Money and Law

When we look at two of the most fundamental components of human society, that is, money and legal systems, an interesting phenomenon pops out at us. Firstly, they both arise in a decentralized and spontaneous manner. Secondly, the vast majority of people in the world today believe that neither could exist without the institution known as the state. This observation gives us something of a case study in how it comes to be that man begins to confused society with the state, a fundamental confusion from which so many other confusions arise. So here I am going to examine the parallels between money and law, in the way that they come to be and develop in societies.

Money arises spontaneously in a society as the most liquid, or tradeable good. In a barter economy, people encounter the problem of the double coincidence of wants: I have a sheaf of wheat and want a pig, so I need to find someone who has a pig and wants a sheaf of wheat. This makes trade difficult and time consuming. If, however, it comes to be recognized that most people will accept, for instance, a quantity of salt in exchange for whatever good, people will begin to acquire salt not only for personal use but also specifically for the purpose of trading it for something else. At this point salt becomes a widely accepted medium of exchange. Eventually, certain goods will win out as exceptional mediums of exchange, by virtue of their portability, fungibility, divisibility, durability, and high value per unit. Gold and silver have long won out on that front, and they became the most widely accepted medium of exchange, or money, throughout the world.

Now, as half of every transaction involves money, it becomes clear to the ruling class in society that control over money is a valuable tool to wield, so rulers tend to establish a monopoly on the minting of coin. They are then able to manipulate it to their advantage. In the past, this included coin clipping; a hidden tax on their subjects which devalues the money of the people while accumulating by stealth more wealth to the state. As paper money came into existence, a sleight of hand was performed. The paper was originally a proof of ownership for gold or silver, and used in trade for convenience. Over time, however, governments disconnect the paper currency from the real money, and the people are left with worthless paper. Its worthlessness is not always immediately apparent, but paper, or fiat, currencies always go to zero eventually. This is disastrous for any society.

A government cannot, however, successfully institute a fiat currency out of the blue. It must appropriate the spontaneously originated money which has real value, and perform this transformation. According to Mises' regression theorem, the purchasing power of money can only come about through its traceable value as a commodity in the market. (For more on this, read: http://wiki.mises.org/wiki/Regression_theorem ) (The emergence of Bitcoin and other cryptocurrencies has brought the regression theorem into question, but my thoughts on that will have to wait for another article. Suffice it to say that I believe the issues that cryptocurrencies bring up do not invalidate the idea that currency by pure government fiat is problematic, if not totally infeasible.)

A government is a monopoly on legalized initiation of force within a territorial area. Its existence rests on a perception of the legitimacy, or legality, or its actions. A group of people do not simply declare themselves a government and THEN invent the laws that make them such (not successfully, anyways). The perception of a legal order must preexist the government. Much has been written on the origin of law and the idea of decentralized or free market legal systems, most interestingly by David Friedman (see the lecture on YouTube called: Legal Systems Very Different From Our Own ). Simply put, commonly understood rules arise spontaneously within a society in much the same way as does money. As disputes occur between individuals and are resolved between them within communities, precedents are set which form the basis of rules by which future similar disputes are to be adjudicated. As people strive to resolve disputes in a way that is most satisfactory to both parties (and therefor peacefully), rules and traditions emerge that are widely understood and accepted, forming the basis of a legal order. Judges and legal experts may appear on the scene, but not as authors of law itself; their job is to understand and apply the law that is already known. Over time, the most successful societies develop legal orders which uphold private property and prohibit the initiation of violence, as these rules have proven to be the most conducive to peace and a sense of justice.

When governments appear on the scene, they usually are not seen, nor see themselves, as originators of law, but as enforcers of it. Over time, however, they find it advantageous to appropriate the role of legislator. They begin by instituting laws that may seem to be in pursuance of upholding the pre existing ideas of justice, but over time will invariably pervert the original legal traditions in furtherance of their own ends. Injustice performed by the state, and often downright tyranny, is the inevitable result.

Both money and law can and did exist without government, and in fact can only arise apart from government. Government cannot exist without them, but they can exist without it, and can only persist in their proper role apart from it. These two aspects of civilization, law and money, are key to peace and prosperity. Governments pervert and destroy both, while claiming that in the absence of a state neither would exist. This parasitical appropriation of the fundamental basis upon which human society is formed gives testimony to the claim by anarchists that the state is not synonymous with society, but is rather destructive of it.