Let's Liberate Money; E. G. Ross

34 that it misses the essential point about sound money. Sound money in the long run requires separation of money from state. A state-run monetary system is self-destructing; it leads to its own eventual erosion as politicians grad ually give in to temptations to in flate. Over and over, history has shown the truth of this proposition. Despite any heartfelt promises they may make, there is no rational basis for expecting future politicians to be have substantially better than thei~ predecessors. Under any command money system, politicians solemnly promise to resist the seductive power of inflation. But government control of money supersedes their resis tance; government controlled money is a powerful attractive nuisance LET'S LIBERATE MONEY 35 which corrupts even the noblest of intentions. Therefore, if one wishes to discuss the best way to bring back sound money, he must seriously consider money privatization.

As the idea of money privatization is not one generally familiar to the lay reader, let us deal with the is sue by answering some common objections. 1. What does it really mean to privatize money? Privatized money is minted, issued and backed by the private sector-for instance, banks or mining companies-with govern ment playing no major role in the process. About all government does is what it does with weights and measures: sets the basic conversion rate for the dollar. In fact, a true gold backed dollar is precisely a question of a measured weight: a dollar would equal a specified weight of gold. Privatized money takes the infla tion machine away from the govern ment-by doing away with the ma chine entirely. It is well known that inflation is economicallydestruc tive. But inflation is in the final analysis a government caused prob lem arising from the government's monopoly over money. If you take away the monopoly, you take away the ability of politicians to print too much currency-currency which they use to serve a long list of "justifiable" purposes of wealth redistribution.

2. But wouldn't private money tend to be unstable, subject to market whims? No. First, remem ber that the government would still be responsible for seeing that a dol lar-any dollar, issued by anyone would represent a specific weight of gold. To .. say that private money would be unstable if private parties issued it is equivalent to saying that yardsticks would be unstable unless no one but the government manu factured them. Clearly, that is non sense. Private companies manufac ture perfectly accurate, reliable yardsticks; a yard is the same whether the yardstick is made by the government or a hundred private companies-because all use the same standard. There is another relevant point here: a different way of stating the elimination of the inflation of money is that it is precisely a stabilization of money. Money privatization has an inherent advantage over govern ment money. Economically, a free market is al ways more stable, healthier, than a controlled market.

A free monetary system, one of pri vatized money, separates money valuation from government and thus helps separate wealth-preservation from state authority and hence from state meddling. This means that 36 THE FREEMAN January savings and investment can be un dertaken with more confidence. Businesses can better plan and are less afraid of what a change of administrations or Federal Reserve governors might bring about every few years. In short, people across the nation, whatever their economic en deavors, are able to focus on market forces and not government force as far as money values go. (It is quite likely that under a pri vate money system, there would be no need whatsoever for a Federal Re serve. Money measurement stan dards could be maintained by the Bureau of Weights and Measures.) 3. Well, how would a system of private money work in actual practice? The use of money itself never changes in basic form. Money is simply a medium of exchange, used as a store of val ue. However, be cause private money is out ofthema jor turmoil of the political winds, it works much better than govern ment-monopolized, fiat money-just as any private market tends to work better than a government-run market.

Not only do issuers of private cur rencies use the pre-set gold-weighted measure for their dollars, the mar ket itself rapidly assures that there is no fudging, no unrealistic money expansion, involved. The private market sees that firms do not issue more dollars than they can reasonably back with gold. Better-valued currencies achieve greater accep tance and circulation, eventually dominating the markets. 4. But if all dollars were con vertible into a specific weight of gold, why would the issue of com petition among currencies even arise? For the same reasons that some people prefer to buy company A's yardsticks than company B's. People ask which dollar is "better made," esthetically and structur ally. Also the stockholders of a money-issuing firm have a powerful interest in monitoring the solvency and wisdom of the firm's policies. Beyond this, users of money sel dom all ask for their gold at once.

Thus, a company may issue dollars in excess of its actual gold holdings, in anticipation of being able to meet conversion demands-as long as the firm is prudently managed. If the market feels the company is not well-managed, or that the com pany is issuing more currency than it can reasonably be expected to con vert to gold, that currency quickly falls out of favor. 5. But this sounds a little un certain. How would the· market be able to keep up on the many competing currencies-and how would money users gain protec tion from potentially imprudent money-issuers? To answer the last 1985 LET'S LIBERATE MONEY 37 part of the question first, above and beyond the protection afforded by stockholders' monitoring of com·· pany prudence, there is no reason why currencies cannot be insured. Once you bring insurance companies into the picture, they immediately and necessarily seek to protect their investment by themselves monitor ing the money-firms' health and wisdom.

Further, rating services can playa role. There are already companies which rate various monetary instru ments, such as Moody's or Standard and Poors (in bond markets, for in stance). Rating agencies are com mon in the United States in many fields-such as Consumer· Reports, which rates an incredibly wide va riety of private consumer goods, and Underwriters Labs, which rates electrical products. There are no major difficulties for the private market to keep tabs on the solvency of private currencies. With modern computers, the equiv alent task is done minute-by-minute on millions of shares of stocks or on competing international govern ment-run currencies. No major in novations are needed in order to keep tabs on private U.S. currencies. 6. But wouldn't privatizing money be a massive, almost im possibly complicated task? Not really, for the private market does most of the work. While it is better to move directly from a fiat system to private money, even if we move from a government gold standard assuming for the sake of argument that we get one-implementing a private monetary system is no more difficult than it was for private com panies to take over the parcel post market, which they now largely run.

Money privatization requires no elaborate groundwork and virtually no government oversight or expen ditures. All that is needed is a sim ple piece of legislation ending the government monoply on money. The idea is to open the U.S. currency sys tem to competition-without neces sarily wiping out the government backed dollar right away. When parcel post was opened to private competition, it was not nec essary to wring our national hands over which specific companies would accept the challenge of parcel post delivery. This was not something one could rationally foresee. The mar kets decided. Companies that wanted to compete with the Postal Service did it. Over time, the more efficient private parcel post compa nies-such as United Parcel, Federal Express, and Purolator-came to dominate the market. But people still could use the Postal Service if they wished. In short, no bureaucrat can or should try to foretell who or what private individuals or firms will dominate the production of private 38 THE FREEMAN January currencies. The market will be the best arbiter. The gradualism of this type of transition is orderly and painless for the nation-except, of course, for those politicians used to paying for their free lunches with fiat money!

7. But how could the U.S. gov ernment pay for its services with out controlling the currency? Taxation and currencies are not nec essarily tied to one another; this merely indicates how closely most people have come to associate a fiat system with taxation-probably be cause they subconsciously realize, or have heard, that fiat money infla tion is "back door" taxation. Under private money, inflation is for all intents and purposes abol ished-but that in no way affects taxation for essential government services, such as national defense. Instead of confiscating taxes de nominated in U.S. Federal Reserve notes alone, the government takes money denominated in weights of gold. At tax time, you do exactly what you do now: write a check to Uncle Sam (but very likely drawn on a private-money account). If Uncle Sam has a question about the check, or if the check bounces, well, laws against bad checks already exist.

Nor are wage withholdings a prob lem. Withholdings are merely a per centage of earnings. The percentage and withholding payments are unaffected by whether the wealth of earnings is measured in governme1!t or private dollars, because, again, all dollars are by law claims for a spe cific weight of gold. 8. What about the international effects on the U.S. dollar? Wouldn't money privatization se verely shock the markets, and perhaps weaken the dollar? We must remember two things: This program would be gradually phased in and would necessarily result in a type of gold standard. As the program would not, could not, be instituted overnight, there would be ample time for interna tional markets to adjust to the situation. Gradual, prudent institution of a system does not psychologically lend itself to panic-but rather to calm. It's not when governments move to ward sounder money that markets are shocked, it's when they move away from sounder money-such as Nixon's closing of the (limited) gold window in 1971. It is not less gov ernment command of money that is feared, but more.

Because the move to private money would be perceived as a move to un tamperable money, the rest of the world would quickly perceive the birth of modern dollars of unprece dented strength. The world would understand that dealing with pri vate, gold-backed money would be no 1985 LET'S LIBERATE MONEY 39 more difficult than dealing with more than one type of stock or bond, with more than one parcel post com pany, with more than one maker of yardsticks. Returning to a gold standard is the American way. As Bernard H. Sie gan wrote, "The evidence is most convincing that the delegates to the Constitutional Convention of 1787 intended to devise a currency based on gold and silver. Their problem was draftsmanship; they did not write this purpose carefully enough into the Constitution to prevent the Supreme Court from applying an en tirely different interpretation." (Wall Street Journal, June 18, 1984.) Beyond the practical considerations of private money, there is the moral question: Is it right for gov ernment to hold total control over the medium of exchange? The an swer should be clear: It is no more morally proper for government to tyrannize the making of money than it is for government to tyrannize the economy as a whole. Such control is pure violation of individual rights, a substitution of command for consent in a nation's medium of exchange.

Is it not time for us to live up to the intended rationality and heri tage of the Founders? Returning to a gold standard is the American way. Returning to private money is the ultimate form of a gold standard for a free people. ® Reprints . .. A Page on Freedom Each of these brief messages is a handy way to share with friends, teachers, editors, clergymen and others a thought-starter on liberty. It also serves to introduce the reader to our work at 'FEE. See page 3 for this month's Page on Freedom. (Copies of previous messages are also available; specify title when ordering.) Small quan tities, no charge; 100 or more, 5 cents each. Or, feel free to reprint the message in your own format if you'd prefer. We hope you'll enjoy this new feature! Order from: FOUNDATION FOR ECONOMIC EDUCATION, INC. IRVINGTON-ON-HUDSON,NEW YORK 10533 Judith Anne Still The Negro and Free Enterprise: A March Forward Singly WHEN the signers of the Declaration of Independence surrendered the cause of slavery before the battle for freedom was engaged, they partici pated in a betrayal of the new na tion's full democratic potential. Man as a group marched forward; man as an individual was forced to retreat.