I was debating this with a friend of mine - he was arguing that a legal tender is necessary in order to fund a government. Because, if there’s going to be a government and if there was free banking, then which currency would be used to fund the government and pay the people involved in it? Obviously the people involved in the government - for instance two different senators - might not want to use the same currency. Would it be that one currency would be selected and used to pay the government? But, that would grant a huge monopoly to that one currency, wouldn’t it? I don’t know…I think this issue here would easily be solved if we were to just be no state, but aren’t there minarchists that support free banking? Like Friedrich Hayek, Mises, and Ron Paul? What would they say about this?
Please excuse me if my question is really stupid - I’m pretty well read when it comes to political theory, but, with economics, I’m still a bit of a newbie!
That seems like a minute argument. Upon hire, government employees could simply pick their bank of choice. Just as employees with direct deposit currently do.
The state could declare a certain weight of precious metal to be the currency used for state affairs. For instance, the Coinage Act of 1792 defined the dollar as 27 grams of silver.
But it is possible to do without legal tender laws. Taxes existed long before legal tender. The earliest reference to legal tender law in the Wikipedia article about is from India 1837. The Wikipeida article on money says the first bank notes ever where issued around 960 and 1279 in China and the first ones in Europe came out 1661 issued by the Swedish central bank. Starting in the 17th centry in Europe money was gradually monopolized and in the 19th century turned into legal tender.
Unless this is completely wrong legal tender is a fairly new phenomenon. Institutionalised taxes have existed at least since the Babylonian empire and ancient Egypt, probably even earlier in China. And I imagine taxes have been collected in a more sporadic fashion since the neolithic revolution 10 000 BC. When the concept of private property first started to arise.
I think there can’t be free banking so long as there is a government - the government has every reason to invade and control the financial markets to the maximum extent possible (how better to levy taxes on people than to know who has what and is exchanging with whom, etc). But, for arguments’ sake, I would say that given that there were a free banking system and a government weak enough that it couldn’t monopolize and manipulate the banking system, the banking system would be as much of a fixture of the economy from the government’s point of view as it is from ours. The government would have to accept payment in the customary forms, just like any other organization. If the government is minimal, in your hypothetical, it wouldn’t have special privileges, it would have to abide by its agreements and market customs like anybody else… no special privileges for its ability to wave guns around or drop bombs or spy on people.
Georges Lefebvre’s studies of the Napoleonic system and society are a recommended read for sorting this out. private banks were very powerful, France didn’t rely as much as England on central banking and paper money and there were plenty of “hard” (ie gold, silver and copper) currencies in circulation inside the Empire and even France herself. A major source of income were contribution extorted from “allies” which, obviously, paid with whatever currency they had at hand. The French government received, say, Hanoverian and Austrian silver and gold coins and used them to pay off the banks which lent it money on advance. French soldiers and contractors were paid with whatever coin was available. There was an official exchange rate which, quite obviously, favored the French franc and unofficial exchange rate, mostly based on gold and silver content. Paper money was seen with suspicion after the Revolutionary experiments with the infamous assignats (quite similar to the US Continentals) and the Imperial government issued it with caution and only in times of dire financial need. While technically there was a primary currency (the French franc), lots of hard currencies were “competing” in the real world.