The essential error of the modern monetary system is the monopolization of currency issue. There is a large confluence of interests in this legal monopoly - the currency issuer retains all the profits to be earned from seignorage (and more, since it can charge above-market-prices for currency issue), the State can better track and tax transactions by making sure that virtually every transaction uses the monopoly currency (how many dollars in taxes do you owe the government for a transaction of X silver ounces for Y bushels of wheat?).
One of the principal arguments for legal tender laws and taxation of commodities which could be used as competing currencies is that only by means of centralized, fiat currency issue can stable prices be maintained. There is a large body of scholarly work refuting this claim but it can be a large learning curve for most people to overcome. I think there is a shortcut.
David Friedman, in a 1982 article, discusses the issue of a currency based on a basket of commodities. Despite some quibbles with his implicit views on property rights, I agree with most of his analysis. In a competitive money market, it would be possible (conceivable) to issue banknotes backed, not by a single commodity, but by a basket of commodities and such banknotes would be much less susceptible to sudden changes in purchasing power than banknotes backed by a single commodity, such as gold or silver notes. Whether such a currency would, in fact, emerge as a dominant alternative in a free currency market, is beside the point. All that matters is that it is possible that such currencies could be issued and, if the market demanded banknotes with this sort of built-in price stability, they could be issued profitably. So, price stability can be produced on the market if it is demanded.
So, the raison d’etre for central banks is bunk. We don’t need central banks.
Uhm, just compare the stability in the purschasing power of gold and the purchasing power of any fiat currency over the last 100 years or so and see what happens…
I made a quick comparison for Swedish kroner
1 SEK could 1900 by the same amount of gold as 67.22 SEK in 2009.
1 SEK in 1900 could buy the same amount of commodities as 52.76 SEK in 2009 (for wages this has increased from 1 to 587.3 SEK)
So in commodities there is a 52.76x difference, in gold the difference is only 1.27x … now which gives the most stable prices … hmmm
I’m certainly not advocating fiat money - in fact, I’m not advocating any kind of money. My argument is only that a (property-rights respecting) commodity-basket currency can be produced on the free market. Since it can, and since such a money would deliver price stability*, there is no reason for central banks. Please note that I’m not seeking to supplant or trivialize the more scholarly approach to the issue - these are needful for serious refutation of pro-central bank scholars. I’m talking about an appeal to the masses.
Clayton -
*not in the “$1 = 1 loaf of bread forever” sense that Grayson means, but in the “contracts written in this currency will be relatively insulated from short-term fluctuations in the supply/demand curves for any one commodity” sense
Yeah, my point was that you probably make this more complicated then it has to be by introducing the commodity-basket.
I think if you examine gold versus fiat track records, gold will be much more stable booth in the long and in the short run. Even if you disregard the many cases of hyperinflation that have happened to fiat currencies there are still rapid fluctuations consistently occurring since they where introduced for most of them. The fact alone that most contracts running over any period of time to speak of don’t use absolute numbers but rather the price base amount should show that fiat currencies are crap at price stabilisation.
That is a simpler case for the masses then your commodity-basket…
Real world examples of something that doesn’t achieve the specified goal anyway and something that does it better should be more convincing and feel more relevant then that the market could, if it wants to, provide it by this thought up construct that have hardly ever been used…
Neither - I’m not playing social engineer. Rather, I’m pointing out that if people demanded a stable reference currency - more stable than gold - for writing contracts in, the market could produce such a reference. Personally, I doubt whether a more stable reference than gold would be demanded since gold worked fine for centuries but let’s assume, for arguments’ sake, that the scale of modern contractual obligations makes them particularly sensitive to even slight deviations in the value of the currency in which they are penned. If that’s the case, then a more stable reference point can be constructed by the market in the form of some hybrid currency basket. I can even imagine currencies competing on the basis of their basket composition, much like mutual funds compete with one another on the basis of their stock picks.
Yeah, well, people listen to the appointed experts. It’s human nature. And the appointed experts say that gold is too volatile and “inflexible”. The inflexibility of gold, of course, is its major virtue! But people are easily impressed by sophistry and the fluctuations in supply and demand for gold seem to people (that I talk to) to be a significant problem with gold (the only more popular argument is the “there isn’t enough gold in the world!” argument). I see no harm in pointing out that the market could handle this problem if it turned out to be that significant. Empirical evidence suggests it wouldn’t be a problem because it hasn’t been a problem in the past.
Well there is one major problem with gold. Unfortunately I can’t find the source now and I don’t really feel like digging it up in the International Monetary Fund’s International Financial Statistics Report. But I once saw a chart on worldwide ownership of monetary gold and if I remember correctly something like 60-70% is held by governments (maybe someone have the figure?).
Of the total above ground gold stock (jewellery, monetary and industrial) governments supposedly own 20-25%.
Fortunately they rarely trade on the open market in large volumes but this is of course makes gold under current conditions very vulnerable.
If they say that there isn’t enough gold I doubt they have enough understanding of what money is to understand either argument…
One ounce could be enough. You could have alloys with other metals. Micro or nano grams of gold in that metal would be enough to give it its market value.
Individuals do not want more money supply, individuals want more money, or a higher purchasing power. Individuals are concerned with personal purchasing power and the ability to increase that.
If time is an issue and they cannot wait than the situation is the prior, they want more money now. In this case they are free to look up any honest lending firm. Such services are entirely legitimate on a free market. But this does not mean we need to expand the money supply, by honest lending I am referring to the lending of real currency and capital, not lending in the contemporary context.
