My questions deals with transitioning away from a fiat currency in a country with zero gold in its treasury. Rothbard, in The Case Against the Fed, states the U.S. can transition away from fiat currency by dividing the amount of dollars by the gold stored in the treasury. For the sake of discussion, allow me to present an easy equation: If there are 30 trillion dollars in circulation, and there are 30 trillioin ounces of gold in the U.S. treasury each dollar would be exchanged for an ounce of gold.
What can be done if a country does not have any gold and wants to stop using its currency and allow a free market in money? Before answering, I need to add that for taxes, the country might accept a few types of money to avoid favoring one type of money. For the sake of this discussion, I will assume the country’s currency unit is called the peso.
To make the transition to a free market in money, I believe the country would need to do the following:
Value the fiat currency unit based on a recent actual value of the currency unit (one peso equals 1/1000 barrel of oil). The currency’s value could be based on a date many months or even years prior to passing legislation enacting this plan to avoid a suddent interest in the currency, which could distort its value. I chose oil because gold will be accepted as payment in a later step and this may radically increase gold’s valuation.
Mutiply the value of the unit of currency by the quantity of outstanding currency to arrive at a total value for the outstanding currency (1 billion pesos x 1/1000 barrel of oil = 1 million barrels of oil)
Sell enough government property or land to raise amount equal to the total value of the currency (5 million acres of land + oil exploration rights in three regions = 1 billion barrels of oil = 1,000 pounds of gold + 100,000 pounds of silver). The government would accept both gold and silver to avoid favoring one type of money..
Exchange the gold and silver for the currency (1 peso = 1 gram of silver and 1/10 ounce of silver)
Stop using the currency
Accept gold and a few other forms of money for tax payments
The citizens of the country will likely protest the selling of government land and natural resources, but peso holders, who will mostly be citizens, would protest if the peso was suddenly deemed worthless.
The country will need to sell less land and natural resources as the sale of land and natural resources progresses, because buyers will need to obtain gold and silver to make purchases, and this will drive up the value of gold and silver, and the more valuable gold and silver will be equal to more oil barrels; less gold and silver will be needed to equal the fixed amount of oil barrels calculated in step 2.
As far off as it seems, figured you deserved my neophyte opinion:
I think you should start by allowing currencies to compete and repealing taxes on Silver and Gold. It is my understanding that Ron Paul has a bill to do this he introduced.
Taxes could still be paid in a variety of currencies eventually yeah.
Selling govt. land sounds like a good idea
Tend to agree with you.
The U.S. government has gold so perhaps it could use that.
Just announce that from now on people can use whatever they want for money and let the chips fall where they may.
I mean, why do we need the govt to decide what is money? Cause of chaos and disorder? Very quickly something will work out. Talk about neccesity being mother of invention, here we have a real neccesity.
Of course the govt can try their hand at producing some money, just like anybody else. Maybe if they are smart, their money will be popular.
The only reason this was not done in the old days was because the kings wanted the right to slice a bit off the coins for themselves, and of course paper money is a real blessing for any govt [as opposed to the governed].
About taxes, Peter Schiff has this idea to abolish all taxes but sales tax. If this were done, the tax would be collected in whatever was used for payment.
In your plan I hope you are going to let the gold and silver value of the peso change as gold and silver change prices against each other in the world markets. I seem to remember that otherwise trouble is ahead, don’t remember the details.
Because Hayek was a radical anarchist who made no prescriptions or predictions concerning the private production of money…
No matter what happens the government will have to be involved in the transition to the private production of money, whether it be Rothbard’s plan of selling off their gold or using a frozen stock of fiat money. Because of network externalities it’s very difficult for one currency to be voluntarily replaced by another, so whatever plan is chosen for the transition to the private production of money, it’s likely to stick. So gold or a frozen stock of fiat money, we’re going to see a lasting government intervention in the market.
They certainly have to be involved in the first stage, the destruction of the current currency, but I suspect they can step into the shadows after that.
Are there not many countries now whose money is destroyed, and yet they figured out just fine how to buy and sell? I give you Somalia and Zimbabwe and Iraq, to name three I read about.
Can you please explain what you mean by “network externalities”, and how you know they will just leave the country in limbo, unable to buy and sell?
The OP asked a practical question, so let’s try and stay practical here. If the government did get rid of the central bank they’d still have to dictate what currency taxes and other government transactions were paid in and they’d have to sell of their gold to act as backing for the new currency, all of these are government interventions in the market that will be around for some time. Perhaps gold was once upon a time the optimal good for outside money, the times have changed and the incentives have changed, with the price of gold as high as it is now there would be huge impracticalities to using gold as currency. What’s more, markets won’t appear the instant government intervention has ceased, as anybody in former Soviet nations will tell you.
As for Somalia, as far as I’m aware, they’re not using gold right now. In fact, they’ve printing up their own money at such a pace that any currency is literally only worth the paper and ink that goes into producing it, yet because of the stability this mechanism provides it serves well as a medium of exchange for small exchanges, whereas US dollars serve as the medium of exchange for larger transactions. I’ve not heard anything about a gold standard developing in Somalia.
What I mean by network externalities is this, people only use currency because they know that those they interact with use that currency, and they expect it to stay that way. So even if society would be made better off by everybody switching currency, every single individual will be made worse off by doing so because they will have fewer people to trade with or higher transaction costs in doing so. See here for more: http://en.wikipedia.org/wiki/Network_externality
Do you mean in Somalia large transactions use us dollars? Or do you mean that Somalians can’t make large transactions because they use a Somalian currency (whatever it is called) which only allows for small transactions? Either way that doesn’t seem to make sense due to the purchasing power which would have nothing to do with the kind of currency as long as the currency is valued. The large or small transaction, I mean where’s the cut-off point on ‘large’ and ‘small’. Do you mean something else here?