An overview of how money became entangled with state power and why that is a problem.
There are two opposing narratives about the birth of money.
One is the story that the state created money. Kings minted coins and designated them as the means of paying taxes - and thus money was born. In this story, money is a state creation from the very beginning.
The other is the story proposed by Carl Menger: money was born spontaneously in the marketplace. To overcome the inconvenience of barter, people began using the most easily exchangeable goods (salt, shells, gold) as a medium of exchange, and that naturally became money.
Austrian Economics supports the second story. And from there, the crucial question follows: what happens when the state seizes money that the market created?
Historically, the process by which the state seized control of money can be summarized in three stages.
Stage 1: Monopoly on minting. The state monopolizes the minting of gold and silver coins - and quietly begins reducing the precious metal content. The Roman Empire's silver denarius started with a 95% silver content, which had fallen to below 5% by the third century.
Stage 2: Convertible currency. Paper notes appeared bearing the promise: "Bring this note to the bank and we will exchange it for gold." Initially genuinely exchangeable for gold, but governments always succumb to the temptation to issue more notes than they promise to back.
Stage 3: Fiat money. Money completely severed from gold. Value is granted solely by government decree (fiat). The Nixon Shock of 1971 was the decisive turning point into this final stage.
When the state seizes money, it gains three powerful tools.
When the government issues money, the purchasing power of existing money declines. This is an invisible tax recorded nowhere in the tax code. Tax increases face political resistance, but inflation faces less resistance because most citizens fail to identify the cause.
When a lender of last resort - the central bank - exists, large financial institutions act under asymmetric incentives: "heads I win, tails someone else loses." The 2008 financial crisis was the product of this moral hazard.
Newly issued money does not reach everyone simultaneously. Governments and financial institutions spend the new money first; by the time it reaches ordinary citizens, prices have already risen. This is the Cantillon Effect.
This course dissects the relationship between money and the state: