An Objectivist Case for Government-Issued Paper Money
Lisa Liel

In his answer to the question "Should the U.S. return to a gold standard?"[1] Dr. Yaron Brook, director of the Ayn Rand Institute, begins, "That is not the fundamental question. The fundamental issue here is how do we get rid of the fiat money system we have today, which is clearly wrong..."

I'd like to challenge that position. I think the principles of Objectivism not only allow, but require a government issued fiat currency, albeit one with Constitutional limitations. One which, in point of fact, is not really "fiat", but is still issued by the government and backed by nothing other than the good faith and credit of that government.

It is commonly stated that in the Objectivist view, the only legitimate functions of government are police, army, and courts. Let's take a brief look at why those are legitimate functions.

As Rand points out in her essay "The Nature of Government":[2]

The precondition of a civilized society is the barring of physical force from social relationships—thus establishing the principle that if men wish to deal with one another, they may do so only by means of reason: by discussion, persuasion and voluntary, uncoerced agreement...

If a society provided no organized protection against force, it would compel every citizen to go about armed, to turn his home into a fortress, to shoot any strangers approaching his door—or to join a protective gang of citizens who would fight other gangs, formed for the same purpose, and thus bring about the degeneration of that society into the chaos of gang-rule, i.e., rule by brute force, into perpetual tribal warfare of prehistoric savages.

The use of physical force—even its retaliatory use—cannot be left at the discretion of individual citizens. Peaceful coexistence is impossible if a man has to live under the constant threat of force to be unleashed against him by any of his neighbors at any moment. Whether his neighbors' intentions are good or bad, whether their judgment is rational or irrational, whether they are motivated by a sense of justice or by ignorance or by prejudice or by malice-the use of force against one man cannot be left to the arbitrary decision of another.

In other words, government must provide objective prevention and objective retaliation, because men will not always behave rationally, and subjective prevention and/or retaliation will inevitably degenerate into chaos and barbarism. A government which provides objective prevention and retaliation; i.e., objective law, is the sine qua non of civilization.[3]

This explains police and armed forces. Rand goes on in her essay to explain why courts are a legitimate function of government:

In a free society, men are not forced to deal with one another. They do so only by voluntary agreement and, when a time element is involved, by contract. If a contract is broken by the arbitrary decision of one man, it may cause a disastrous financial injury to the other—and the victim would have no recourse except to seize the offender's property as compensation. But here again, the use of force cannot be left to the decision of private individuals. And this leads to one of the most important and most complex functions of the government: to the function of an arbiter who settles disputes among men according to objective laws.

In other words, the government function of courts stems from a need for objective arbitration. But this requires some consideration. It is possible for two sides to choose an objective arbiter. In fact, arbitration outside of the court system has become more and more common over time.

The answer, of course, is that if one party doesn't like the decision of the arbitrator, there is nothing forcing him to accept it. Only governmental power can exercise objective coercion of both sides to accept an objective determination. Rand writes, in that same essay:

Man cannot survive, as animals do, by acting on the range of the immediate moment. Man has to project his goals and achieve them across a span of time; he has to calculate his actions and plan his life long-range. The better a man's mind and the greater his knowledge, the longer the range of his planning. The higher or more complex a civilization, the longer the range of activity it requires—and, therefore, the longer the range of contractual agreements among men, and the more urgent their need of protection for the security of such agreements.

Even a primitive barter society could not function if a man agreed to trade a bushel of potatoes for a basket of eggs and, having received the eggs, refused to deliver the potatoes. Visualize what this sort of whim-directed action would mean in an industrial society where men deliver a billion dollars' worth of goods on credit, or contract to build multimillion-dollar structures, or sign ninety-nine-year leases.

What Rand implies here, and in fact lays the conceptual groundwork for, though she never reaches the conclusion herself, is the necessity of having objective money.

What is money? Barter, as Rand points out, is impractical. Therefore, we need something portable, which can represent possessions and be used for trade in their place. It must also be able to represent different amounts of wealth. If a standard piece of money is sufficient to purchase a stick of gum, it will require an outrageous number of pieces of that money to purchase a car. If a standard piece is sufficient to purchase a car, it will be impractical to use it for purchasing a piece of gum.

The most common money throughout history has been metal. Usually gold and/or silver. Often, the two are used complementarily, because neither one can practically be used – directly – to buy both costly items and cheap ones. And in fact, even those who call for a gold standard don't envision us walking around with bars of gold or gold coins in our pockets, but rather, for banks to hold our gold in vaults and issue us paper money against that gold.

The problem with using metals as money is that they are commodities. And like any commodity, they can become concentrated in the hands of a few. In fact, it has been the case that any time in history that a gold standard has been used, banks have had the exclusive power to determine the amount of money in circulation. In recent centuries, this has become even more the case with the advent of what is called "fractional reserve banking," in which banks loan out – at interest – more money than they actually possess in deposits and their own capital. By doing so, they create money where none existed before, but since they are not creating any wealth to back it, the money already in circulation loses value. All of the lost value accrues to the bank eventually, since that money is repaid to it. In this way, banks create a constantly flowing stream of money from everyone else to themselves.

Rand writes:

Observe the basic principle governing justice in all these cases: it is the principle that no man may obtain any values from others without the owners' consent—and, as a corollary, that a man's rights may not be left at the mercy of the unilateral decision, the arbitrary choice, the irrationality, the whim of another man.

Any system which allows the size of the money supply to be controlled by "the unilateral decision, the arbitrary choice, the irrationality, the whim of another man" is in conflict with civilized society and the role of government. Since money, representing the ability of one man to trade with another, is used by all of society, it is necessary that there be objective money, which is not subject to manipulation by individuals. This can only be issued by the government.

Now, however, we come to the obvious problem, and one which we have seen in our own times. The arbitrary inflation and deflation of the money supply by the government, which has wreaked havoc on our economy. For a government to issue objective money, it must do within Constitutional limits. It must not be able to change those limits without fundamentally changing the Constitution. I would argue that any money supply must be kept at least roughly proportional either to the land controlled by a government, or by the population. The latter seems more practical in the United States, both because the population is counted by Constitutional mandate every ten years, and because vast additions to American land, such as the purchase of Alaska, did not increase the wealth of the nation in any proportional way.

The details, however, are not the essential issue. What is essential is the fact that by the very Objectivist principles enunciated by Ayn Rand, not only are police, army and courts valid and necessary functions of government, but so is the issuance of objective money.

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[1] http://capitalism.aynrand.org/yaron-answers-should-the-u-s-return-to-a-gold-standard/

[2] http://www.aynrand.org/site/PageServer?pagename=arc_ayn_rand_the_nature_of_government

[3] Rand only speaks of objective retaliation, but objective prevention is clearly implied as well, for if an individual threatens another, government is surely not required to wait until the threat has been carried out to take action against the aggressor.