“So what do you think should be done?”
I often get this question after I present my case against our fiat money system, and I sense there is a trace of frustration in it, a bit along the lines of “you are telling us that we are in quite a mess but you offer no policy prescriptions”. That is a fair point, I guess. Most writers who lament the economic ills of our time usually have a bag of policy advice on offer. Indeed, whispering new policy ideas into the ears of those in power is what most of these writers aspire to. I reckon what separates them from me is that they believe in government and I don’t.
The mess we are in is the result of policy, of the very idea – the silly idea – that the field of money and finance would work better if it were supervised, managed, guided and controlled by the state; that if we had clever, powerful and astute policymakers, consulted by economist philosopher kings, we could enjoy a smoother, better functioning economy. And if ever things were not running so smoothly, we would change the policy. So what is your policy, Mr. Schlichter?
Could you not be a bit more … constructive?
My conclusion is straightforward. There should be no policy. The existence of policy is already the problem. What we need is proper capitalism in money and finance. We do not have that now. What we have is limitless state fiat money, quantitative easing, systematic market manipulation, bailouts, regulations, the IMF, the World Bank, the FSA, FDIC, TARP and LTRO. We need proper markets, not more policy, not more manipulation, and not more bureaucracy. And not more fiat money. We need the state to exit the field of money and banking. Completely.
The main problem with monetary policy is that there is such a thing as monetary policy.
The state is the problem. It will not be part of the solution.
Before I tell you what I think should be done, let me give you another reason why I have been so reluctant to offer policy advice. The aim of my book Paper Money Collapse was to expose widespread fallacies and debunk erroneous common wisdom concerning money. It was not to provide a program for reform. The book is meant to be an eye-opener. Almost the entire discussion on money and banking today is based on deeply flawed theories. This is true of the financial markets industry where I worked for 19 years. It is equally true of most of the discussion in the media and, as far as I can see, academia.
My intention was to challenge the present consensus and the established orthodoxy. I think this is what needs to happen before we can even talk about the drastic changes that our system requires. Any policy debate of the type you read in The Economist or The Financial Times occurs within the boundaries of the established consensus. Questions of a more fundamental nature cannot be addressed in the context of policy debates.
But I am not going to evade the question about policy. So let me talk a bit about policy and reform.
The first piece of advice is this one, naturally: don’t start here.
The big mistake has already been made. The gold standard was abandoned, in a step-by-step process that began around the time of World War I and that culminated in Nixon’s closing of the gold window in August 1971. For more than 40 years, gold has played no official role in global monetary affairs. State paper money ruled. Everywhere.
This was the era of the central banker, the monetary bureaucrat, of artificially cheap credit, of stimulus, of big equity rallies, of bigger real estate bubbles, of constant debasement, of the quick buck and the big bonus, of growing banks and of ever more sovereign debt. The global financial system got unhinged. After four decades of persistent inflationism we have an overstretched finance industry gravely addicted to the constant drip-feed of cheap money and an out-of-control public sector constantly issuing debt that will never get repaid. Capital misallocations and asset mispricing are gargantuan. The establishment prescribes itself ever more easy money to keep the show on the road.
So the first conclusion is, there is no painless exit. The cleansing crisis is inevitable. Simply being honest about the mess we are in would not be a bad starting point for policymakers.
And to acknowledge that this can’t go on forever.
It certainly won’t go on forever.
Okay, but what next? If you could design policy, what would it be? What is the number one thing that we need to change to restore financial sanity?
Fiat-money-critics have floated a whole range of policy proposals. There is the return to some form of gold standard. Also, there is the rather fiercely contested debate about whether fractional-reserve banking should be banned or at least restricted. Recently, colleagues of mine at the Cobden Centre have introduced a bill to Parliament that would make board members of banks personally liable for bank losses, which is supposed to reduce or eliminate moral hazard. Thus we are already faced with a range of policy proposals. What is my position on them?
I think we can have it much easier. My proposal is more effective and more easily communicated: let us separate state and money completely. That is, I believe, the one thing that needs to change. Capitalism is the only economic system that works in the real world. But what we have today is monetary socialism, albeit a socialism predominantly to the benefit of the rich and well-connected.
We need to get the state out of the economy completely. To achieve this we must get the state out of ALL monetary affairs. The monetary sphere of society should be a no-go area for politicians and bureaucrats. State involvement in finance is the problem. Let us get the state out. Period. That is the one goal we should have. That is the one policy I recommend.
My enthusiasm for any other policy proposal varies considerably and is dependent on how much state intervention the policy still allows or in some cases even requires.
As an opponent of fiat money I am naturally positively inclined to a return to a gold standard. I believe that Mises was right when he wrote:
If in the coming years or decades our civilization is not to collapse completely the gold standard will be restored.
But what type of gold standard should be implemented? Would there still be central banks that would ‘administer’ that gold standard? Under any form of gold standard, the central bank would most certainly be more confined in its monetary operations than central banks are today but there could still be considerable room for manipulation. The US Fed was founded in 1913 under what was officially still the Classical Gold Standard but that didn’t stop it from funding the US government’s military spending in World War I and from initiating credit bubbles and business cycles. By 1933, the dislocations introduced by cheap money were so big that their dissolution – mandatory and normally automatic under a gold standard and indeed inconceivable under a proper gold standard – had become politically unacceptable. The Fed’s mission was accomplished and the gold standard was abandoned. The rest is history as they say.
An official, government-directed return to a gold standard also raises a lot of questions about implementation that would invite lobbying and horse-trading by various pressure groups. How much of the existing money stock – obscenely inflated after decades of money printing and fiat money debasement – should be backed by gold, or to put the same question in a different way, what should the new exchange rate between the money in circulation and gold be? How much should the existing money stock be devalued? Should banks be allowed to create deposits that are not backed by gold? Should fractional-reserve banking be permitted?
Questions over questions, and the room for political maneuvering and for political abuse are massive. Do we really want politicians, central bankers, bureaucrats, and their economic advisors make all these decisions? I don’t think so.
I know somebody who is best equipped to make all these decisions.
We may not all agree on the merits or demerits of fractional-reserve banking but as capitalists we should agree on the benefits, indeed the necessity, of free competition.
So how do we get from A to B? How do we get from the present system of finance socialism, of interest rates fixed by the central bank and asset prices manipulated by the central bank, of nominally private banks operating with the protection of a lender-of-last resort, to a system that again deserves the label capitalist?
Step 1: Privatize the central bank.
Do not even introduce a gold standard. Just transfer ownership of the central bank officially to the banks that have an account with the central bank. This is the first step for the state to exit the sphere of money. The central bank is no longer a public institution run by bureaucrats and politicians but an entirely private undertaking. It is owned and operated by the banks.
The central bank administers bank reserves and provides certain clearing functions. The banks need this, for now at least. Shutting the central bank down is not that easy. But its most pernicious aspect is that it is a policy tool. This would end abruptly with its privatization.
Step 2: The state revokes with immediate effect ALL laws and policies that relate specifically to banking and money.
From this moment on, banks are capitalist enterprises just like any other normal business. There is no lender of last resort (at least not one run by the state), there is no inflation target or other official monetary policy for which the banks function as conduits, which under the present system puts them in the strange position of being profit-seeking enterprises and policy-transmission mechanisms simultaneously. But equally, there is no backstop for the banks from the state any longer. No guarantees, no deposit insurance or taxpayer bailouts. If a deposit insurance institution exists, it is handed over to the banks, similar to the central bank. Again, the state has exited the business of regulating, supervising, licensing, subsidizing and backstopping the banking industry.
Entry into the field of banking is now free. You do not need a license. You do not need an account with the now privately owned central bank (although without such an account clearing with other banks might be difficult). There are no legal tender laws anymore, so if anybody has any bright new ideas about money (Liberty Dollars, bitcoin) they are most welcome to try them. The consumer alone will decide over success and failure.
Monetary policy has ended. Bernanke testimonies on TV will be replaced with reruns of old Simpson episodes. Senators and congressmen will have to find new soapboxes from which to propound their personal economic theories.
Step 3: The state’s gold hoard is handed over to the banks.
What? A gift to the bankers? – I do not consider this a gift to the banks but more a return of property to the bank depositors. The bank depositors are the ones that should benefit from this transfer most.
The present monetary system could only have come about because it was once based on gold. Deposit banking spread at a time when banks still promised to repay deposits or banknotes in specie, and when all banks were thus required to hold (some) gold reserves – reserves that no political entity could create at will. Only slowly and gradually was the gold backing removed and replaced with various implicit or explicit state guarantees, all of which are now practically failing.
Of course, just like investment genius Warren Buffett, the bankers may not know what to do with a pile of gold and may thus be tempted to simply put it on a big heap. I suspect, however, that the bankers will have a very good use for the gold. Their customers – the holders of bank deposits – may be very unsettled by the exit of the state and thus the taxpayer from the business of underwriting the banking industry. Most people only consider their bank deposits safe because they believe the state would not allow Bank XYZ to default, not because they have any confidence that Bank XYZ is run prudently. Now that the state has exited the field of money and banking, the banks are likely to use the gold as additional backing for their balance sheets. They will use the gold as it has been used for thousands of years – to gain trust. And to avoid bank runs.
Will the gold hoard be sufficient?
I don’t know.
Presently, the US government sits on 260 million ounces of gold. At the present gold price of $1,655 per ounce, we are talking $430 billion. The monetary base is presently $2,673 billion; M1 is $2,220 billion and M2 minus money market funds is $9,163 billion. The gold hoard is thus only 16%, 19%, and 5% of these money stocks, respectively. Hardly a proper gold standard but it could be a start. Through proper balance sheet deleveraging and through additional gold purchases the private banks are obviously free to improve these ratios. (Again it is not for bureaucrats or economists to decide what is appropriate. This is the role of the banking entrepreneur.)
But now that the private banks own the central bank, would they not put the printing press into overdrive and create inflation?
I don’t think so. Through quantitative easing the central bank accumulates assets from the banking sector and expands the money supply. The central bank leverages its own balance sheet in the process. The Fed is already levered more than 50 to one, which is more than Lehman and Bear Stearns were when they collapsed. But now the banks own the capital of the Fed. They foot the bill, not the taxpayer. The banks can no longer dump unwanted assets on the central bank. They own the central bank. They cannot transfer risk to it.
Additionally, the public will be very suspicious of an overtly expansionary central bank. They know it is operated by the private banks and entirely for their own benefit. Any inflation concerns will translate into higher interest rates and that is detrimental to the highly leveraged banking sector. I would expect the private banks, now operating without any safety net from the state but under the suspicious gaze of their own customers, to be very cautious about how much money they print.
Easy money is great for the banks for as long as they can lower reserve and capital ratios. That was much easier when they could rely on government backstops or when meeting official regulatory requirements already gave their balance sheet policy an official seal of approval. Now that they are on their own, monetary expansion and thus debt accumulation and leverage are a double-edged sword. It will pay again to run a bank prudently and even advertise your higher capital and reserve ratios.
Furthermore, the relatively sounder banks (if we assume for a moment that those indeed exist) have little interest in running the jointly owned central bank for the benefit of the weakest banks. To the contrary, it is in the interest of the stronger banks to see weaker banks fail and exit the market. At the same time, it is not in the interest of even the strongest banks to see widespread bank runs or a general distrust in banks as that could quickly come to haunt them, too. I think it is very reasonable to assume that under my plan of complete privatization the key challenge of allowing corporate failure in banking on the one hand but avoiding a complete collapse of the banking system on the other will be managed much better. The reason is that this task is now given to bankers as entrepreneurs who have a keen interest in getting that balance right. As long as banking is under the protection of the state, monetary and banking policy will be conducted for the benefit of the weakest banks, and the strongest banks will simply reap windfall profits.
Does the state get off too lightly?
The state no longer has any responsibility for the banks or money. No more setting of policy, no big hearings in Washington, no bailouts, no IMF, no World Bank. A lot of money will be saved and many explicit and implicit claims on the taxpayer will be eliminated. But also, the state can no longer tell the banks that government bonds are safe and encourage the banks through bank regulation and official capital requirements to invest in them. There is no longer any bank regulation from the state. Banks will be regulated by the market, which means ultimately by the consumer. The state also loses the central bank and can thus no longer create an artificial demand for its securities. Remember, last year 61% of new Treasuries were placed with the Fed. Why should the banks, which now own the central bank, continue to accept this?
Government bonds everywhere benefit from the idea that states can’t go bankrupt because they can always print the money. This idea is fundamentally wrong as I have argued repeatedly. Once the debt load reaches a certain level, it can no longer be inflated away. If this is still tried, currency disaster will ensue. Be that as it may, with the state officially separated from the field of money and banking, it would have to manage its finances like any other entity, like a private corporation or a household (or almost like any other entity as it still benefits from the privilege of taxation). We would certainly see higher state borrowing costs, lower levels of spending and smaller deficits. This would be an important step to what Doug Casey calls “starving the beast”.
Of course, in such an environment we would not have to worry at all about how the banks arrange their executive pay, how their bonus schemes work, or if bank shareholders hold their board members at all responsible for their mistakes and failures. These are internal affairs of entirely private and capitalist enterprises. If bank shareholders get this wrong and set the wrong incentives, only they will bear the consequences. The idea that banking is a public service for which a specific set of rules and regulations must be designed and administered by the state does no longer apply.
Come to think of it, this proposal looks much better in terms of consistency and clarity than any other, in my humble opinion. Those who argue for an official gold standard are asking the state to design and implement a new monetary order. Those who ask for a ban on fractional-reserve banking ask the state to define what constitutes legitimate banking business and then enforce it. Those who want to introduce new legislation in response to executive pay and bonus schemes, ask the state to interfere in the relationship between shareholder (principal) and manager (agent).
I ask the state to do just one thing: Get the hell out of money and banking! Now!
In the meantime, the debasement of paper money continues.
This article was previously published at Paper Money Collapse.
I totally agree that the consensus opinions around national and global monetary economics runs too thin a thread to be useful in these chaotic times.
But there seems little chance that the excesses of private ponzi finance of the last decade will see a denationalization of money.
In order to have a rational discussion of the alternatives to the present system, it might first be useful to correctly portray that which is existing, something which would be vain for Austrians to put out there.
I agree there should be a separation of the monetary, financial and banking powers, but not along the lines of total privatization. We should first restore to government its authority to issue the national currency, where that authority belongs, and at that point leave all matters of banking and finance to the proper bailiwick of the privateers of credit.
The ONLY thing the government should do is to ensure the proper QUANTITY of money in existence so as to be neither inflationary nor deflationary – especially in continuous cycles of the two.
Irony being, here in the US, we already have a private central bank, in that the FRBNY is a privately owned corporation, but that is totally another matter.
What the author fails to identify is the real problem of this broken private monetary system of the day, that of its debt-based nature, which causes ultimately that it MUST end up where Minsky said it would, in a debt-saturated ponzi finance scheme.
You can’t blame that on the government, except for passing their monetary sovereignty off to the international bankers.
This is the JP Morgan money system.
For all the non-haters of government in the world, those who want to take back their civic authority to join with our fellow citizens for collective self-improvement, including in money, we should abandon the hundred year experiment with temporal, reserve-based money and banking and resort to a permanent, debt-free-at-issuance system of public money administration.
It is all laid out in a Bill introduced by Congressman Dennis Kucinich.
Let the bankers have the finance system and leave the money system to the people where it has always belonged.
Have a go at that.
Debating alternatives to the present system is of paramount import – good luck with that.
For the Money System Common.
If by leaving the monetary system to the people, you mean giving it to the government, then I don’t think that changes our current system. I agree that money production should be returned “to the people” but in my case, the government should revoke all legal tender laws and remove the privilege that banks have for creating money. For that matter, the government should have nothing to do with money production.
Fractional reserve banking allows banks to conjure up huge amounts of non-existent money from thin air. The banks then lend this non-existent money to businesses and get paid huge amounts of interest, which they have done nothing to deserve.
This must be severely distorting the system to the disadvantage of savers.
If fractional reserve banking was made illegal, loans to businesses would have to come from savers, allowing them to charge a reasonable rate of return. This would appear to me to be a much fairer system.
In a 100% reserve banking system with commodity money, we would presumably have less inflation and less need to grow to stand still.
Would there be enough savings available to be loaned out, and allow modest growth to fulfil people’s expectations of an increasing standard of living?
reply to Chris
While its true that FRB allows creation of non-existent money by the bankers, distorting wealth accumulation, and that full-reserve (or non-reserved) banking would create less inflation and less imperative for growth, it is also still true that ALL money must be created out of nothing.
There’s no such thing as money.
It doesn’t grow on trees.
It is a civil, legal construct that must, by definition, just who should have the power to create it (out of nothing).
This is not a criticism or anything.
Just saying that resort to full-reserve banking (I prefer non-reserve banking)
does not solve for the money-creation conundrum.
In fact, it tends to mask its significance.
“The ONLY thing the government should do is to ensure the proper QUANTITY of money in existence so as to be neither inflationary nor deflationary – especially in continuous cycles of the two.”
And just how do you suppose it is going to manage to achieve this aim?
I see that your own website suggests that it will be achieved by some kind of Monetary Authority (how composed you do not say) which will calculate the exact amount of new money needed over time.
A (rather persistent!!) commenter on your site sums the situation up nicely in my humble opinion: –
“….there would be absolutely no way of knowing what the right amount of new money would be, because no human or group of humans can possibly gather, much less process, all the information available in the economy.
It is impossible to centrally plan the production of boots. Considering that, it is nigh on impossible to even imagine the impossibility of centrally planning the money supply. Central planning has always failed…….It has not failed because the planners of the past have been incompetent, it has failed because it is impossible.
Regarding the Monetary Authority, it can’t really correct the first year’s mistake with an adjustment to the increase the next year, because that implies that they can calculate what would have been the exact right amount a year after the fact. This is only very slightly less impossible than calculating the correct amount the first time. This is actually what the Fed has tried to do, more or less, and as we both can agree, it has failed miserably. Looking at the numerous examples of runaway and hyperinflation throughout history, there is absolutely no reason to think the Monetary Authority would do better, especially not considering that Kucinich’s bill provides for paying off all the obligations of the federal government with printed money. That alone would amount to tens of trillions of dollars, with trillions more created every year.
We certainly can agree that the present system is immoral, corrupt and insolvent, but what I still don’t understand is how your Monetary Reform would bring actual change. Everything will still be under government control. The Monetary Authority set out in the NEED Act is hardly distinguishable from the Federal Reserve Board. There will still be enormous incentives for rent seeking on the part of (big) business, and the vote buying potential will grow exponentially.”
Additional to all of this though is the simple fact that a State issued currency monopoly imposed using the threat of force can have no place in a properly free society (as opposed to the notionally free society we currently endure): –
“Any monopolist is a disturbing factor in exchange and the worst type of monopoly is political government. Government is (should be?) a public non-profit enterprise; money is an agency inherently devoted to private profit enterprise and free exchange. Government has no competitive restraints; it does not sell its service by inducement. It makes no over-the-counter bid for its issue. It merely levies upon the wealth of the community without regard to the value, or any means of determining the value, of its services. It has no free exchange method of backing its money issue and lacking that, it is not qualified to issue.
Governments are operated by fallible men who are not individually responsible for their acts, as are men in private life. The reaction from their false action falls upon the citizen and not upon the officials. The paternalism that the political money system has permitted government to affect is the reverse of the truth. The citizen is father and the government is child. The citizens must nurture and discipline government and their exclusive control of the money system is the essential implement therefore. To lose it is to lose sovereignty. A government with money power can free itself from citizen control, and pervert the economy by injecting into it un-backed money.
The cost of government must be borne by private enterprise but government can and should be denied the power to insinuate the cost into the price of commodities and the cost of living. It can and should be obliged to present its costs openly and obviously, so that it will excite the resistance that any excess may justify. To permit government the money creating power is to enable it through an unbalanced budget to increase the cost of living and deceive the citizenry on the actual cost of government and thus free itself from citizen control. It must, therefore, be confined to the status of a credit power participant in exchange. In other words, before it can spend money, it must collect it from the sum already created by the citizens. It must be unable to create money by the debit power which power must be confined to private enterprisers. This compels it to maintain a balanced budget and protects the economy against inflation, which is its worst enemy, and assures the citizen economical and responsible public service”.
Unfortunately, I can only imagine.
Dear E.C. Riegel
Thanks a lot for taking the time to visit our economicstability website and pointing out some of the contentious issues between monetary reformers such as myself and the Austrian school dialogue.
However I think many of the questions you raise here have been answered there, and I am glad to address them again.
The context here is raised as to the proper relation, if any, of the state to the national monetary system.
The national money system is well established in our country and functions as the legal and civil construct I mentioned.
We are, of necessity, discussing the dismantling of that particular legal and civil construct of our national monetary system, and either replacing it with another – which would leave us discussing WHICH other, or of not replacing our legal and civil construct of a national money system with anything legal, however civil that may be.
I think it’s a petty argument, when discussing the national monetary system and the national economy, as to which, the private versus the public, administration of the money power would be most accurate in meeting the ongoing and long-term needs for a national circulating media.
I would be glad to meet at the point that neither would be perfect and that neither would necessarily be disastrous, given the billions of commercial machinations that go on in a national economy needing money to sustain.
I would be willing to agree that under either system the exact same amount of “money” would be created – one amount created as a private debt and one amount created as a public credit.
What is it that were discussing here?
The object of monetary policy is to use the money system to achieve economic objectives. The objectives we have are the fullest employment possible and a lack of general price inflation or deflation. The fullest employment possible means utilizing all of the resources we have available for improving our economic well-being.
So, to me, the issue becomes one of whether complete privatization of money is the superior alternative to complete nationalization of the money system. As I said, in a public money administration, the only thing needed is the proper amount of money to be in circulation to let the market determine what economic activity will happen, were there that adequate money available. That is kind of what defines the role of money – that of providing the means of exchange between whatever consumers want and whatever producers provide.
I agree that the use of the savings of the depositors is the proper source for the capital needed to achieve these objectives. But I also believe that it is the role of the state to provide the circulating media necessary to ensure a smoothly working exchange mechanism.
You engage in a lot of unnecessary mini-economic trivia in engaging what is a totally macro economic issue. (Jeezum, who’s in charge of boots here?) Only history will show whether a public money administration does the better job.
There is no need for the perfection in forecasting money quantities demanded by the Austrian school. What is important is to have a well worked out plan for achieving your economic objectives. Keeping inflation in check is just as important avoiding deflation.
As for the Fed’s methods for controlling money amounts, the tool of interest rates is an unnecessary and pathetic substitute for “issuance”. Let the interest rates be determined by the capital markets.
Again, for those of us who do not believe in the Austrian philosophy, the government boogey-man argument causes us to want to destroy that corrupt system and take back our birthright from the malcontents who now control the money power.
All the rhetoric about the need for openness and transparency in government is a given from my stance. I don’t get the importance of pretending that having a privatized money system will somehow free the slaves here. Quite the opposite.
We’re not the slaves of the government, but of the debt-issuing monied elite.
Let the markets determine commerce in all things that happen on the level playing field of the national economy. But do not give anyone the power to create your nation’s money, unless you can vote them out of office.
For the Money System Common
To Robert Sadler
“If by leaving the monetary system to the people, you mean giving it to the government, then I don’t think that changes our current system.”
I really have no idea why you would believe that, but I promise you the battle royale of all times is coming when those who now possess the power of money issuance have to give it back to ‘we the people’.
Surely THEY see it as a change from the current system.
Its a fact that the Government has full control of money production. They set the laws and provide the regulatory environment in which the banks operate.
How would giving money production back to the people be any different? “Back to the people” sounds very communist btw.
My apologies to Peter Wraith.
I just realized he was quoting E.C. Riegel .
With regard to Mssr. Riegel’ contention that having government issue the nation’s money “is to enable it through an unbalanced budget to increase the cost of living” seems a bit narrowly based.
Were either government (debt-free) or private bankers (debt-based) to issue the same amount of the nation;s money, it would the interest bearing private option that would add to the nation’s cost of living, and not the option of government issuance.
Besides, given that the government’s budget represents the public necessities of the national economy, it would not seem possible under the von Mises definition of inflation to be such a burden (to increase the cost of living).
Again, monetary reform through public money administration ain’t for those who fear that a every time two citizens get together to try to improve their well-being they are going to steal someone else’s private property.
“Besides, given that the government’s budget represents the public necessities of the national economy”
It’s hard to take seriously anyone who suggests that current government spending is on ‘necessities’.
“public money administration ain’t for those who fear that a every time two citizens get together to try to improve their well-being they are going to steal someone else’s private property”
There are plenty of ways two citizens can get together to improve their well-being without stealing from a third party. None of those ways involve the government.
Completely privatising money – ie, taking monetary issuance from the hands of the existing banking cartel and giving everyone the ability to issue their own currency, would solve most of the current problems we face, as citizens would not be obliged to take any particular currency at ‘face value’, but to discount it according to whatever criteria they choose. It seems pretty clear to me that very quickly, issuers would have to have some commodity backing their notes, or no one would take them.
So, for instance, imagine Lloyds issued a currency (the “Lloydo”), that was backed by gold @ the rate of 100 Lloydos per ounce of gold, whereas Barclays issued their ‘Barclo’ currency @ the rate of 10 Barclos per ounce of silver. Assuming neither allowed fractional reserve banking (FRB), the rate at which the two currencies traded would probably reflect the old 16:1 ratio between silver and gold (though as most of all gold ever mined is still in existence, whereas much of historical silver has been dissipated through industrial use, perhaps not…)
Anyway, (say) Lloyds did practice FRB, and Barclays didn’t, then presumably the market would discount Lloydos in relation to how much Lloyds had inflated their currency. If Lloyds refused to publish the figures, then the market would discount their currency further… this loss of purchasing power by holders of Lloyds notes (ie, those who had lent Lloyds the underlying specie) would act as a powerful incentive for them to withdraw their deposits, which in turn would act as a powerful incentive for the bank’s directors to limit their currency inflation.
ie, within a polity, their would be multiple, private currencies trading at variable rates.
Most people now would think this would be too complicated for the average citizen to get their head round, and thus impractical. But citizens would still be able to make the choice of trading in physical specie if they preferred, or only dealing in currencies that were 100% backed.
In a true Anarchy, this system would be fine. However, as soon as we accept the need for some government (and I do), we raise the issue of how it pays for its services. And, of course, it would do this through taxes.
Taxes are, obviously, an involuntary exchange. Fail to pay them, and you face draconian punishment. Thus, it seems to me whatever currency the government declares its taxes must be paid in, would immediately take on the status of ‘legal tender’, thus rendering any other currencies at a disadvantage.
I’d be interested in hearing other people’s thoughts on this issue.
As I understand it, legal tender is what *everyone* is obliged to accept as settlement for a debt.
There’s no necessary connection between this and the form of payment the government demands for taxes.
They could stipulate whatever they like, without requiring other people to accept that same currency.
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