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.
tomozope: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.
tomozope: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.
tomozope: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?
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.
So the more money there is in circulation the richer we are?
tomozope: "If there had ever been enough of it [gold as money] 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."
There is no connection between the lack of money in an economy and the need to borrow. In an unhampered market, some people borrow because they lack capital or savings, while other people are willing to lend because they have savings accumulated for this purpose. This process has nothing to do with the lack of money (ie, gold) within an economy.
Fractional reserve banking did not arise due to a shortage of money within an economy. It arose because depositors tolerated it (or were ignorant that it was happening) and banks wanted to profit from lending money they really did not have available to lend.
(by the way, I did not intend to sound like a jerk back there when I suggested reading material is available to you. I'm sure you are well aware of what is available :-).