Problem: inflation. Solution: free markets in money.

A few people asked in comments on the inflation post about the problems with restricting the market for money in our country. We do have the option of holding foreign currencies instead of dollars, and many smart people take up that option, especially in times of volatility in the dollar. But why should we have to invest in the production of a foreign nation (especially a state) if we could have the option of using home-grown industry?

Seth asks:

I have heard questions of the US currency before, but is the alternative we want colonial US where each state has their own currency?

This is not specifically what I’m proposing. Yes, if they want to, I think every state should be able to issue its own money, fiat or otherwise. That’s not the only thing I want to see. Banks should be able to do the same! The first paper money was issued solely by banks, and has evolved into something many of us use every day: checks. When Seth says

There is a great benefit to using one currency, I know what money is suppose to look like, it is hard to counterfeit.

he seems to forget that checks are money too; and issued by private companies. Norms and procedures have evolved to verify that checks are not counterfeited, and the same would be true of any private currency.

Money issue should not be limited to only states and banks forced to register with those states. Frankly, any entity that chooses to issue money should be allowed to do so. One example is the Liberty Dollar, which is a gold and silver-backed private voluntary currency who recently had assets seized by the government for no reason. Liberty Dollars are redeemable for a certain fixed amount of gold or silver, which means that it is very hard for them to inflate. They are better holding than dollars in some cases for that reason. There is a reason the constitution says “No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.

Frankly, I’ve seen how well the government manages things. I’ve seen how well the manage the dollar which, frankly, is not very well. I would definitely trust currency backed with something over currency which is not backed (like U.S. Dollars currently, which are only worth something because the government requires people to accept them as payment for things). For example, if Google or Paypal introduced silver-backed “Googlebucks” or “Payps,” you could use those. There would be a floating exchange rate and you could use a check card anywhere that automatically converts them to dollars at point of sale (or doesn’t if the merchant prefers payment in one of these currencies!) Check cards do this already with foreign currencies. This is only one step farther.

So, I’ve tried to explain what I think should happen, and how it’s plausible that it could happen. We come to why I think it should happen. Here are a few reasons:

  • I am a big believer in freedom. People should be able to choose to engage in mutually beneficial trade without anyone stopping them. Freely chosen trade always creates a benefit to all parties involved. It is positive sum; value is created from nothing when I choose to make a trade with someone else. Trading items of value for any currency that the seller desires is a mutually beneficial trade and so should be allowed and encouraged. Legal tender laws (saying that U.S. Dollars must be accepted) and government strong-arming of private currencies both diminish this freedom, and thus create less trades than there otherwise would be.
  • A free market in money is good for all the reasons that a free market is always good: competition provides incentives to achieve better service, lower costs, and lower profits. Government dollars are currently more expensive than they should be, and when they inflate it causes massive headaches. That inflation is usually directly a result of poor management of the money supply by the government itself. Competition in this arena would solve that problem. A monopoly enforced at the point of a gun is always bad. In this case, nothing is different.
  • Ultimately, in a mutualist society, every person would be able to issue their own money backed by their own assets, or combine together to form a mutual bank backed by all the assets of its members. This would incentivize local currencies. If you, and the person you are buying from are both members of the same mutual bank, you are free to make trades and purchase from each other without having to deal with any money monopoly at all. Essentially all the members of a town could get together and create “town dollars” which are backed by all the assets owned by people in that town. Only people in the town would accept town dollars and there would be an exchange rate with other currencies. This means people will have a strong incentive to buy and sell locally, which, in my opinion, would be a good thing. And, if a town (or members of a mutual bank scattered across the country) managed itself very well, with everyone gaining many assets, their money would be worth more when traded with the outside world (they would get a better exchange rate). The problems of inflation and poor management only affect small groups of people, rather than the economy as a whole. Decentralization is usually a benefit in this way.

I’m sure many people found this post rather dull, but I don’t think what I’m advocating here is that crazy or that complex.


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