Monday, May 14, 2012

The Path to Sound Money

Professor Herbener very well presents the case that prices are the most effective and valuable communication system ever invented by man, and that profit and loss is the best system devised to ensure the wise utilization of resources.  To the degree either of these two systems is not allowed to function freely, wealth destruction occurs in direct and opposite proportion (no, I don’t have a mathematical formula that proves this).

However, I have a not-so-minor quibble with the professor.  He makes a compelling case for the free market in money, yet he proceeds to prescribe his non-market based, centrally planned solution:

The primary step in monetary reform, then, is to turn FRNs into 100-percent-reserve redemption claims for gold coins…. The other step along this path to a market monetary system is to establish a 100 percent reserve of money against bank-issued fiduciary media.

Once this transition was accomplished, the government should permit private production of money and money certificates according to the general laws of commerce.

Why are the first and second steps necessary?  Applying “the general laws of commerce” will suffice.  Why not just advocate for the private production of money – necessarily entailing the end of legal tender, the end of taxation on saving and use of alternative monies (taxation in all forms, including sales tax and income tax), and allowing the contract to rule the relationship?  Most importantly, this step would require that the banking system operates without government support.

In this case, the cartel known as today’s banking system could continue to operate for as long as the market found its services acceptable.  Or the cartel could change its model.  In other words, it isn’t necessary for the professor to recommend a centrally planned solution for this market actor.  The market will clear.  Good money will drive out bad.

The professor’s path is more direct – it has the appeal of getting to sound money faster.  But “more direct” is the mantra of all who desire the use of government intervention into the market.  “More direct” always ends up in the hands of those who desire political power.

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