August 6, 2014 – Following on my article from
last week, I want to take some time to describe the perfect monetary system. Money, like any other economic good, is subject to the laws of supply and demand. Like any other good, if government begins to interfere with the supply of or demand for money it introduces disruptions that will negatively affect the economy.
The root of our current economic problems come from government intervention into the monetary system. The Federal Reserve attempts to manipulate interest rates by creating money out of thin air and using that money to purchase assets. That additional supply of money drives down interest rates, which stimulates more demand for money. But because that new money was created from nothing, and was not the result of savings, the capital structure of the economy is skewed. Resources are malinvested and, when that malinvestment is discovered, businesses begin to fail. This is the all too familiar cycle of booms and busts that we have seen over the past few decades.
Many people have heard of the “Golden Rule” – he who has the gold makes the rules. Government interference in the monetary arena has always been with the aim of expanding government power and influence – government wants the gold so that it can make the rules. There was perhaps no better example of this than in 1933 when the U.S. government decided to seize all private gold holdings and make private ownership of gold illegal. The government then proceeded to devalue the dollar by 40% by raising the dollar price of gold, and issuing new dollars to spend on its own aims. When government takes control of the monetary system, money holders suffer while the government benefits.
Gresham’s Law states that an artificially overvalued currency will drive out an artificially undervalued currency, or “bad money drives out good.” If government deems that a half-ounce silver coin should be accepted at the same value as a one-ounce silver coin, the half-ounce coin will circulate and the ounce coin will disappear. If legal tender laws require creditors to accept paper money at the same value as gold or silver, the paper will circulate and metal will disappear. That is precisely what has happened in the United States, as legal tender laws favored paper money over precious metal coins.
The ideal money is one which serves the needs of the market, not the government, and the ideal monetary system is one in which government does not interfere. The market should be allowed to determine what it uses as money, and there should be no centralized authority issuing money or dictating what is or is not money. For millennia, gold, silver, and copper were used as money, and there is no reason to believe that they would not regain their monetary role in a monetary system free from government intervention. The perfect monetary system is one in which government barriers such as legal tender laws do not exist, so that the mutual consent of parties to a transaction is all that is needed to determine what is money.
Given how technologically advanced our society has become, using precious metals in the monetary system has never been easier. It should be no problem at all for a banking business to offer accounts denominated not just in dollars, euros, or yen, but also in ounces of gold, silver, or copper. Smartphone apps can constantly inform consumers of the exchange rates between the metals and point of sale systems at stores can offer consumers the choice of using multiple metals or currencies. The technological barriers to multiple, competing currencies circulating side by side are just about non-existent today.
The one barrier that remains is that of government. Governments do not want to relinquish control over the monetary system. The power to define, create, and issue money allows governments to spend with no limits and to force their creditors to accept repayment in devalued currency. That is a power that is both lucrative and addictive but, for the benefit of all, that is the most important hurdle that needs to be overcome. As long as government remains in control of the monetary system, the system will always be far short of perfect.