The public’s understanding of what money is and its origins has devolved to the point where the government monetary authorities can now inflate with impunity, with the ultimate result to be the destruction of the division of labor undoing all of mankind’s progress to date. The average Joe and Jane must trust the wise men and women working secretly in central banks around the world with what passes for money—paper and digits on a computer screen. These banks are the largest employers of academically-trained economists. But under the guidance of the Keynesian-schooled, the central banks engage in monetary operations that fulfill the funding needs demanded by politicians for political ends.
The hopes, dreams, and living standards of millions are affected daily by these faceless bureaucrats that supposedly know exactly which monetary buttons to push and levers to pull to insure our prosperity. However, history shows that central bankers have but one strategy to cure all things, especially their past mistakes: print more money, with their plans for stabilization resulting in just the opposite.
If only everyone could read and understand the essay you hold in your hands, described by 2009 Schlarbaum Award winner Jesús Huerta de Soto in his Money, Bank Credit, and Economic Cycles, as “the best and perhaps the most brilliant synopsis of Menger’s theory on the evolutionary origin of money.”
Written in the same year that he testified before the Currency Commission in Austria-Hungary, Carl Menger explains that it is not government edicts that create money but instead the marketplace. Individuals decide what the most marketable good is for use as a medium of exchange. “Man himself is the beginning and the end of every economy,” Menger wrote, and so it is with deciding what is to be traded as money.
It was Menger who developed a complete theory of social institutions which arise as humans interact, each with his own subjective knowledge and experiences. It is the spontaneous evolution of these human actions that create institutions whereby individuals discover certain patterns of behavior that aid each person in attaining their goals more efficiently. Nothing is more central to this evolution than the development of money, making the division of labor possible, and satisfaction of wants attainable.
In his testimony for the Currency Commission in 1892, Menger urged a return to sound money and provided specific recommendations to achieve that goal, but Menger was, in the words of Hans F. Sennholz,
always skeptical about the knowledge and wisdom of the political authorities that were conducting the reform. But he had an abiding faith in the principles and laws of the market that spring from the subjective choices of men.1
And while economists outside of the Austrian School leave the actions of individuals out in formulating their theories and arguments, Menger’s contribution to economics starts at that very place. Menger’s work provided the foundation for all of the Austrian School and the bedrock for monetary theory, laying the groundwork for Mises, Hayek, and Rothbard.
Sadly the world’s economies continue to gyrate between continuous booms and busts while money is in the hands of the world’s central bankers. And while the free market is being blamed for the recent financial meltdowns, there can be no free market if money is controlled and debauched by the state. Menger provided the answer more than a century ago: a sound money, and in turn a sound economy can only be a product of the market.
Douglas E. French
Auburn, Alabama
November 2009
1 Hans Sennholz, “The Monetary Writings of Carl Menger,” in The Gold Standard: An Austrian Perspective, Llewellyn H. Rockwell, Jr., ed. (Lexington, Mass.: Lexington Books, 1985), p. 33.