The austrian school of economics talks a lot about how, in a free market of currencies, there would still be a tendency for one, or at most two items, to be used as mediums of exchange.
The reasoning is that when someone uses an item as a medium of exchange, as opposed to using it as an item meant for consumption or production, they are generating an additional demand for that item, which drives up it’s marketability. For example, when an additional individual wants to use gold as a medium of exchange, there is one more individual in the society who is accepting gold in exchange for other items of value. Thus there is an additional incentive for other people to also use gold. As if different groups of people used different mediums of exchange, buyers would constantly be paying a fee to convert the medium of exchange of their choice into the one of the seller’s choice.
I agree with this reasoning in general. But what would happen if the conversion fees were low enough, that the consideration would be more about which resource retains or increases it’s value over time, in a steadily manner, more than the others?
In his book Denationalization of Money, F.A. Hayek talks about how, if private currencies were to be allowed, there would be many private organizations that would start offering their own currencies, backing them in different commodities. He talks about how some might use gold, some might use silver, and how he sees most organizations using baskets of several different commodities as backing for their currency. His reasoning is that in this way, the value of the basket is protected from fluctuations in the price of one single commodity. The rothbardian counter-argument is that there would always be one commodity in the basket that would have a higher degree of marketability than the others, and so it would be more effective for an individual to save and loan in that commodity, rather than the others, as he or she would know that more people would accept that commodity than the whole basket in exchange for other goods or services, without having to pay a fee.
I also agree with the rothbardian critique of Hayek’s idea of baskets of commodities. However, an internet user by the name of auamoti, in his “Invisible currency” series, suggested that stocks could be used as mediums of exchange. I thought this idea was very interesting as stocks can vastly outperform commodities if picked by a sound investor. However, individual stocks have a much higher degree of volatily as compared to commodities.
So I was thinking what would happen if we mix auamoti’s and Hayek’s ideas together. Private organizations offering currencies backed in baskets of stocks. Putting aside state restrictions and controls on stock exchange, these baskets could contain stocks from hundreds, even thousands of different companies from all over the world, making them virtually immune to volatily, even more so than any commodity. Gold could go down a lot if new discoveries are made that allow gold to be produced at a cheaper cost. But if you take a basket of stocks of 2000 reliable companies from all sectors of the market, there’s virtually no chance for anything like that to happen.
So how would this work?
I was thinking that a private organization, let’s call them “bank X”, would purchase a basket of different stocks, and then offer paper or electronic money that represents that basket of stocks. If bank X has stocks from 100 different companies, and each of the stocks of those companies is worth the same, then if you had 100 “bank X” dollars, you would be entitled to exchange those $100 for 1 stock from each of the 100 companies.
Bank X could issue a new currency every 6 months to update it’s basket of stocks to the new market conditions, determined by their expert investors. If you wanted to keep the old currency you could do that, or you could exchange it for the new one at any point.
Bank Y could have a different model, where they update the basket of stocks in real time, giving the currency more adaptability and thus a potential for higher gain in value over time. However this would carry the risk that bank Y could potentially make bad investments that the customers are not in favor of.
If the currency of one bank showed over time to be more stable than other currencies, and/or had it’s value rise more on a per year basis, that would be the one most consumers would choose.
Gold, as any other commodity, has it’s price much more dependant on supply and demand than stocks. Sure, supply and demand still apply to stocks, and they do determine their value somewhat, but more important than that is the supply and demand for the actual goods or services that the company is providing, as well as the company’s capital and organization. So what this means is that just because a given stock is in a basket of stocks used as currency by one bank, doesn’t mean that the value of the stock will necessarily go up. As if that bank wasn’t buying it, someone else would. And as soon as banks realize that they have an overpriced stock in their baskets, they would sell them and buy a better stock.
How about actually using this money?
When you went into a store, the store could quote the price in many different currencies, or they could use just one and you’d figure out how much that is in the currency of your choice. With today’s techonology, it wouldn’t take more than a couple of seconds to check.
As for conversion fees, if everyone was constantly using different currencies, there would be a huge demand for currency conversion, which would drive down the cost of prodiving that service. Also, in today’s world, the main reason conversion fees are so high is because people are using paper money that isn’t backed in anything, and so a business that does currency conversion has to mantain a very large capital in pieces of paper that lose value over time. That has a very high cost for the business which is then passed on to the consumers.
So, to recap:
*A private currency backed in a basket of stocks can gain more value over time and be less volatile than any commodity. It can be easier to store and transport, just as easy to divide and to recognize that the item is what the owner claims it is.
I think in an entirely free market, many items would be used as mediums of exchange, but I think baskets of stocks would be among the most popular. What do you think?