Another Case for Monetary Competition

2010-04-29T15:10:00Z

One topic that has been discussed more over the last couple of years than at any time in my lifetime is the viability of the U.S. Dollar. Just a few years ago, the status of the U.S. Dollar not only as the international reserve currency but certainly as a viable currency was not even an issue that politicians or mainstream economists discussed. Now even mainstream Keynesian economists are questioning the continued viability of the U.S. Dollar. Paul Volcker, the former Federal Reserve Chairman from 1979-1987, said recently there is a 75% chance in five years of a dollar crisis or hard landing. Robert Rubin, the former Secretary of the Treasury under Clinton, speaks of a day of reckoning for the U.S. Dollar. No longer are Austrians the only economists warning about the continued viability of our currency.

In the United States, the U.S. Dollar is the only medium of exchange enforceable by law. The United States Coinage Act of 1965 states (in part)

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes and dues. Foreign gold or silver coins are not legal tender for debts.

—31 U.S.C. § 5103

Could this restriction be creating a lack of flexibility in our medium of exchange that might result in an unnecessarily chaotic and even dangerous situation should the dollar

suddenly weaken or collapse? The laws such as 31 U.S.C. § 5103 noted above are referred to as Legal Tender acts. These laws effectively give our government a monetary monopoly. Over the years there have been a number of arguments made against these laws. Ron Paul often addresses the Constitutional and legal issues of our government's monetary monopoly. Austrian economists like Guido Hulsmann have presented the ethical issues regarding monetary monopolies. Both those arguments are well-founded and compelling arguments for the abolition of the Legal Tender laws. I would like to present a less academic but more practical reason for abolishing the Legal Tender laws and allowing complementary and competing currencies in the United States. Complementary and competing currencies provide long term stability to our society which would help soften the impact of a sudden weakening or collapse of the U.S. dollar.

Bernard Lietaer, economist and currency expert, in a recent interview presented this analogy concerning the inflexibility of the U.S. monetary system.

"Basically, for any complex to be sustainable it needs to have a balance between two factors: resilience and efficiency. These two factors can be calculated from the structure of the network that is involved in a complex system. A resilient, efficient system needs to be diverse and interconnected. On the other hand, diversity and interconnectivity decrease efficiency. Therefore, the key is an appropriate balance between efficiency and resilience.

This is more understandable in ecosystems. One animal that can eat only one plant is going to get more easily in trouble than a more omnivorous one. If that plant gets in trouble, the animal will become extinct. If he eats 50 types of plants, when one plant gets in trouble, he can just eat some of the others.

The same thing is true for whatever eats that animal. It’s a chain of the appropriate levels of diversity and interconnections—which are the key to sustainability. We have now been able to measure quantitatively the conditions under which any complex flow network will be sustainable as a function of these two structural variables of diversity and interconnections.

Our economy is precisely a complex flow network where money circulates, similar to biomass circulating in a natural ecosystem. When you apply what we learn from ecosystems to money systems, it’s clear that our current money system is a monoculture, and that creates problems. Just imagine that you plant one type of plant on the whole planet and eradicate everything else. It’s very predictable that one day, that crop will get in trouble. We don’t know have to know from what—whether a new microbe or climate change or whatever. It is structurally brittle.."

The dangers inherent in a monoculture are not just theoretical speculation by Lietaer. During the summer of 1845, a "blight of unusual character" devastated Ireland's potato crop, the basic staple in the Irish diet. A few days after potatoes were dug from the ground, they began to turn into a slimy, decaying, blackish "mass of rottenness." Expert panels convened to investigate the blight's cause suggested that it was the result of "static electricity" or the smoke that billowed from railroad locomotives or the "mortiferous vapors" rising from underground volcanoes. In fact, the cause was a fungus that had traveled from Mexico to Ireland.

The Irish potato famine was not simply a natural disaster. It was a product of social causes. Under British rule, Irish Catholics were prohibited from entering the professions or even purchasing land. Instead, many rented small plots of land from absentee British Protestant landlords. Half of all landholdings were less than 5 acres in 1845.

Irish peasants subsisted on a diet consisting largely of potatoes. Since a farmer could grow triple the amount of potatoes as grain on the same plot of land, a single acre of potatoes could support a family for a year. About half of Ireland's population depended on potatoes for subsistence. Reliance on one crop for food clearly was the downfall of the Irish farmers. If the farmers had raised a variety of crops instead just the one, then the devastation of the potato crop would not have had the severe consequences that followed.

Lietaer's analogy provides us with a practical consideration in our current monetary system that genuinely needs to be addressed. What safeguards are in place to allow commerce to continue in the United States following a dollar collapse? Currently, in our "monoculture" monetary system, any collapse of the U.S. Dollar would bring life as we know it to a standstill. Unpredictable chaos would ensue. Even civil unrest and violence is possible if not probable. If state and local governments, corporations and individuals were allowed to develop complementary and competitive currencies, would that not soften the impact of a dollar collapse and allow commerce to continue in some form? Complementary and competitive currencies would provide us with alternative mediums of exchange in the case of a U.S. dollar crisis.

In conclusion, I would like to suggest that the case for monetary competition could be made not only on legal and ethical grounds but also on practical grounds. If our dollar were to collapse, we need a system in place to ensure the continuation of commerce. Complementary and competing currencies provide us with alternative mediums of exchange that could minimize the impact of a disastrous collapse of the U.S. Dollar. Ron Paul's Free Competition in Currency Act of 2009 is a necessary first step in establishing currency competition. The Act would repeal the Legal Tender acts and allow state and local governments, corporations and individuals to establish their own mediums of exchange. Complementary and competing currencies not only provide safety and security but also efficiency and freedom to our commerce and lifestyles.

WilliamWCurlee

Another Case for Monetary Competition