What keeps China from counterfeiting them, then?
Yes. The situation you describe would have a powerful incentive for collusion. I think collusion would be an inevitable certainty, in fact. The countries wouldn’t check each other … they would cooperate to manipulate the currency supply.
In a free market (a 100% unregulated free market, something we’ve come close to but never completely had), fractional reserve banks have a limited ability to inflate the currency supply. They are a check on each other, however, keeping these effects limited. If one bank lends out a little bit too much, keeping too small of a reserve, then as other banks and the public come to redeem the claims they have on that bank’s accounts, there will be a run on the bank, destroying it. I don’t remember the exact figure, but I think at times when we’ve had freer markets than we have now, bank reserved hovered at something that was at least 15%. Perhaps somebody can correct me. I think the actual figure is somewhere in Murray Rothbard’s America’s Great Depression, which I highly recommend that you read!
If banks can collude together, everything changes. If the banks will not call each other’s claims, then they can loan down to an even riskier reserve level without a run. The problem on a free market is that even if a bank agreed to collude with another bank, it still has an incentive to change its mind and call it’s claims on the other bank. No collusion situation could be stable. No banking cartel could ever form, or if it did, it just would not be stable, because it would not be in any individual bank’s interest to engage in this collusion.
But, with force of law, all banks can collude. In 1913 America established its federal reserve system, the “lender of last resort,” the bank that loans money to banks to manipulate our economy. All banks in America are subject to the federal reserve system. In effect, there is just one bank, with lots of different names and branches, because the banks are all part of the one system. There is no real bank competition. The federal reserve sets minimum reserve ratios for banks. They claim they do this to protect the public from the economic problems that result from banks keeping too low a reserve ratio. But they set this level somewhere around 10%. (Again, someone else can give the exact figure.) We’ve already seen that in a natural market, the reserve ratio would be higher than this! Far from protecting the public, this “minimum” reserve ratio is actually the mechanism by which the federal reserve permits every bank in America to collude together; they can safely keep their reserve levels at a riskier level than the free market would permit them to have, because all other banks are subject to the same standards, and thus there is no incentive to be safer. They are protected from the claims on their deposits and the runs that would occur in a free market if they did this.
Now, this is the situation where every bank in America has colluded to create the modern dollar, which is really just a bank note issued by this federal reserve system. You will notice that your dollars are labelled “federal reserve notes.” (The original dollar was an ounce of silver. A bank note, issued not by the government but by a private bank, was a promise to pay a dollar, that is, an ounce of silver, from the issuing bank to whoever brought in the bank note to redeem. A federal reserve note is similar, but there is no promise to pay anything.)
The situation would be about a trillion times worse if the central banks of every country in the world, or most countries in the world, colluded. Those reserve ratios could be set even lower. The currency involved would have far greater reach, and thus the power involved in manipulating that currency would be far greater. Collusion definitely occurs on a national scale when banks get to collaborate on a central currency, like we have. It is even more certain to occur under a global currency, and the effects will be far worse.
Competition makes everything better. If anyone wants to establish an international currency, they should be free to do so, but they shouldn’t be able to force it on anyone. The free market is perfectly capable of selecting a currency or currencies that will meet the needs of its participants. That might be gold, but it doesn’t have to be. As long as currencies are subject to competition or potential competition from other currencies, the best currencies will rise to the top and outcompete the worst. But use the force of law to establish an international currency, by removing or discouraging competition, and you will see Gresham’s Law come into effect: bad currency will drive out good.
Did you read Rothbard’s Money, yet? You really need to!