Although all too many Americans are unaware of it, whether the United States should return to constitutional systems of money and banking is one of the most important issues facing the nation today. To understand why, several questions need answers:
1. What is the economic role of money?
Unfortunately, people too often confuse “money” with “wealth.” Wealth may, but does not always, consist of money, because wealth need not be capable of performing the special function of money. And even a very large quantity of some types of money —for example, German paper marks from the period of the Weimar Republic in the early 1920s—may be worth very little, precisely because that money cannot perform (or only very poorly performs) the function that money must fulfill to have or maintain value.
Strictly speaking, “money” is nothing more or less than the social medium of exchange. In any advanced economy, people do not barter goods for goods, services for services, and goods for services in direct exchanges, but instead engage in indirect exchange: that is, exchanging some goods and services for money on certain occasions, and then exchanging that money for other goods or services on other occasions. This system of indirect (or monetary) exchanges is far more efficient than direct barter, and therefore maximizes the total social welfare that derives from all exchanges. “Money” is what facilitates this system of indirect exchange.
Monetary transactions determine the “prices” of goods and services, the values of goods and services expressed in the medium of exchange. All prices are economically interrelated, because ultimately all goods and services compete with one another. (footnote 1) Because of this interrelation, prices function as signals to entrepreneurs, indicating how scarce resources should be allocated so as to maximize total social welfare. If money-prices properly reflect the real valuations of goods and services throughout society, then resources will tend to be allocated away from the production of less valuable, towards the production of more-valuable, goods and services. (footnote 2) This will tend to maximize the efficiency and value of all production, and thereby the real material wealth of society as a whole.
Of course, the key condition for the operation and success of this process is that money-prices properly reflect the real valuations of goods and services throughout society. This condition will not be fulfilled if there is what free market economists call “intervention” in the economy through the action of politicians and government bureaucrats, of politically or economically powerful private special interest groups, or of other organized criminal elements.