Despite major inconsistencies, the social contract theory remains one of the most prominent founding myths of our societies. Is it possible to revisit this dogma to correct its deficiencies?
Human societies emerged well before the institutions that govern them.
The social contract theory finds its origins during the Enlightenment era in the 18th century. In the context of challenging royal institutions, philosophers like Rousseau and Hobbes sought to answer the following questions: How are societies born? Why do humans decide to live together? Where do governments derive their legitimacy?
According to Rousseau, an implicit contract binds men together to form a society. Through this contract, men relinquish some of their freedom to the state. In return, the state provides justice and security. This way, the general welfare is protected from special interests through the legislature, elected by the people.
The social contract theory has had a major influence on Western philosophy. As attractive as it is, the theory suffers from fundamental flaws.
First, no one has ever signed such a contract. One can argue that elections represent a tacit renewal of the contract. But in this case, abstention should be considered. And what about countries like Belgium where voting is compulsory?
Second, history teaches us that human societies emerged well before the institutions that govern them. It is the society that begets the institutions and not the reverse. Moreover, these institutions have been set up in bloody wars and revolutions.
Lastly, according to Rousseau, since the parliament represents the people, the minority must accept any decisions taken by the majority in the name of a nebulous “general interest.” In the 19th century, Alexis de Tocqueville had already mentioned the risk associated with this belief. Such a system drifts into a tyranny of the majority.
It is the society that begets the institutions and not the reverse.
If we looked closer, we would see an institution inseparable from the human society that could perfectly fulfill this role of the social contract: money.
Is Money a Social Contract?
Money is proper to man. Historically, no society could develop without the support of some form of money. Conversely, the concept of money is meaningless when taken out of its social context. It is from its acceptance by users that money derives its legitimacy and value. Men voluntarily adopt money because they benefit from it.
By facilitating exchanges, money allows specialization — the source of new technological developments. As a store of value, it allows users to save, which is the source of investment and protection against the hazards of life. Investment and technological progress both generate growth. This is the fundamental reason why men unite: in order to draw greater benefit from each other’s labor.
If money is the cement that binds society together, what happens when this cement disintegrates?
If money is the cement that binds society together, what happens when this cement disintegrates? The German hyperinflation between 1921 and 1924 is certainly one of the most tragic examples of monetary collapse, but it is far from an isolated case.
Given its critical role, it may be tempting for a minority to manipulate the currency to its advantage. If the phenomenon is not new, it has also become more complex over time.
An early example occurred with the use of minted coins.
Originally, coins ensured the weight and quality of the currency. But gradually, the right to mint coins has become a state monopoly. This has allowed governments to control currency and extract a rent (seigniorage and sometimes debasement).
The invention of the banknote was a major technological evolution. Originally introduced to facilitate increased trade, banknotes have gradually become a monopoly of the power in place. As a striking example, Napoleon Bonaparte gave the monopoly of printing bank notes to the Bank of France, of which he was a major shareholder.
The creation of central banks is the logical continuation of the state’s growing influence over money. Under the pretext of stabilizing money issuance and protect depositors from banking crises, the creation of central banks actually greatly facilitated state indebtedness, war funding, and ultimately inflation.
Speaking of inflation, here is precisely what Keynes said about it:
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some."
From Social Contract to Social Control
But inflation is not the only stab to the social contract of money. From the moment the money is imposed by the government rather than freely chosen by citizens, it loses its legitimacy. Initially acting as a social contract, money in state hands becomes a tool of social control. It allows a minority to exploit their privileged position for profit and power.
The states impose the use of their currency in more or less subtle ways. In the most authoritarian countries like China, the currency is subject to strict controls.
Exchange rates are set by the government and capital movements are tightly monitored. In the so-called democratic countries, the currency is imposed through legislation and numerous regulations. For example, the official currency is the only one allowed for the payment of fines and taxes. Banking and insurance regulations require individuals to invest a proportion of assets in state bonds, to inform the government of all transactions above a certain amount, etc.
In terms of social control by the currency, governments can be very creative. One example is the introduction of price and wage controls. Another example is the introduction (and increasingly pervasive use) of the food stamp program.
A more pernicious threat now hangs over the money with the disappearance of cash so desired by our governments. The abandonment of cash threatens to increase our dependence on the banking system. It also increases the stranglehold of states over their citizenry by facilitating the establishment of taxation on savings accounts or even an outright confiscation of bank accounts, as was the case in Cyprus.
The worst tyrannies are those where citizens were deprived of their currency.
Freeing the Money
All monies do not fulfill their social contract equally. Among fiat currencies, large differences exist, depending on the objectives of central banks and economic policies. So if we compare the consumer price index (a proxy for inflation), we observe that the US Dollar has lost about 54 percent of its purchasing power over the last 30 years.
The Swiss Franc saw a decline in purchasing power when it was limited to 31 percent and then 14 percent for the Japanese Yen. At the same time, the currency's purchasing power fell by more than 99 percent in Mexico, Turkey, and in many countries of the former Soviet Union.
Gold and precious metals enjoy a lasting credibility because these commodities are difficult to manipulate. Precious metals have also provided an effective hedge against inflation and other monetary turpitudes throughout history. Gold is still a reserve currency of choice for central banks.
Finally, a new form of currency has recently emerged: the cryptographic currencies among which Bitcoin is undoubtedly the most famous. Bitcoin appeared in 2009, at the height of the subprime crisis and bank bailouts by the taxpayers. If they have often aroused disbelief in their infancy, these cryptocurrencies now enjoy a combined capitalization largely exceeding $100 billion.
More fundamentally, cryptocurrencies are the perfect illustration of the competitive bidding of private currencies. This is similar to what was proposed by Friedrich Hayek in his book "The Denationalization of Money."
Money is a tremendous source of emancipation for the society.
Since the use of these currencies is free, their value fluctuates according to the interest they generate and the resulting demand. Their course is closely linked to the services they can provide, as a means of payment, and their credibility, as a store of value. The proliferation of these cryptographic currencies is a full-scale laboratory experiment for the future of money.
Money Guarantees a Free Society
Money, even more so than democracy, embodies the essence of the social contract. Its legitimacy comes from its acceptance, freely chosen by all users.
The fundamental role of money in exchange explains its catalytic action in the seeding of the development of human societies, long before the emergence of democratic institutions. Finally, currency manipulation inevitably causes the decline of a society, as democratic as it may be.
Nothing better sums up money that Ayn Rand’s quote:
"Money is the barometer of a society’s virtue."
Money is a tremendous source of emancipation for the society. It promotes cooperation and peaceful exchanges between humans, no matter their views, gender, origin or preferences. It is the conductor that imperceptibly regulates the human action.
Conversely, anyone who aims to suppress money should be prepared to substitute it by a planned economy with cohorts of bureaucrats who impose by force. Anyone who denounces the dictatorship of money should recall that the worst tyrannies are those where citizens were deprived of their currency. And if money is regularly accused of being the root of all evil, it is all too often the victim of those who control it. Rather than blaming the money, let’s blame those who corrupt it.
Perfect currencies do not exist. As the brainchild of fallible humans, monies are bound to constantly face primal temptations. Failing to find such an illusory ideal, the freedom to choose currencies is the best guarantee of having sound money in a free society.