4: Money and the State
Historically, the state has engaged in the practice of obtaining commodities it desires by force or threat of force. Simply stated, the state simply takes what it wants, and if it offers anything at all in return, it is by its own whim and is not a representation of value.
When a state abdicates the use of force and proposes to participate in economic markets, it does not differ from any other participant in transactions, and is subject to the market's own mechanism for the determination of value.
Aside of participating in market transactions, the state may seek to interfere with the function of the market, by setting arbitrary exchange rates or prices for commercial goods. These attempts have generally been frustrated by the fact that the decree of the state is valid only within its borders and not elsewhere, and that when the exchange rate dictated by the state is unacceptable to buyers and sellers, commerce is quashed rather than regulated and a black market emerges.
The Legal Concept of Money
When an exchange occurs in which both parties fulfill their obligations, there is no need for state intervention. But when one party fails to tender as agreed, the shorted party (rightly) maintains that he has been defrauded and seeks state assistance in obtaining the payment to which he is due by terms of the agreement.
(EN: Von Mises generalization is limited to the exchange of physical goods, but the same principles might be seen to apply to services. If both parties bide by the agreement, the state is not needed. But if payment is made and service not rendered, or vice versa, there is appeal to the state to settle the dispute. Qualitative matters may also apply, such as the service not being performed to the satisfaction of the purchaser, but this may be true of physical goods as well, should the seller deliver merchandise that does not meet the expectations of the buyer.)
It's also noted that, when the terms of exchange are other than currency, the state generally requires the acceptance of currency in a certain amount in lieu of the item promised. This is common where the item cannot be provided by the party that owes it, making the literal fulfillment of the agreement impossible.
This does not indicate that the law requires money to be used as a common medium of exchange, or that the law has the power to suggest an exchange rate - merely that in the settlement of a case, the plaintiff is required to accept a specified sum, of a specified currency, in that specific instance.
It's also noted that the state is also the guarantor of money substitutes, by this must be sanctioned by commercial usage. Should a court refuse to acknowledge the value of commercially-accepted money, or attempt to compel a party to accept a form of money that is not freely accepted in the market, it in effect becomes not a court of justice, but an abettor in fraud or deceit.
But the state may legislate a settlement of debt in terms other than money, provided that the outcome is accepted as just by both parties to the dispute: a party that has failed to deliver an agreed-upon quantity of wheat may be required instead to furnish a greater amount of barley. This does not make barley into money, or require it to be accepted in any commercial transaction, nor does it set an exchange rate between wheat and barley by virtue of the decision. The power of the court is limited to the settlement of a single dispute.
It can likewise be said that when a state enters into a purchase contract, the authority of the state is binding only upon that contract. The price that the state is willing to pay for a good does not fix the value of that good for any other transaction. (EN: Though it has historically been true that the state has an influence on supply and demand, especially when it conducts transactions for large quantities, this is a side-effect of its behavior in the market, not a virtue of its legislative power.)
For the state to impose further restrictions on commerce, to produce an unfair settlement to a dispute or to demand goods at a lower price than the market values them, is not an impact on commerce, but merely an act of extortion - the use of force or threat to take as it desires and offer whatever it will, if anything, in return. And such acts have no long-term impact on the free market (EN: except to instill fear into suppliers of the same commodity that their goods might also be seized.)
The (proper) role of the state in commerce is as a guarantor of commercial exchanges, particularly when any form of credit is extended (which may be as simple as a lapse in time between payment and delivery), but in order to remain effective in doing so, it must yield to the standards of exchange set by the free market.
State Influence on Monetary Systems
The state's original activity in the monetary sphere was the manufacture of ingots and coinage. The notion that the state would be fair in creating a standard coinage of a given weight and purity, and the notion that the state would act to discourage counterfeit of state-issued currency, was not strictly necessary to commerce, but was effective in the facilitation and encouragement of commerce.
Later, the state undertook to act as a bank as well as a mint, issuing token coinage that contained only base metals, but could be redeemed for the precious metals held in state treasury. The impact of this decision has previously been considered.
Problems of differentiation later emerged: different issuers, and even the same issuer at different times, would issue coins of differing weight and quality. The solution was fairly simple, in that coins were stamped with their mint and date of origin as well as the weight and fineness of metal contained within or represented by the coinage.
The state's authority in these matters was no different than a private mint or bank - and the practice of issuing currency did not constitute authority on the state to dictate what commodities could be used in exchange, nor to force the acceptance of state-issued coins. It was merely a convenience that was valid only insofar as the parties to a transaction agreed to accept it.
However, the state has greater authority when it comes to demanding currency - specifically, in the form of taxation. By virtue of force rather than consent, the state could mandate that taxes and other forms of payment made to the state were required to be made in a certain form of currency - for example, the state would impose a tax that could only be paid in the most recent currency issued by the state. This created a need, hence a demand, for a very specific currency.
The same can be said of payments made by the state, but in this instance, it is typically a matter of voluntary consent rather than coercion for a merchant to agree to accept the state currency in exchange for goods demanded by the state. However, this limitation also influences the state's demand for payments - the state gains no benefit in demanding taxes to be paid in coins that it cannot itself spend.
It's also noted that gold and silver have been used in parallel as media of exchange for thousands of years, and there has not been a persistent method of fixing the exchange rate between the two metals. This fluctuation has been a continuous obstacle to commerce, and states have attempted to intervene by either imposing an exchange rate upon the two metals.
The inherent problem is that supply and demand for precious metals causes the state-mandated guidelines to cause certain coins to have greater value, as base metal, than the amount the state decided them to have. In effect, merchants were given an incentive to melt gold coins into ingots to make them worth more in trade than the proposed value of the coinage at times when the value of gold increased in comparison to silver, and vice-versa.
Ultimately, the fluctuations led to a decision between the two precious metals: one would be used as coinage, and the other simply as a commodity, like any other. Such determinations could be made by the market, but were often made by the state by choosing a single metal by which to denominate its currency.
In effect, the notion that the state has any power in monetary systems is largely illusionary. Except for the ability to use force or threat to create imbalance, decisions pertaining to currency are based on the value of the commodities (metals) they represent as determined by their usage in the market - as the market will defeat or circumvent any attempt made by the state to influence free exchange.