May 7, 2013

Free-Market Money: Can it really exist? (April Post)

Free-market Money: Can it really exist?

I’ve had many discussions with Mike, my Libertarian co-worker about the need for sound money. He reminds me time and again that our current fiat money is worthless and that through inflationary measures the Fed has brought our dollar on the verge of collapse.

Mike wholeheartedly supports the return to the Gold Standard so government cannot wantonly print additional money out of thin air like we’ve seen with QE1, QE2, and the like.

I found Hayek’s short essay on free-market money interesting but I question whether such a system can really exist.

Sure I like idea that government would be forced to have a quantity control for any commodity backed money. This isn’t to say that we would necessarily have to go back to a gold standard; we would just have to introduce money or currency that cannot be inflated at will. Hayek believes that as long as government maintains its monopoly control over money that it can inflate or manipulate currency. I don’t disagree with him on this point.

Hayek calls for the introduction of free-market money through the private sector. He seems to be adamant that any “good” money (which he really doesn’t define good) must be issued by private institutions. “Good” money it seems, can never ever come from government.

I am having a helluva time conceptualizing this. As a “Keynesian schoolboy” I have been raised to believe that money, any form of money, is a matter of social convention and social cooperation. Whether it’s dollars, salt, glass, beads, or Rai stones (which have at various times in history been used as currency and money) all money must be socially accepted to be used as money.

I cannot purchase big macs with bitcoins. I cannot pay my bills by mailing in my cache if silver bullion. I do not want to get paid in Rai stones. Because of social convention, I must use dollars. But I suppose one could argue that the government “forced” this social convention through the exercise of monopoly power over money.

Hayek writes, “…no senior banker, who understands only the present banking system, can really conceive how such a new system would work…” Well, I’m no senior banker and I’m having troubles conceiving how this new system would work. Maybe I’m being a bit too pessimistic here, but free-market money sounds great, and I’d like to see how private institutions would carry out this idea. But I question if free-market money can really exist.
Maybe an independent study of Austrian School banking is just the ticket...

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