Liberty and Property

On July 4th we celebrate the Declaration of Independence, signed on July 4, 1776. Its second paragraph contains the famous words, "We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty, and the pursuit of Happiness. -- That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed."

The concept that governments derive their powers from the consent of the governed, and that individuals have unalienable rights to life, liberty and the pursuit of happiness is fundamental to the prosperity and progress that America has enjoyed in the ensuing two centuries.

Critical to that prosperity and progress has been the protection of property from seizure by criminal elements and by the government itself -- a protection firmly established in the Constitution's Bill of Rights and sadly lacking in many other nations to this day, to their severe economic detriment.

In light of this central importance of the protection of property, a brief discussion of the relationship between inflation and liberty is perhaps appropriate.

Since money is a store of value, the erosion of the value of money has long been recognized as an assault on individual property. Thomas Paine, in his 1786 publication Dissertations on Government, the Affairs of the Bank, and Paper Money averred that:

"The only proper use for paper, in the room of money, is to write promissory notes and obligations of payment in specie upon. [. . .] But if he is worth nothing, the paper note is worth nothing. The value, therefore, of such a note, is not in the note itself, for that is but paper and promise, but in the man who is obliged to redeem it with gold and silver. But when an assembly undertakes to issue paper as money, the whole system of safety and certainty is overturned, and property is set afloat."

Economist Ludwig von Mises in 1912 wrote that: "It is impossible to grasp the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights" (Theory of Money and Credit, 455).

Even John Maynard Keynes in his early years echoed these sentiments, saying in 1919: "There is no subtler, no surer means of overturning the basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose" (Economic Consequences of the Peace, 220-221).

Thus, the issue of sound money is an issue of property rights. Since the passage of the Federal Reserve Act of 1913 and the institution of a fiat currency in the United States, there has been a steady and significant erosion in purchasing power of money, graphically illustrated in the increasing amount of money required to send one ounce of first class mail in the stamps above.

In 1938, it would have cost 3 cents.
By 1958, the cost had risen to 4 cents.
By 1968, the cost had risen to 6 cents.
By 1978, the cost had risen to 15 cents.
By 1988, the cost had risen to 25 cents.
By 1998, the cost had risen to 32 cents.
In 2008, the cost is currently 42 cents.

This erosion of value represents to citizens the certainty of the erosion of their actual wealth over time, and requires them to find alternatives that will not lose their value relative to inflation. We have argued before that the surest way to do that since 1913 has been by connecting some portion of your wealth to the growth of successful business enterprises through the ownership of stock in those businesses (see here for that post, which also includes a link to academic research which demonstrates convincingly that stocks have succeeded in this effort to a far greater degree than investments in commodities such as gold, or investment in bonds and other interest-bearing instruments).

In this sense, Tom Paine was prescient when he stated in the same 1786 essay quoted above that "One of the evils of paper money is that it turns the whole country into stock jobbers." Whether investment in stocks is evil is a subject for another day. But it is important to emphasize that "stocks" are real shares of ownership in a business, and ultimately their worth is determined by the success of the business behind them. This is the very opposite of the problem that Paine saw with paper as money -- paper that was not backed up with anything other than a fiat (the Latin word for "let it be" or "let it be so"). Because we have had a system of fiat money (the same thing Paine meant when he talked about "paper money") for nearly a hundred years, we believe ownership in businesses is an absolute necessity for the preservation of the wealth.

For later blog posts dealing with this same topic, see also:

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