Private currencies: The future of money?

A new system of currencies

In the United States, former presidential candidate Ron Paul found much support from those who saw in him an uncanny ability to predict, decades before they happened, the growth of the terrorist problem, as well as the chaos in Wall Street.

In connection with the latter, Paul has been advocating for a return to the gold standard, since the 1970s in fact, and even published a minority report about it under the Reagan administration in 1982. A gold standard, Paul maintains, is the way to reestablish monetary stability and to hinder continuous devaluation of a currency.

In spite of the US Dollar’s decline to only 4% of its value from 100 years ago, Paul doesn’t advocate an outright abolition of the Dollar. Instead, he has called for private currencies that could compete against one another for public patronage. In order for this to happen, the government must be barred from legislative or executive action that would limit such competition of private currencies.

Friedrich Hayek

Paul takes his cue from the Austrian economist Friedrich Hayek, who wrote ‘Denationalisation of money’ in 1976. At the time of publication, the notion of leaving the issuing of currencies to private entities was far more revolutionary than it is today. Even Hayek had established his career many decades before under a central-banking framework. Nowadays, people are more open to ideas such as those of Ron Paul.

The institutions during Hayek’s time up to the present have long taken for granted that money is a government matter. Most economists just assume that currencies are the government’s job, since money is perceived as too important to leave to the private sector.

The rise and fall of money

In fact, the use of money in history has evolved apart from any centralized agency, as people sought better ways to store value and to facilitate exchange amongst each other.

But while gold and silver came about as most ideal for media of exchange, it was another matter to transport these metals with ease. This is where certificates for redemption in gold and silver became useful. Soon enough though, certain monetary experiments, if not actual scams, were carried out, wherein the number of certificates were increased without corresponding backing in gold or silver. With the issuance of too many unbacked certificates, debts become more and more unsustainable, and incidentally, prices rise across-the-board.

Even with the failure of what we recognize to be currencies, the problem continues to crop up, sometimes even leading to hyperinflation, where prices go up exponentially. People lack alternatives to such worthless currencies, when governments claim the right to issuing these.

Another way

Hayek, in his book, outlined the case for competition rather than government control of banking and currencies. Just as monopolies make for inflationary currencies wherein people have no monetary alternatives, competition would rein in depreciation, since the market participants themselves choose which currencies are worth patronizing.

Even among his free-market colleagues, Hayek was criticized for supposedly presuming the viability of private currencies even if these were not backed by gold. However, Hayek never denied the need for such backing. His point was precisely to allow markets to determine what currencies prevail, and if this entails backing currencies by gold, that is to be expected.

Speculation

While we are not certain how future private currencies will appear exactly, if or when they come about, we can be certain that those that do prevail will do so on their ability to maintain value over time. The backing asset must be durable; its supply stable and rare enough; and divisible in various sizes and quantities.

Gold and silver, far from being a barbarous relic as stated by Hayek’s antipode John Maynard Keynes, will remain the future of money.