Lets pretend that the state magically falls apart and dismantels itself in a very brief period of time. Assume that we could end the fed today, and assuming no interference from the USGov, we had a free market in the production of money literally tomorrow.
Our assumption states that the dollar has not failed because of hyper-inflation, or that it has even failed at all. Only that the Fed has ended, and the US likewise has no authority over the creation of money.
What I am interested in discussing is what happens to the dollar if it all ends today. Keeping the regression theorum in mind, where does the USD go? Obviously business owners won’t stop pricing things in dollars overnight. There must be some kind of gradual progression towards a different system.
Do we start to see goods priced in various things, like USD, Gold, Silver, Canadian Dollar, Ect…?? Do we start to see a public awareness of the dollar/gold ratio? At first the value of gold is denoted and priced by the dollar, does this ever switch around? That the value of the dollar is priced in oz’s of gold? (And it may not be gold I’m just using it as an example)
I know this is all speculation so have fun with it, I’m just curious as to what other peoples thoughts are.
Again the key component is to keep Mises regression theorum in mind.
After the collapse of the Barre regime in Somalia, counterfeiters were able to issue Somali shillings like there’s no tomorrow. But no Somali would accept a shilling note in excess of 1,000 shillings, the largest legal size printed before the collapse of the Barre regime. So, the shilling experience a brief period of rapid devaluation (over the period of a month or two IIRC) until it fell to about 3 or 4 cents for a 1,000 shilling note which is about the paper, ink, transportation, etc. costs of printing them. So, we have a voluntary system of shilling note issue which is maintained by “counterfeiters” who print notes when the value of the shilling goes up a little and stop printing when it goes down, which keeps the supply of notes in working condition as notes go out of circulation due to loss or wear and tear. This is just a regurgitation of economist Ben Powell’s description of what he jokingly calls a “commodity paper money” in Somalia. There’s an online lecture somewhere where he discusses this.
Other currencies, including USD and gold Krugerrands, co-circulate with Somali shillings for larger transactions.
At 3 or 4 cents per 1,000 shilling note, it would take a boatload of shillings to buy an ounce of gold. I guess someone who deals in large quantities of shillings might be willing to do the exchange, I’m not sure. Here’s the lecture.
I would imagine that the “Gold Awareness” we see today - the rising popularity of gold investment - would translate into a portion of the population that immediately considers use of gold as a medium of exchange. The trend will catch on with small business owners with more at stake, and crawl up the ladder, until all businesses are valuing goods and services in gold. Of course, businesses conform to consumers, so this will begin by using gold for its storage value; when consumers begin offering gold to pay, businesses will begin to price with ounces (or grams, etc) of gold.
This is my theory, in any case. I’m not as familiar with Mises’ writings as I should be, so my grasp of the regression theory is flimsy at best, but I contend that my prediction is realistic.
The two assumptions are blatantly inconsistent. At the first whiff of a chance that there’s is no more Fed and US govt to maintain the USD, gold would shoot to $10k/oz and as the chance turns into certainty it would shoot to $1million/oz quickly proceeding to $infinite/oz i.e. quick and utter destruction of the USD.
I say that the very next day nothing would change. Financial institutions and ex-im businesses, used to work and calculate in foreign currencies, would be the first to use, at least among themselves better currencies as the Swiss franc. Some banks could, after a year or two, begin to offer checkable deposits in gold and silver. The use of the dollar would dwindle and, to keep financing the deficit, much more printing would have to be done, sending the dollar tumbling. Within e few years, I believe nothing dearer than a car would be bought and sod in dollars, with homes and productive assets trading in silver/gold certificates. From then on, its free banking again. That’s my take.
As far as counterfeiting goes, I don’t think this would be a problem. Once people realize that counterfeiters will make their attempts, the business owners etc. will make their attempts to stop them. A lot of businesses mark bills that are $20, $50, and $100 to see if they are real or not, and of course banks do the same. I think the market would spring up to safeguard against that. It wouldn’t be as easy as it seems. If anything, I wouldn’t be surprised if people started cracking down more on counterfeiters if free-banking starts up, because obviously banks who are to make a profit want to protect their own interests, and the interests of businesses.
The dollar would still be used, and at the same time free-banking would spring up. I don’t expect everyone to start using gold, especially when a lot of people are not educated in this area. I think this would take some time for the layman to get a grasp of. It depends on how fast the usage of gold (or anything for that matter, it could be something completely unsuspected) is used. I’d expect businesses, investors, and entrepreneurs in general to be the first to start using gold (besides those educated in economics). Eventually it would take root with the people that this is what’s starting to be preferred in large transactions.
What parts are inconsistent? It’s a hypothetical world we’re talking about here…
So what happens? I like Merlin’s example. Foreign currencies first, especially with international business’s, gold not coming into the picture until some time later.
This raises a valid point. Let’s say a bank, or whoever is issuing/minting/printing a given currency, and someone copies that currency exactly (as best they can), is this “fake” money still valued about the same as the “real” money it’s based off of?
What if a bank or someone who issues a currency decided to go as far to patent or copyright their money? If it’s an actual metal like gold or silver, counterfeiting would not be likely, if they are issuing notes, it seems more likely. Can some agency on the market go through and prove what’s the legitimate money of various banks on the market?
Of course if someone is going through the trouble of counterfeiting they might as well make their own currency. Would counterfeiters be held as criminals for copying someone elses currency?
I think the competition itself would keep “false” currencies from arising in place of someone is actually printing/minting money to make some sort of profit, but I feel like this just leads myself into a circle to define what a “false currency” is if the value is subjective…
(1) that the dollar has not failed because of hyper-inflation, or that it has even failed at all.
(2) that the Fed has ended, and the US likewise has no authority over the creation of money
(1) and (2) cannot be both true at the same time.
I already described what happens. Markets are forward-looking. If/when (2) becomes certain or even likely, there is no such thing as “some time later” – the market will brutally adjust right then and there.
Err by what logic are you employing which stipulates that both of these conditions are not possible in a hypothetical world?
Are you stating that if the Fed ended tomorrow, the dollar would automatically fail immediately?
No offense but I don’t need a lecture on markets. I’m asking for what in your opinion, how the whole mechanism would play out, keeping the regression theorum in mind. You have not really offered anything to the discussion.
This is just simply a mental exercise.
Is this compatible with the regression theorum? Lets say the Fed failed today, what would goods be priced in tomorrow? If you say “the dollar” then you may see why your nitpicking leaves much to be desired.
An interesting point indeed. It would seem to me that holding one liable for merely copying and selling a piece of paper amounts to recognizing IP rights, for that is the only claim a bank can have to ‘its’ currency.
On the other hand, if the bank uses such pieces of paper as merely certificates for prompt redemption in gold, silver or what have you, than copying would be fraud no les stahn copying checks is today, and punishable thereof.
Thus, there would be, in a free banking system, a tendency towards commodity money. The poor Somalis can get hold on no gold or silver but free banking in a more advanced and/or endowed economy would probably switch to commodity within the decade.
Also note that the moment a truly free banking economy is established, the rest of the world will do whatever it can do destroy it. If we cant hold people liable for copying private banknotes, we sure as hell cannot hold them liable in copying foreign states’ pieces of paper. And since there is money in printing fake dollars with which to buy US Xboxes, a free banking community would very soon flood fiat regimes with their own currency, destroying other, less sound, economies. Thus, I believe that a free banking economy should, at the very least, poses nukes to starve off any invasion, for that is surely what will happen when free banking is implemented.
An interesting point indeed. It would seem to me that holding one liable for merely copying and selling a piece of paper amounts to recognizing IP rights, for that is the only claim a bank can have to ‘its’ currency.
On the other hand, if the bank uses such pieces of paper as merely certificates for prompt redemption in gold, silver or what have you, than copying would be fraud no les stahn copying checks is today, and punishable thereof.
I’d like to make that more specific. Absent IP laws, copying a piece of paper is by itself not a crime - even selling it may not be a crime - but selling copies while pretending they are the real thing constitutes fraud, even if the bank issuing them doesn’t exist. For example, making glass gems is perfectly fine, selling them as real gems is fraud.
Also remember the Kurds using old Iraqi currency, it was limited in number and hard to counterfeit, which suited them just fine as money (especially as the new currency was badly inflated). In this scenario, the dollar is likely to continue to stay in circulation for some time, though it is doomed in the long term.
Well, that would depend on what one thinks constitutes fraud. To myself, a product is fraudulent when it pretends to deliver something that it doesn’t. thus, when a Chinese guy makes a shitty Porsche Cayenne, externally undistinguishable form a decent one, that is fraud. On the other hand, if I make an exact copy, down to materials and all, of the thing, that its not fraud for me to sell it as a Porsche Cayenne: after all I am selling the real thing.
Thus for unbacked banknotes: as long as they are exactly as the original, they are the original. Ah sure, if the note contains words such as “printed by Bank X”, than sure reproducing that would be fraud. But absent that, the counterfeited note is good enough, from my legal point of view. Of course in practice people would put “printed by bank X” on notes, but I’m not sure whether that would halt either counterfeiting (being illegal is something, being stoppable is entirey something else) or the demise of unbacked notes.
To myself, a product is fraudulent when it pretends to deliver something that it doesn’t.
I’m all for that.
thus, when a Chinese guy makes a shitty Porsche Cayenne, externally undistinguishable form a decent one, that is fraud. On the other hand, if I make an exact copy, down to materials and all, of the thing, that its not fraud for me to sell it as a Porsche Cayenne: after all I am selling the real thing.
Here I’d be careful, this is running into problems of determining what is the “real thing”'. If you are selling the Porsche as a perfect copy, congrats, it is okay. But it is still not a “real” Porsche built by Porsche - and selling it as one would be fraud.
These days you can buy perfectly looking “antiques”, replicas of items centuries or millenia old, made out of the right materials with the right techniques - the same principle applies.
Finally, if you use ‘dollar copies’, when your buyer expects ‘actual’ dollars, is fraud, no matter how perfect they are. Things are not the original even if they are exactly the same as original.
