James Leroy Wilson's blog

Sunday, April 19, 2009

The Foundation of a Free Market is a Free Market in Money

Some years ago I suggested the Freedom Paradox: that the less the State does, the stronger it will be. Less government will mean more prosperity and justice in society, which will renew public confidence in their government, making them more likely to loyally submit when the State expands again.

But I left out a key element that would change my premise. What if we abolished legal tender laws?

Federal Reserve Notes - dollars - are legal tender for all debts, public and private. Individuals are compelled to accept them as payment even if they would prefer some other means of payment.

What if individuals weren't forced to accept them as payment for debts? What if they arranged for debt payment to be made in, say, gold, and only in gold? (Or silver, or Euros, or Disney Dollars, or Canadian Tire money, etc.)

This would mean the Federal Reserve system would have competition. We'd have a free market in money.

The Fed exists for two main purposes:
  • to bailout out fractional reserve banks (i.e., banks who lend out more money than they actually have in cash reserves for depositors to withdraw);
  • to finance the federal government's deficit spending.
Because the Fed's notes are legal tender and are (in violation of the Constitution, by the way) the nation's currency, it has little-to-no competition. They enjoy a monopoly privilege. And the dollars are not redeemable in any commodity such as gold or silver. The Fed can print them up at will, and also, in our checkbook and credit/debit card culture, create even more money with computer keystrokes. This is called monetary inflation, and it drives down the value of dollars relative to other goods, which leads to rising prices. This leads to over-investment (or speculation) in over-priced assets which in turn causes the boom-and-bust cycle.

Repeal the legal tender laws, and the Federal Reserve dollars face competition. In turn, the fractional-reserve banking system itself will face competition. If new gold and silver banks are formed promising to keep 100% of their deposits available for withdraw, the public will be made aware of the nature of fractional-reserve banking. They will finally learn that fractional-reserve banks are, by definition, insolvent;
  • they are unable to meet the withdraw demands of all their depositors
  • to bail out the bank in the case of a run, the Fed would have to create more dollars of no real value, reducing the value of the dollar
Fractional-reserve banking is itself immoral, especially if depositors are not made aware that they may not be able to withdraw all their money. As Murray Rothbard pointed out in The Case Against the Fed, it is like a grain elevator printing out fake receipts for bushels of grain it didn't receive, to be bought and sold in a commodities exchange.

The public will then more likely choose to bank where 100% reserves are kept and the bank notes represent redeemable values of gold, silver, or some other commodity.

When the Fed faces this competition, it will be more reluctant to further cheapen its dollar by financing the government's deficits. The government will not find anyone to borrow from, and will be forced to downsize.

And in this system, it also won't have the resources to upsize - to increase its size, scope, and power again - without re-imposing legal tender laws. But the people, enjoying low prices and a high standard of living, will reject inflation with its booms and busts.

Some things the State does may be even more morally abhorrent than legal tender laws and protection of the Federal Reserve system: wars, torture, victimless crime laws, etc. But its capacity to borrow money from a limitless inflationary resource is immoral and feeds all that it does. One could say that while gold can be used as money (a presently-existing product of nature to be exchanged for another currently existing product of nature), the Federal Reserve note is pure mammon and the root of all the State's evils.

But if we have a free market in money, the Fed and its member banks will have to compete or die. The State will lose its cushion. No more borrow-and-spend.

Moreover, a self-styled promoter of the free market who does not acknowledge that there can't be a free market without a free market in money, will ultimately lose the debate. The system as it exists now encourages over-production, speculation, mal-investment, environmental degradation, and government debt. These are attributed by critics as "greed" and proof that "unregulated" markets don't work.

On the other hand, critics of our current system who call for tweaking of it through higher taxes and more regulation miss the point. If they don't recognize the immorality of a financial system based on fraud and inflation, none of their fixes are going to work in the long run.

It is the system itself that must be abolished by allowing a free market in currencies and banking. A free market here will actually create more checks and balances in the system than "regulation" of an inherently monopolistic system would.

The problem free-marketers have today is that their arguments are ultimately unconvincing to those who sense that, at its core, our current economic system is inherently unjust. In our current system, arguments against, say, the minimum wage, do not persuade people. After all, the argument goes, "the cost of living keeps getting higher. Shouldn't wages keep pace?"

Unless we have a free market in money, this objection can at best be rebutted with charts and graphs and curves. But it can't be refuted, because the "sense" that something is wrong is valid.

But if free marketers insist on a free market in money first and foremost, the argument that we then abolish the minimum wage and most other business regulations become airtight cases - precisely because the free market in money will impose checks and balances first in money and finance, and ultimately throughout the market.

Without addressing the system of money and banking, libertarian outreach to the following parties will not succeed:
  • the tax-and-regulate Left;
  • trade protectionists;
  • those of any stripe who believe "immigrants steal jobs and drive wages down"
And it's precisely because we'd fail in getting to the heart of the problem. We must reveal the fundamental injustice and immorality of our money and banking system and promote the solution of a free market in money. If they're not persuaded, then challenge them to defend legal tender laws, fractional-reserve banking, and the Fed.

Instead of libertarians always on defense, we can state the case for a free market in money and when they try to change the subject to suggest we are uncompassionate, libertine, or whatever, we can refuse to take the bait and press them more forcefully: why do you defend the Fed?

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