Free To Choose: a personal Statement

Who Protects the Worker?
247
CONCLUSION
When unions get higher wages for their members by restricting
entry into an occupation, those higher wages are at the expense
of other workers who find their opportunities reduced. When
government pays its employees higher wages, those higher wages
are at the expense of the taxpayer. But when workers get higher
wages and better working conditions through the free market,
when they get raises by firms competing with one another for the
best workers, by workers competing with one another for the best
jobs, those higher wages are at nobody's expense. They can only
come from higher productivity, greater capital investment, more
widely diffused skills. The whole pie is bigger—there's more for
the worker, but there's also more for the employer, the investor,
the consumer, and even the tax collector.
That's the way a free market system distributes the fruits of
economic progress among all the people. That's the secret of the
enormous improvement in the conditions of the working person
over the past two centuries.

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CHAPTER 9
The Cure
for Inflation
Compare two rectangles of paper of about the same size. One
is mostly green on the back side and has a picture of Abraham
Lincoln on the front side, which also has the number 5 on each
of its corners and some printing. You can exchange this piece
of paper for some quantity of food, clothing, or other goods.
People will willingly make the trade.
The other piece of paper, perhaps cut from a glossy magazine,
may also have a picture, some numbers, and some printing on its
face. It may also be colored green on its back. Yet it is fit only to
light the fire.
Whence the difference? The printing on the $5 bill gives no
answer. It simply says,
"
FEDERAL RESERVE NOTE / THE UNITED
STATES OF AMERICA / FIVE DOLLARS
"
and, in smaller print,
"
THIS
NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE.
"
Until not very many years ago, the words
"WILL PROMISE TO
PAY
"
were included between
"
THE UNITED STATES OF AMERICA
"
and
"
FIVE DOLLARS.
"
That seemed to explain the difference be-
tween the two pieces of paper. But it meant only that if you had
gone to a Federal Reserve Bank and asked a teller to redeem the
promise, he would have given you five identical pieces of paper
except that the number l took the place of the number 5 and
George Washington's picture the place of Abraham Lincoln's.
If you had then asked the teller to pay the $1 promised by one of
these pieces of paper, he would have given you coins which, if
you had melted them down (despite its being illegal to do so),
would have sold for less than $1 as metal. The present wording
is at least more candid if equally unrevealing. The legal-tender
quality means that the government will accept the pieces of paper
in discharge of debts and taxes due to itself, and that the courts
will regard them as discharging debts stated in dollars. Why
should they also be accepted by private persons in private trans-
actions in exchange for goods and services?
248

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The Cure for lnflation
249
The short answer is that each person accepts them because he
is confident that others will. The pieces of green paper have value
because everybody thinks they have value. Everybody thinks they
have value because in his experience they have had value. The
United States could not operate at more than a small fraction of
its present level of productivity without a common and widely
accepted medium of exchange (or at most a small number of
such media); yet the existence of a common and widely accepted
medium of exchange rests on a convention that owes its existence
to the mutual acceptance of what, from one point of view, is a
fiction.
The convention or the fiction is no fragile thing. On the con-
trary, the value of having a common money is so great that
people will stick to the fiction even under extreme provocation—
whence, as we shall see, comes part of the gain that issuers of the
money can derive from inflation and hence the temptation to
inflate. But neither is the fiction indestructible: the phrase "not
worth a Continental" is a reminder of how that fiction was de-
stroyed for the Continental currency issued in excessive amount
by the U.S. Continental Congress to finance the American Revo-
lution.
Though the value of money rests on a fiction, money serves an
extraordinarily useful economic function. Yet it is also a veil.
The "real" forces that determine the wealth of a nation are the
capacities of its citizens, their industry and ingenuity, the re-
sources at their command, their mode of economic and political
organization, and the like. As John Stuart Mill wrote more than
a century ago: "There cannot, in short, be intrinsically a more
insignificant thing, in the economy of society, than money; except
in the character of a contrivance for sparing time and labour. It
is a machine for doing quickly and commodiously, what would
be done, though less quickly and commodiously, without it: and
like many other kinds of machinery, it only exerts a distinct and
independent influence of its own when it gets out of order."
1
Perfectly true, as a description of the role of money, provided
we recognize that society possesses hardly any other contrivance
that can do more damage when it gets out of order.
We have already discussed one example: the Great Depression,

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250
FREE TO CHOOSE: A Personal Statement
when money got out of order through too sharp a reduction in
its quantity. This chapter discusses the opposite and more com-
mon way in which money has gotten out of order—through too
sharp an increase in quantity.
VARIETIES OF MONEY
An amazing variety of items has been used as money at one
ti me or another . The word "pecuniary" comes from the Latin
pecus, meaning "cattle," one of the many things that have been
used as money. Others include salt, silk, furs, dried fish, even
feathers, and, on the Pacific island of Yap, stones. Cowrie shells
and beads have been the most widely used forms of primitive
money. Metals—gold, silver, copper, iron, tin—have been the
most widely used forms among more advanced economies before
the victory of paper and the bookkeeper's pen.
The one thing all the items used as money have had in common
is their acceptance, in the particular place and time, in return for
other goods and services in the faith that others would likewise
accept them.
The "wampum" that the early settlers of America used in trade
with Indians was a form of shell, analogous to the cowrie shells
used in Africa and Asia. A most interesting and instructive money
used in the American colonies was the tobacco money of Vir-
ginia, Maryland, and North Carolina: "The first law passed by
the first General Assembly of Virginia, July 31, 1619 [twelve
years after Captain John Smith landed and established at James-
town the first permanent settlement in the New World], was in
reference to tobacco. It fixed the price of that staple `at three
shillings the beste, and the second sorte at 18d. the pounde.' . .
Tobacco was already the local currency."
2
At various periods tobacco was declared the only legal cur-
rency. It remained a basic money of Virginia and its neighboring
colonies for close to two centuries, until well after the American
Revolution. It was the money that the colonists used to buy food,
clothing, to pay taxes—even to pay for a bride: "The Rev. Mr.
Weems, a Virginian writer, intimates that it would have done a
man's heart good to see the gallant young Virginians hastening

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