| | Bill: "And just as merchants today accept checks from the customers of Wells Fargo, B of A, Citibank, etc..." John: Well I as a merchant don't accept any checks because people have a tendency to forego any math skills when balancing a check :) Of course, and merchants would typically be even more willing to accept private banknotes than they would private checks. But I understand what you're saying. So would you say the government ought not to establish any kind of currency? Including a commodity based currency? Yes, on the grounds that it's not the proper function of government. The right to freedom of exchange is a corollary of the right to freedom of action, which means that people ought to be free to make any deals they want as long as the deals are voluntary and consensual. So, if people want to use platinum as a medium of exchange, they should certainly have the right to do that, in which case, the government has no business interfering with that arrangement by mandating the use of an alternative currency.
I asked, "Are you saying that each State had a different commodity money, or that each state had different bank notes for which a uniform commodity money could be redeemed? Not sure actually. I only recall there was some issue of at least a perceived chaotic system of differing states with their own currencies and in 1792 a national currency was established to replace state currencies. I don't know whether those currenices were based on a commodity or if they were just fiat. Perhaps there was no chaos at all and the national currency was established for political reasons. I honestly don't know. As I understand it, the problem was not any confusion caused by a proliferation of different banknotes by the states, but rather a devaluation of these notes both by the Continental Congress, which resorted to the issuance of fiat money (the "Continental dollar") to finance the Revolutionary War, and by several of the states, which subsequently issued their own paper currency. The total money supply at the start of the Revolution in 1775 was $12 million. By 1779, it had risen to $239 million. Whereas at the end of 1776, the Continental dollar could be exchanged for one dollar's worth of gold or silver, by 1779, 42 Continental dollars were needed to acquire one dollar's worth of specie. By 1781, the exchange rate was 168 paper dollars for one dollar in specie. Moreover, several of the states, led by Virginia and the Carolinas added their own paper money for an additional $210 million in depreciated dollars to the Nation's currency. (Murray Rothbard, A History of Money and Banking in the United States, p. 59, 60)
It is this inflationary debacle that Jeremy Atack and Peter Passall misleadingly refer to in their book A New Economic View of American History, when they write, "The [monetary] situation had only deteriorated under the Confederation with each new state issuing its own money and the repudiation of the Continental dollar." (p. 82) Observe that it was governments, both the Continental Congress and the state governments, that were responsible for this inflationary fiasco, not a system of free, private banking. This fiat money expansion simply exacerbated whatever "shortage" of gold and silver was thought to exist at the time. In accordance with Gresham's Law, which states that "bad money drives out good," the bad -- relatively worthless -- fiat paper notes made gold and silver specie much more valuable by comparison causing people to hoard it, just as people buy gold coins today and hold them as a hedge against inflation. Didn't Alexander Hamilton start the first Central Bank of America? Actually, Robert Morris was responsible for starting the first central bank, in 1782, called "The Bank of North America." But it too proceeded to inflate its bank notes, causing them to depreciate against the reserves of specie, and people soon lost confidence in its notes. The bank was eventually sold into private hands. Because of the failure of The Bank of North America, Hamilton sought to replace it with the "First Bank of the United States" in 1791, which was actually the second central bank of the new Republic. I will check out that book though Bill, sounds interesting and I am ashamed to admit I know so little about commodity currency even though I have a degree in Economics :( Well, you're not likely to hear much about the failure of central banking in today's universities, that's for sure, nor anything about the free-banking alternative. So, no shame there! Most of your professors probably didn't know a lot about this issue either.
Dr. Richard Ebeling, President of the Foundation for Economic Education (FEE) recently gave a talk at my university in which he argued that central banking is subject to the same criticism as any other government-run economic activity. Are you aware of the "socialist calculation" problem, identified by Ludwig von Mises and F.A. Hayek? The problem is that no central planner can possibly have enough knowledge to direct economic activity for the entire economy, nor would he or she have the incentive to do so efficiently, even if such knowledge were available. Well, the same problem exists for central banking. A central banker cannot know the proper quantity of money nor the proper interest rate, any more than a central planner can know the proper quantity or price of any other item in the economy. Only the laws of supply and demand can determine that. Why should we think it is any different for money and banking?
- Bill
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