Article by Ryan McMaken. (See also here.)

[Comment by PwG: For over half a millennium, we have allowed states to get away with stealing and lying their way into total control of our money. We have thus tolerated their breaking of some central Godly commandments. The results have been predictably calamitous, including totalitarianism and total war.]

Excerpts from above linked article:

Yet the monetary system was dominated by the private sector, and Van Creveld reminds us that a sizable amount of money in this period

was produced not by the slowly emerging state but by private institutions. Before 1700, attempts to develop credit systems succeeded only in this places where private banking and commerce were so strong as to virtually exclude royal authority; in other words where merchants were the government…. Common wisdom held that, whereas merchants could be trusted with money, kings could not. Concentrating both economic and coercive power in their own hands, all too often they used it either to debase the coinage or to seize their subjects’ treasure.

[. . .]

The lack of national monetary monopolies in most cases did not stop nascent European states from engaging in two centuries of state building. By the sixteenth century, France was already building an absolutist state even in the midst of ongoing currency competition. By the mid-seventeenth century, of course, the state had come into its own, with absolutism gaining ground in France, Spain, Sweden, and other parts of the Continent. In England—although the Stuarts failed to achieve their much-desired absolute monarchy—the state progressed far in the direction of a centralized, consolidated state during this period. Indeed, by the mid-seventeenth century, Europe’s Thirty Years’ War—what might be called Western Europe’s first era of “total war,” ended with the consolidation of the state system throughout Western Europe.

Indeed, war and state building—two things that were often one and the same—drove efforts to build government revenues through debasements of the coinage. It was war with Scotland that drove Henry VIII to begin a multiyear period of debasing the currency in 1542, which continued into the reign of Edward VI. War drove other monarchs to similar ends, and on the Continent Charles V devalued the gold taler in 1551. In the seventeenth century, European monarchs engaged in “progressive debasement … in anticipation of the Thirty Years’ War.” Ultimately, Kindleberger concludes,  “Many princes in the sixteenth and seventeenth centuries did a roaring business in currency depreciation.”

Spain, France, and other rising states of the period accomplished all this without establishing true monopolies over the money supply, and currency competition limited what states could get away with. Even if national states had been able to solidify de jure monopoly control of money within their own borders, the sovereign’s money still faced competition from currencies in neighboring states and principalities. Just as dozens of different types of coins circulated within France, it was always possible for merchants, financiers, and more mobile classes of individuals to move their wealth in such a way as to avoid using the more heavily devalued currencies.

Thus, monarchs were cognizant of the risks that devaluation brought. “Too much” debasement of the currency could cause merchants, and even residents, to flee to competing imported or black-market currencies. Practical limitations controlled how much a regime could debase its currency. Thus, when Henry VIII began his campaign of debasement, he combined it with a broader wartime policy of confiscating goods and church property, and compelling loans.

In the seventeenth century, the ability to escape debased national currencies was further facilitated by the advent of the Bank of Amsterdam. Established by the City of Amsterdam in 1609, the bank—technically a “government bank”—calculated the values of the “no fewer than 341 silver and 505 golden coins” circulating in the Dutch Republic. The bank helped merchants identify which coins were “good” and which were debased. The bank then provided credit based on coins’ “real value” regardless of the coins’ claimed nominal values. The bank issued coins known as bank guilders which became the “the world’s most used currency at the time,” or perhaps even a “reserve currency” of a similar status to the US dollar today. This was not due to any moral righteousness on the part of Dutch politicians. It is likely that the Dutch regime would have also preferred to manipulate its own currency for gain. But the smallness of the Dutch Republic and its reliance on foreign trade greatly limited the regime in this regard. Thus, the Dutch were essentially forced to be become a reliable, competitive financial center in order to compete with larger states.

[. . .]

Banks proved to be essential, providing access to money in many cases, since even as late as the eighteenth century in many places, coinage was in short supply. These shortages may have been especially acute where wage work had replaced subsistence farming and agricultural barter. The new breed of employers needed money of various types.  Bank-created paper money thus served an important role in providing a medium of exchange when coins were either unreliable or unavailable.

This diminished the dependence on the sovereign’s coinage, and princes came to view these banks as troublesome competitors. Moreover, banks—unlike ordinary consumers—had the knowledge and the means to more carefully evaluate regime money and to accept devalued coins only at a discount.

Unhappy about the fact banks could often do an end run around the king’s coinage, states then sought to compel payments in metals, which the sovereign could more easily control.

[. . .]

The downside of crippling a polity’s banking sector is sizable, so eventually the state abandoned this strategy and learned to love paper money. But getting the public to accept government-issued paper money would be a long uphill battle.

[. . .]

It was not until 1694 with the Bank of England—that is, after more than three hundred years of modern state building—that the foundations were laid for a true note-issuing central bank. And even then, the Bank of England did not begin as an institution that creates money and did not have a monopoly on issuing banknotes until 1844. Rather, the Bank of England initially financed the government deficit by issuing shares. These shares, not surprisingly, were very popular given the fact the bank also enjoyed a monopoly on government deposits.

[. . .]

The rise of these central banks throughout much of Europe provided states with unprecedented powers in terms of issuing new debt and financing explosive government spending in times of emergency. The regulatory role of central banks further solidified the regime’s control of their financial systems overall.

Ironically, however, it was also in the nineteenth century that states faced mounting opposition to state monopoly powers in the form of the classical gold standard.

This was a result of the rise of laissez-faire liberalism in the nineteenth century, which was especially notable in Britain, France, and the US. Increasingly in Western Europe, the liberals and the commercial class insisted, according to Glasner, on an “obligation to maintain the convertibility of gold or silver at a fixed parity.”19 These formal definitions of a currency’s value in metals were important in that they made it easier to see the extent and effects of government manipulation of the currency. That’s all to the good, but it offered no challenge to the state’s growing monopoly over money. After all, the gold standard could be—and repeatedly was—suspended for reasons of war.

In other words, it would be a mistake to regard the era of the classical gold standard as a period of state weakness in financial and monetary matters. On the contrary, the classical gold standard was built on a firm foundation of state power limited only by legislation. The legitimacy of the state’s prerogative to ultimately oversee the monetary system was not in question. By the end of the nineteenth century in Britain, and in many other key polities, the days of privately issued banknotes and privately minted coins were over. (The US lagged this trend somewhat, but the outcome was eventually the same.) That is, there were no institutions left that could realistically challenge the state in terms of issuing and creating money.

[. . .]

Although many liberals apparently hoped that the classical gold standard would render national currencies irrelevant in a truly globalized world, this did not happen. Instead, the CGS appears to have in many ways set the stage for what came later: Bretton Woods and floating fiat currencies. These two developments, of course, finalized total state control over national currencies.

An analysis of these historical trends brings us to an important conclusion: it is not enough to wax nostalgic about the classical gold standard and seek a return to nothing more than gold-backed national currencies. Rather, the very idea of national currencies must be abandoned altogether, while embracing true currency competition and private commodity money.

[. . .]

So what is the ideal? Hayek concludes: “If we want free enterprise and a market economy to survive we have no choice but to replace the governmental currency monopoly and national currency systems by free competition between private banks of issue.”

[. . .]

He’s right. And what are these national currencies? They are the currencies we now refer to by their national names. The US dollar. The British Pound. The French Franc. This idea of a national money was central to the system of what we now call the classical gold standard. But, this idea of a national currency was essentially a trick foisted on ordinary people by governments themselves.

The rise of national currencies under the gold standard augmented state power in two ways. First, the CGS [classical gold standard] system helped accustom the public to using token money. Second, the consolidation of the national monetary systems under a single national currency solidified the power of central banks.

[. . .]

This, however, did not lead to runs on banks to convert banknotes into gold. Rather, ordinary people in domestic commerce learned to associate the regime’s paper money with gold, but without insisting on possessing the gold itself. More importantly, it was convenient to use paper money rather than to carry around heavy and bulky metal coins. As the public embraced this easy-to-use paper money, more and more of the gold supply flowed into bank vaults—including the all-important vaults of central banks.

[. . .]

This process of replacing gold and silver with things called shillings and kroner and dollars, by the way, was very important. Murray Rothbard saw this switch for what it was. In his book The Mystery of Banking Rothbard identifies how labeling precious metals as equivalent to some government currency denomination helped national governments pass off government currency as the same thing as gold.

[. . .]

On the Continent, regimes gradually abandoned silver and bimetallism due to a series of market events and government interventions. Thanks to the relatively new practice of governments imposing a fixed ratio for the prices of gold and silver—as opposed to embracing free-floating market prices—this meant that either gold or silver was undervalued in relation to the other. The undervalued metal would then be hoarded rather than used as a general medium of exchange. Throughout the first half of the nineteenth century, a relatively high level of silver production, combined with a fixed ratio, meant gold was legally undervalued. Gold then disappeared into hoards and France, for instance, entered a de facto silver standard. But after the middle of the century, thanks in part to gold discoveries in Alaska and Australia, gold coins become both more numerous and relatively overvalued. This meant gold became the preferred medium of exchange and silver was hoarded or switched to nonmoney purposes. Many of the world’s regimes thus moved more rapidly toward a gold standard.

Embracing a gold standard was also useful in facilitating trade with Great Britain, the world’s economic powerhouse at the time. Residents of countries on a gold standard could more readily and easily trade with residents from other countries that were also on a gold standard.

[. . .]

But, this system was fundamentally a system that relied on states to regulate matters and make monetary standards uniform. While attempting to create an efficient monetary system for the market economy, the free-market liberals ended up calling on the state to ensure the system facilitated market exchange. As a result, Flandreau concludes: “[T]he emergence of the Gold Standard really paved the way for the nationalization of money. This may explain why the Gold Standard was, with respect to the history of western capitalism, such a brief experiment, bound soon to give way to managed currency.”

The ordinary consumer, of course, had no way of guessing where all this was headed: toward the end of gold convertibility in the face of the First World War. It was then that the gold-standard regimes realized they could cash in on all that trust they had gained during the period of the CGS. Once the war broke out, the façade of regime devotion to “sound money” immediately melted away. The gold standard had succeeded in growing state power over the issuance of banknotes, over coinage, and over physical control of specie. During the war, states became very interested in using that power to enrich themselves. Van Creveld concludes:

Within a matter of days [of the outbreak of war] all belligerents showed what they really thought of their own paper by taking it off gold, thus leaving their citizens essentially empty handed. Draconian laws were pushed through, requiring those who happened to own gold coins or bullion to surrender them. Next the printing presses were put to work and started turning out their product in previously unimaginable quantities.

[. . .]

The movement toward state controlled money over the past century is just part of a larger process of the state monopolization of  money. For the past 500 years, states have become increasingly bold in asserting total control over the money supply and the financial system in general. The classical gold standard was part of this process, although one that was certainly less than optimal from the state’s perspective. In the century since the decline of the gold standard, however, states have managed to gain almost total control of money, and this is not a power states will give up easily.