Sunday, May 06, 2007

Three Unproductive Drains of Value: Part 5

What to do about currency debasement, inflation.

I've shown that counterfeiting and currency inflation are basically the same thing, undertaken by private parties and the government, respectively. This one is probably the easiest to fix out of all of them. All that is required is monetary freedom; the government doesn't really have to do anything, other than get out of the way.

It is entirely possible for private companies to issue money; this is already happening. However, the legality of such things is in question. It really shouldn't be. The simple fact is that the current monetary system is an upward wealth transfer system, and any alternative should be tolerated, if not welcomed. One thing that could not be done instantly is to abolish the Federal Reserve without there being something else in circulation to replace it. This, of course, is precisely why certain powerful interests will oppose any attempt to establish a privately issued medium of exchange superior to that issued by the government.

As I have written before, privately issued currency would not necessarily have to be based upon gold and/or silver. They could be based upon any other commodity, or even shares in business of one sort or another. Gold and silver have the advantage of rarity and durability, but I can see a place in our monetary system for many other sorts of things, as well. The key feature is that no kind of money should have a government monopoly.

The role of government in this would simply be to enforce contracts and claims of purity. If a company issues a silver piece that claims to contain a ounce of .999 pure silver, but it turns out that they do not, the courts would be there to settle the dispute. I would also like to see a law that says that any credit backed by a commodity would have to be 100% backed--a company would not be allowed to issue more credits backed by a commodity than they have the commodity in their possession or currently owed to them.

I say "currently owed to them" because one of the functions of banking is making loans on behalf of their depositors. I would require them to specify--in writing--what percentage of a given depositor's account is under loan at any given time, and require that the depositor agree that they are only allowed to withdraw the remainder over a given period of time. In other words, if I deposit twenty ounces of silver into my bank, specifying that they can loan out up to 50% of it, I could only go back and withdraw 10 ounces; I would have to give them a contractually specified amount of time to come up with the rest.

This would ensure two things. First, it would prevent a bank from inflating the supply of a given commodity. If there exists x amount of silver, people will trade it based upon that knowledge. If there exists 2x amount of silver backed credits (be they paper or digital), people will then begin to trade it at a lower rate. This is dishonest, and should not be allowed. Secondly, it would ensure that banks in compliance would never collapse, provided they engaged in sound lending practices. Nobody would wake up one day to find that the 100 ounces of silver they thought they had saved up was, in fact, only 20 ounces of silver, because the bank over-issued silver credits.

I could see a role for government in the establishment of a standard of weight and purity for a commodity. For example, early in our history, the US Government defined the "dollar" as being "equal to 412.5 grains (26.73 g) of 90% silver" (ref). While the Treasury was the only entity allowed to issue coins, banks issued their own bank notes, backed by silver dollars. The government could create a similar standard once again, though it'd have to come up with a new name, having so thoroughly corrupted the word "dollar". However, I don't even think this is necessary. Terms like "ounce" and "gram" are sufficient, and the while individuals would determine what degree of weight and purity they prefer to trade in, the network value of money would strongly encourage a consensus standard.

The key feature of all of this is that nobody would have the authority to issue unbacked credits at will and force anyone to accept it in payment (as the Federal Reserve has today). The wealthy and the powerful would no longer be able to steal the earnings of the poor and middle class by way of currency inflation.

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