largely theory in previous works. Think of this as a historical application of Mises’s Theory of Money and Credit or Rothbard’s What Has Government Done to Our Money.

Selgin was the first Mises Institute scholarship student, and the publication of this book by the University of Michigan Press was made possible in part by the Mises Institute.

Order here.

{ 55 comments }

PR July 25, 2008 at 8:43 am

Both are vulnerable to robbery, but the 100% reserve bank is the more vulnerable of the two.

I see no reason why this should be the case. Unless of course the FRB’s assets aren’t really worth as much as the gold they claim to represent, which is my point. In addition to robbery, FRB is vulnerable to lots of other things. If, say, a farm is used as backing, then the bank is also vulnerable to wildfire, locusts, a sudden widespread dislike of asparagus, and any number of other things. Again, there is nothing wrong with this as an investment, but that is what it is.

Also, I already understand that my ‘demand deposit’ is something of an investment account

No, words have meanings. What you are describing is not “something of an investment,” it is an investment.

You pop into nearly every thread having remotely anything to do with money touting your pet “theory,” which, when pressed, you admit is nothing more than a redefinition of terms, then claim that anyone who doesn’t accept your private definitions is uneducated/narrow-minded/tyrranical. Yes, we get it! Store your life savings in a mutual fund if you want! Just don’t expect any sympathy when the bottom drops out and your share of the “backing” turns out to be two-thirds of a chicken and a few dusty grains of wheat swept off the bottom of the vault.

jp July 25, 2008 at 9:28 am

“I won’t be surprised if we see total losses from FRB fraud surpass $10 TRILLION. How many illegal aliens got mortgages with no proof of income or identity?”

Yes, but I think we can agree that there is a difference between FRB in a free banking world and FRB in a world dominated by the Fed, Fannie, Freddie, Ginnie, FHA, FHLBanks, FDIC, etc. Gold standards too can be coopted by central banks (say the Bank of England in the 18th and 19th c) making them more prone boom bust cycles.

It is not FRB at fault but government interference with FRB.

Going on an internet-less holiday, folks. Enjoyed the conversation!

Nathan Mayer July 25, 2008 at 10:32 am

Mike,

I don’t think any Austrian would be opposed to trading with money that is not convertible into gold on demand. What they may object to is your version of RBD.

All Austrians (and I think mainstream economists) agree that “dollar” at one point in time was a name of a unit weight of silver. They all agree also, that silver and gold became standard money for various reasons (homogonous, divisible, high unit value, durable etc)

Let’s drop the term “dollar” and use “oz of silver”

If I deposit 100 oz silver in my “bank”, he must give me a receipt that says “pay bearer on demand 100 oz silver”. If another customer deposits a truck worth 100 oz, why should the banker be allowed to give him a receipt that says “pay bearer on demand 100 oz silver”?

A receipt that read “pay bearer on demand 1 x 2004 Ford z1″ could serve as money if all parties agreed to it.

Yet you insist on allowing the bank to write a receipt for something the banker doesn’t have.

Michael A. Clem July 25, 2008 at 1:20 pm

Yet you insist on allowing the bank to write a receipt for something the banker doesn’t have.
Good point, Nathan! Let me see if I can anticipate Mike Sproul’s response. He would say that financial convertibility still exists, because the truck could be sold to obtain the 100 ounces of silver. Of course, this is only true if the truck, can, in fact, be sold for 100 ounces of silver, and hasn’t lost value at that point. It’s like me borrowing a dollar from a friend, and when he wants it back, I give him a dvd worth a dollar instead of a dollar. He might be agreeable to the dvd, but he expected to get a dollar back, and the dollar, as money, is generally more useful to him than the dvd. Likewise, 100 ounces of silver is general more useful to people than the truck.

surf April 18, 2011 at 5:00 am

nice, good post

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