Competing Currencies

Monetary policy is a totally boring subject for most people. Whenever I try to talk to my brother about it, he pretends that he’s falling asleep. He does a fake snore and everything. People who are more polite will listen respectfully. But I can see in their eyes that they can’t wait for me to finish.

Even though its an issue of extreme importance for the good of the economy and the liberty of the citizenry, most people simply don’t care.

For that reason, I’ve made a pact with myself to only discuss monetary policy in writing, unless somebody specifically asks my opinion on the matter. If this topic bores you, by all means feel free to click away.

After giving it a lot of thought, and reading roughly fifty books on the matter, I’ve come to the conclusion that a gold standard is the best monetary system.

Over the course of a few millenia, gold became a globally accepted money purely as a result of voluntary actions. Paper and electronic money on the other hand, require government legal tender laws for its creation. Gold can’t come into being merely by a stroke of the keyboard or by putting some ink on paper. It requires labor. It has independent demand. It is subject to the forces of supply and demand just like every other product. Gold, in short, is a private market money and it has been for thousands of years.

The fact that gold can’t be created at the whim of government officials has tremendous implications. Under a representative from of government, the citizens are supposed to be in control of the politicians. Gold acts as a safeguard for this process. If only gold is money, the politicians have to tax the citizens directly for any and all government expenditures. Wars, welfare, corporate bailouts, bureaucracies, and everything else that the government wants to do must be financed through taxes or by borrowing gold from the citizenry.

As you can imagine, a gold standard makes it much more difficult for the government to force unpopular programs on the citizens. They can just refuse to send in the gold to the treasury. If the government programs look like bad investments, private citizens will choose not to loan their gold to the government.

Such is not the case with paper money. If the citizens don’t like a program, to hell with them! The central bank can just print up some money and give it to the politicians to spend. If the powerful banks make bad loans and get themselves into financial trouble, just print some money and bail them out. Huge deficits? No problem. Just have the Federal Reserve print some money and buy government bonds. Wars? Welfare? Spying on citizens? Boondoggles? Yes on all counts!

In this way, monetary policy has a huge impact the liberties of of the citizenry. Without a gold standard as a last line of the defense, it is impossible for citizens to curb the activities of hyperactive governments.

The gold standard has proved its value in another way. Under a gold standard, speculative booms and their subsequent busts are much less likely. Instead of wild periods of apparent economic growth, followed by deep and long lasting depressions, the gold standard tends to provide for steady and stable economic development.

It isn’t hard to understand why this is the case. When a lot of new money is introduced into an economy, this leads to increased economic activity. It doesn’t mean that new goods and services come into existence. It means that there is more buying of existing goods and services. Whoever gets the new money first goes out and spends it, increasing demand in certain sectors of the economy. Entrepreneurs, seeing prices rising rapidly in newly booming industries, rush to get in on the action. They invest in new equipment and hire employees in order to satisfy what they perceive as a profitable opportunity.

However, business people aren’t privy to the cause of the boom. Unless new money continues to be created and spent in these sectors, the demand will die off and the recent investments will plummet in value. People will be fired. Unemployment skyrockets. Recessions ensue.

This process can and has happened under a gold standard. Whenever new, large, supplies of gold were discovered, the increased money supply set the business cycle into motion. The gold standard is not perfect. However, the effects of newly created money have been much more severe and much more prevalent under government, paper money regimes. It isn’t hard to understand why. Even the most productive gold mine in the world can’t create money as fast as a printing press or a computer entry.

For various reasons, a lot of people don’t like the idea of a gold standard. They think that money printing can get economies out of depressions. They think that growth in the money supply is needed to keep up with and facilitate a growing economy. I disagree with these points.

Any supply of money will work. Given a stable money supply ,as economies grow and become more productive, prices will trend downwards. Less money will be chasing more goods. The value of savings will increase. More and more items become affordable. Everybody enjoys an increasing standard of living.

Nevertheless, I believe that everybody has a right to use anything they’d like as money. If some people prefer government paper money to gold and silver, that is their prerogative. I would only ask that my right to choose my own money be respected. Why should’t individuals be allowed to make contracts in gold? Why does paper and electronic money have to be accepted as “legal tender for all debts, public and private”?

It could be countered that nothing is stopping me. If I want to barter with gold coins, I can go right ahead and do so. Such an argument is false. The tax code taxes any gains earned on gold transactions. For example, if I buy gold at $1,000/ounce and hold it for a year until its price is $1,200/ounce and then trade my gold ounce for something worth $1,200, I’ll have to report $200 of taxable income. Further, it would be illegal for me to loan out money and require repayment in gold. After all, government paper is “legal tender for all debts, public and private”.

Also, I realize that is highly unlikely that in this day and age the majority of the population would want to go back on a gold standard. Most people don’t even understand it, let alone desire it. What people can understand is liberty. Each person should have the liberty to choose their own money. Nobody’s rights would be infringed upon as a result of competing currencies.

Those who find paper money to be a precarious investment would have a way to opt out. Citizens would have a way to protect themselves against business cycles. Finally, people would have a way to register a vote of no confidence against the government, by opting out of its money system.

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