I've done a bit of thinking on the subject, and have come to the conclusion that paper currency is unnecessary. Why do we need something called a "dollar" or a "peso" or a "euro". Why can't we simply trade precious metals in the form of coins or bars?
They need not be produced by a government; anyone can (and does) make coins of various sizes. If more coins are needed, more will be produced. If there are too many coins, they will be bought, melted down and made into other things (jewelry, etc).
You wouldn't have to carry around a satchel of coins if you didn't want to; banks could handle transactions (similarly to how dollar transactions work with a debit card, check book, traveler's cheques, etc).
There is no need for the government to provide paper money. However, to make the transition, I suppose prices would have to be set in ounces of silver or gold. I can't think of any way to do this but by making a law. And metal purity would likely have to be regulated to avoid embezzlement, etc.
The biggest problem that I see is that rapid changes in the relative price of silver or gold would have an effect on global trade. A decrease would make foreign products more expensive; an increase would make local labor more expensive. It would be interesting to see the relative price of gold or silver to other commodities with respect to time.
I understand that this idea is nothing new, but it seems as though it's better than the current system that the world uses. I'm wondering what people in this forum think of the idea.
Chris, on the subject of sound money, you're preaching to the choir.
"However, to make the transition, I suppose prices would have to be set in ounces of silver or gold. I can't think of any way to do this but by making a law. And metal purity would likely have to be regulated to avoid embezzlement, etc."
I don't believe a law would be necessary. The market can handle establishing prices and can regulate metal purity. The transition would, however, be quite traumatic due to the fiat system we've been under. People would be shocked to realize how many old fiat dollars it would take to exchange them for a loaf of bread. Mises and Rothbard (and others) have written about the transition to sound money.
"The market is a process." - Ludwig von Mises, as related by Israel Kirzner. "Capital formation is a beautiful thing" - Chloe732.
Chris,
I don't think it's a matter of government doing away with a currency. It's a matter of the people doing away with the central bank and establishing sound money.
Trading bits of gold / silver, etc. is foreign only because we've had to endure a central bank, and gold was confiscated by the government in 1934 (January 1st, 1934, if I am correct). People used to exchange goods for gold and silver all the time (silver coins in the U.S. until 1964). Gold and silver were used to exchange goods for centuries. It is the central bank that is the new phenomenon in the history of money.
Money entering the system (precious metals): This would be (should be, ought to be) an entirely free market process. First, all prices arise due to the interaction of subjective value scales among people interested in exchange (this may seem like a tangent issue to what you are asking, but it I think is a vital concept to understand).
If the market determines that "more gold coins are needed" , a signal will be sent through increased purchasing power of gold (lower prices). The mines will see that an expansion of activity will be profitable because prices of goods, including labor, have dropped. So more gold is produced. The gold is either turned into coins used to pay for mining activities, or, is taken to a coin maker (who charges a fee for this service). It could also be deposited into a bank that makes loans. In this way, the gold finds its way into circulation.
I'm sure there are more sophisticated explanations, but I believe this would be the basic process.
Sieben:Are you saying that if I buy oil futures on nymex, that I really just want the receipt and not the oil? People use receipts because they don't want to lug stuff around with them. Gold is heavy dude.
What I was getting at is that companies (banks) could shuffle precious metal (or oil, or ketchup, or whatever) around for their customers without the need for a government. People could use debit cards, check books, or numerous other ways to trade - the sticky part is, I can see difficulty in a system without a standardized medium of exchange. It seems as though a government would have to set a standard medium of exchange (ex. ounces of silver) to simplify pricing.
As a consumer, I need to be able to compare apples-to-apples and if one vendor is asking 300 grains of sand for their bubblegum, and another vendor is asking for 2 small rocks for the same bubblegum, it becomes difficult for me to determine where to buy bubblegum - and the market becomes less efficient (i.e. I'll choose wrong more often).
Chris:People could use debit cards, check books, or numerous other ways to trade - the sticky part is, I can see difficulty in a system without a standardized medium of exchange.
Chris:It seems as though a government would have to set a standard medium of exchange (ex. ounces of silver) to simplify pricing.
Chris:As a consumer, I need to be able to compare apples-to-apples and if one vendor is asking 300 grains of sand for their bubblegum, and another vendor is asking for 2 small rocks for the same bubblegum, it becomes difficult for me to determine where to buy bubblegum - and the market becomes less efficient (i.e. I'll choose wrong more often).
Your rock vs sand example is confusing because we don't actually know the market value of either, and never have.
Why can't we simply trade precious metals in the form of coins or bars?
Because there simply isn't enough precious metals to support an economy, nor do the people want to use precious metals. They always have preffered the easier to use paper money or book entry money.
If a government were to do away with a currency completely, it's likely that the citizens would use some other well-known currency (for example, people in Zimbabwe trade in dollars due to the lack of faith in their native currency). Trading bits of gold/silver/whatever seems foreign to most people.
The sticking point for me is always understanding how new money makes it into the system. Would coin makers simply have to buy "stuff"?
tomozope: "Because there simply isn't enough precious metals to support an economy,"
What do you base that assertion on? How much precious metal, or paper money, is needed to "support an economy"? What does "support an economy" mean?
"nor do the people want to use precious metals."
What do you base this on? How do you know they don't want to use precious metals (or fur coats for that matter)? How can you know this given legal tender laws and monopoly on money printing granted to the Fed?
"They always have preferred the easier to use paper money or book entry money."
Not correct. Precious metals have been used, paper was redeemable in precious metals. The great thing about Mises.org is that numerous books are available for free download on the very subject you are commenting on. I'm sure some titles could be provided if you so desire.
"Because there simply isn't enough precious metals to support an economy, nor do the people want to use precious metals. They always have preffered the easier to use paper money or book entry money."
Banks could still provide money-trading services the same way they do today. Armored cars could ferry gold (rather than dollars) from bank to bank, while people merrily write checks or use debit cards to make transactions. I'm sure that the cost of transport can't come close to equaling the cost of inflation.
My point is, there's no need for paper money provided by governments - it can be accomplished privately.
"I don't think it's a matter of government doing away with a currency. It's a matter of the people doing away with the central bank and establishing sound money. "
That's all well-and-good, but if it were merely the case of people doing away with a central bank, why aren't people in Panama trading bits of metal? There seem to be plenty of opportunities around the world for the exchange of coins rather than fiat currency, but it just doesn't seem to happen.
At the end of the day, sure- I could probably walk into Wal-mart with a gold brick and walk out with a couple of CDs, but since things are priced in dollars I'd likely grossly overpay (because the manager at Wal-mart doesn't know what things sell for in units of gold - or for that matter, how much gold she paid for things). It would be difficult to trade effectively in anything other than dollars, since everything is priced in dollars.
Have you ever thought of walking in the store with a paper that guarantees that brick of gold?
"Have you ever thought of walking in the store with a paper that guarantees that brick of gold?"
Even if there were no doubt in the manager's mind about the purity or quantity of gold that I was offering, she still wouldn't give me a 1-for-1 exchange rate with dollars. She can't because she doesn't know what the exchange rate is or what she paid for her merchandise in units of gold/silver/whatever. Her pricing structure is in dollars.
On the other hand, if bits of metal were common currancy, I'd have no problem making a fair trade.
The manager is going to lose her business. Guess her competition is going to win.
@Curius: I think you're counting your chickens before they've hatched. Fiat paper money is money in today's world (cf Rothbard's discussion of the true money supply). A paper US dollar is the most marketable good, the medium of exchange - at least in the United States (many other places, too) - and is the final means of payment (it is not a paper instrument like bond or promissory note).
Accepting non-money - such as gold or silver coins - is not a competitive advantage, it is just an oddity. It's as much of a competitive advantage as having a cashier that can speak fluent Latin.
Clayton -
Because there simply isn't enough precious metals to support an economy
This is funny. Can you tell us the amount of precious metals that would need to exists to support an economy?
nor do the people want to use precious metals. They always have preffered the easier to use paper money or book entry money.
Not true actually. People have always prefered a mix of both paper and physical when they have been free to choose.
As for why people dont use precious metals as money in a widespread way today Ill quote myself from another thread:
The monopoly on money is real. Imposed by the government and benefiting both bankers and politicians, because both can spend more than they could otherwise (banks lending, politicians spending). Legal tender laws and taxes are the main ways that government use to impose the monopoly on money. Try doing some transaction in other currency and see how the government sets the exchange. You will get to pay more taxes than if you payed in dollars, because the government will set the exchange favorable to itself. F.e. if you buy a house with gold, the government will set the exchange between gold and dollars very favorable to itself, and you will end up paying a lot more in taxes than you would if you just sold your gold for dollars in the market and bought the house with dollars. Also, legal tender laws basically give the judicial branch the capacity of breaking a contract. F.e. you specify that you want some service you provide to be payed in silver. If they guy does not pay or refuses to pay in silver, and you go to a judge he will ask the guy to pay you in dollars, even when your contract specifies that you only want silver. Legal tender laws stablish that any debt can be settle in dollars, so you migh as well accept dollars directly and avoid the judge part, since that is going to be the outcome anyways. The law gives the paper dollar an unfari advantage over any other money, creating a de facto monopoly. Yes, you are not forced to use paper dollar, but the law makes it difficult enough for you to use any other currency. And I am sure that if people found a way to go arround the present laws and the system got big the government would enact laws to stop it. And as long as the government has the monopoly on money, they can really abuse the system and create the boom and bust cycles.
Legal tender laws and taxes are the main ways that government use to impose the monopoly on money.
Try doing some transaction in other currency and see how the government sets the exchange. You will get to pay more taxes than if you payed in dollars, because the government will set the exchange favorable to itself. F.e. if you buy a house with gold, the government will set the exchange between gold and dollars very favorable to itself, and you will end up paying a lot more in taxes than you would if you just sold your gold for dollars in the market and bought the house with dollars.
Also, legal tender laws basically give the judicial branch the capacity of breaking a contract. F.e. you specify that you want some service you provide to be payed in silver. If they guy does not pay or refuses to pay in silver, and you go to a judge he will ask the guy to pay you in dollars, even when your contract specifies that you only want silver. Legal tender laws stablish that any debt can be settle in dollars, so you migh as well accept dollars directly and avoid the judge part, since that is going to be the outcome anyways.
The law gives the paper dollar an unfari advantage over any other money, creating a de facto monopoly. Yes, you are not forced to use paper dollar, but the law makes it difficult enough for you to use any other currency. And I am sure that if people found a way to go arround the present laws and the system got big the government would enact laws to stop it. And as long as the government has the monopoly on money, they can really abuse the system and create the boom and bust cycles.
chloe732: tomozope: "Because there simply isn't enough precious metals to support an economy," What do you base that assertion on? How much precious metal, or paper money, is needed to "support an economy"? What does "support an economy" mean?
If there had ever been enough of it to work there would have never been a need to borrow from banks to begin with. The very fact that there was a shortage of money is how we got handed fractional banking to begin with.
chloe732: "nor do the people want to use precious metals." What do you base this on? How do you know they don't want to use precious metals (or fur coats for that matter)? How can you know this given legal tender laws and monopoly on money printing granted to the Fed?
I base this on common sense and logic. If the people truely would have wanted to use the gold/silver in the past they would have never used the paper receipt promising to pay the gold and silver. They would have demanded it on the spot and rejected the easier to use, more convienient paper money. The FED does not print any actual money. All FRN's are printed by the U.S. Treasury Beauru of engraving and printing and do not become money until monetized by the banking system when a customer purchases those Notes with Check book entry.
chloe732: "They always have preferred the easier to use paper money or book entry money." Not correct. Precious metals have been used, paper was redeemable in precious metals. The great thing about Mises.org is that numerous books are available for free download on the very subject you are commenting on. I'm sure some titles could be provided if you so desire.
I never said they weren't used at all, but its clear that the vast majority of the people preffered and still preffer to use easier to use forms of money over heavy bulky coins. I have a hard time believing that paper reciepts were redeemable because everything I've read said banks always fractionalized off their reserves (I.E. 5 to 1) which means that the bulk of the receipt holders could NOT redeem their receipts. Can we agree that the banks are commiting fraud by loaning a promise to pay something that they clearly don't have enough of, or any at all, to redeem on demand?