Money: The Root of All Evil?

Some ideas and sayings die hard, even when they are demonstrably wrong. In this case, the saying "money is the root of all evil".

To understand what the saying means, we first need to ask, what is money? Essentially, money is nothing more than a medium of exchange. It is a tool or means of allowing people to engage in indirect exchange instead of direct barter. It is usually considered the most commonly exchanged commodity in a society.

As such, money was developed spontaneously in society by people who were having difficulties engaging in direct barter--money solved a difficult exchange problem and made it easier for people to trade with other people in a more convenient form. Commodities like gold and silver were eventually adopted because they were considered most suitable for use as money, given their particular attributes.

Note that money arose spontaneously out of human need--it was not created by governments. Governments only later appropriated the money-making process, which was originally a private function. Only by government appropriation could we have reached our current situation, where debt-backed paper (Federal Reserve Notes) is considered to be "money". Switching back to a commodity-based money supply would currently be difficult and illegal; government would not allow it if they can help it.

So money is a tool that enables the convenient exchange of goods and services between people. To say that money is the root of all evil is to say that voluntary, indirect exchange between people is evil. To a libertarian, and I hope to most other people, this seems like an absurd thing to say. How can it be evil for me to give someone money in exchange for groceries, clothes, books, or other things that I want and need to live my life? Or for people to give me money in exchange for my labor, goods, or services?

Quite simply, voluntary indirect exchange is about as opposite evil as you can get--nothing has improved people's lives as much as the division of labor made possible by indirect exchange through money. It's true that through theft, fraud, or counterfeiting, some people can get money without producing any beneficial good or service in exchange, but that's a small subset of all economic transactions, and doesn't outweigh the benefits of money or change the moral equation.

It's also true that there are serious problems with our current Federal Reserve system and fractional reserve banking, so much so that some consider the Fed itself to be issuing "counterfeit" money. However, this is not fundamental or inevitable to money, but is simply a problem caused by the politics of government taking over the production of money instead of leaving it in the private sector.

In this light, it should be obvious that money is not the root of all evil, coercive power is. The next time someone brings up this old quote to you, perhaps you should ask them what they mean by "money", and maybe they, too, will see the light.

Laissez-faire and the Financial Crisis

It's funny how so many people are ready to jump on laissez-faire, the free market, or capitalism as the cause of the financial crisis. Exactly when did we have this glorious economic period, anyway? There are regulations too numerous to mention, and of which people are obviously unaware, to believe "deregulation" was the cause of the crisis. If nothing else, the mere existence of the Federal Reserve should disabuse anyone of that notion.

Laissez-faire no more caused the current crisis than it did the Great Depression of the 1930's. Anyone who thinks Herbert Hoover sat on his hands and did nothing when the Crash occurred needs to read some more history. Hoover did quite a bit in trying to deal with the crash. And Hoover himself was no big fan of laissez-faire, and says so in his book The Challenge to Liberty. When Franklin Roosevelt took office, he did the same basic things that Hoover did, only on a larger scale. Unfortunately, since they were both unwilling to admit how much the Federal Reserve, created in 1913, had to do with the problem, their actions were useless at best, and most likely helped to prolong the Depression, instead of ending it.

The Fed made possible the Roaring 20s, the biggest boom this country had ever seen, but it was unsustainable, created by the Fed's loose money and easy credit policies. Austrian Economics describes this problem as part of their theory on business cycles. The bust we know as the Great Depression necessarily had to follow so that the market could correct the malinvestment created by the Fed's policies.

These same policies have cursed us over the decades since then, giving us continual (although gradual) inflation that has degraded the value of our money and earnings, and created other boom and bust cycles, though not as big as the one of the 20s and 30s.

The dot com bubble of the 90's was one such boom/bust period, and now the housing bubble of the 2000's is just the latest boom and bust that we are experiencing as the financial crisis.

Without understanding the causes of the financial crisis, especially the Fed's part in it, neither Obama nor McCain will be able to fix the problem, any more than Hoover or FDR were able to fix the Depression.

Why do people want to blame laissez-faire, free market capitalism? I can most charitably conclude that it stems from a misunderstanding of laissez-faire. The essential argument they make is that the Fed and the federal regulators allowed the banks and Wall Street too much unregulated freedom to operate, and didn't properly constrain them when they made bad decisions. And yet, even if that were true, they were still protected from the consequences of their bad decisions, as government regulation was still in place to back them up or bail them out.

This freedom without responsibility is license, made possible by government regulations, not the lack of regulation. In a laissez-faire, free market capitalist economy, freedom and responsibility go hand-in-hand. Businesses would be free to make decisions, but would suffer the consequences of bad decisions, usually in the form of losses. The losses would tell them to change their policies, or else risk going out of business and letting other businesses take over their assets. They would not be able to socialize their losses as government is allowing them to do now.

Technically, I suppose government license, protection, or subsidy should not be considered government "regulation" the way other government rules and regulations are, but nonetheless, it would not be possible without government policies and power. This crisis could not have occurred in a true laissez-faire, free market capitalist economy, and this is true even if we accept the arguments about "deregulation" leading to the crisis. Governments allowing license or freedom without responsibility is no better than governments requiring burdensome regulation (responsibility) without freedom.

Financial Bailout Nonsense

Okay, okay, the big news lately is about the financial bailout package Congress and the President are trying to work out. In my opinion, this is a big mistake. We shouldn't be bailing out businesses for making bad business decisions, but letting them suffer the consequences of their actions. Instead, our government wants to make everybody pay for their mistakes. "They're too big to fail", they say. Nonsense, no company is too big to fail.


More importantly is how we got into this mess. Ultimately, it boils down to the Federal Reserve's policy of inflation and artificially low interest rates. By manipulating the money supply and keeping credit cheap, the markets were led into making business decisions that would not have been considered profitable at the true market interest rate.


The housing boom is a perfect example of this. Subprime mortgages would never have happened if lenders didn't have the support and guarantees of government to back them up. But they did, so they allowed people who really couldn't afford to buy houses to buy them, and put stress on the system when these people learned the hard way that they couldn't afford to buy houses. But why bail out the lenders? Why not bail out the homeowners directly? It still wouldn't be a good idea, but the fact that they don't do it goes to show who will actually benefit from the bailout--not the end consumers, but the financial firms who made the bad decisions.


Fannie Mae and Freddie Mac are GSE's that wouldn't even exist on a true free market. On a free market, businesses that make good business decisions are able to win more consumers (by satisfying them) and earning bigger profits that can be reinvested in the company to improve or expand the company. Businesses that make bad decisions end up losing money (i.e., they are failing to satisfy their customers), which tells them they need to make changes or else go out of business. The assets of businesses that go out of business are purchased by better-run businesses that then put those assets to better use. That's how it's supposed to work.


The bailout will reward businesses for bad decisions, and punish the better-run companies for not making the same bad decisions. The bailout will do that by the same means that got us into this mess in the first place: increasing the money supply and keeping interest rates artificially low. That's not going to fix the problem, merely prolong the problem. The market needs to correct for the bad business decisions, not prolong the bad business decisions.

The financial crisis is the direct result of government intervention in the economy, not capitalism, and the bailout is more government interventionism and will not solve the problem.

Of course, this is all my opinion and assertion. For more extensive information, check out "The Bailout Reader" at the Mises Institute website: http://mises.org/story/3128