Monday, July 9, 2012

Free Money

Money and Freedom, by Hans Sennholz

This book is a brief (less than 100 page) overview by Dr. Sennholz of the intersection of money and freedom.  As money is central to a division-of-labor society, it is central to man’s improved condition on this world.  Dr. Sennholz argues that to the extent money is free (that is, allowed to function and develop in a free-market environment), man is free.

He begins the volume covering the history of money and the various interferences by the state in this otherwise normally market-derived commodity.  He discusses various alternate philosophies regarding money and economics.  He continues with a clear statement about gold – free gold coinage as opposed to a government managed gold standard.  He concludes with a concise argument of why money should be developed solely by the free market.

There are a few subjects in this short volume that I will cover in the coming days.  However it is with this conclusion, the issue of free-market-derived money, where I would like to begin.

Currencies are sound, not as they are managed, but as they are free.  This essay urges reconstruction of the monetary order on the foundation of freedom.  It differs from all other reform proposals in both the simplicity and audacity of its objective: only freedom.

We seek no reform law, no restoration law, no conversion or parity, no government cooperation: merely freedom….The legal underbrush that has grown up over the years – legal tender laws, tax discrimination against gold and silver coins, banking regulations preventing the opening of accounts denominated in ounces of gold, and so forth – must be cleared away so that Americans are once again free to use sound money.

Sennholz does not advocate to petition for the gold standard.  He does not advocate for any preconceived sanctions to a new monetary order.  In this statement he seems clear – leave the market alone and the market will figure out money.

I have long held such a position.  It also seems consistent with the work of Mises in Human Action.  It also stands in the face of many advocates of free market Austrian economics who add qualifiers such as 100% reserves or gold backing only.  Let’s see if Sennholz maintains his position of truly free (market/contract derived) money, or if he adds a qualifier.

The primary objective must always be the abolition of the money monopoly and legal tender coercion.

Political money with legal-tender power, which is currency issued by politicians or bureaucrats and forced on people at face value, is an ominous restraint of human rights.

Sennholz sees this as a moral issue.  The current money system impoverishes most people, forcing them to take and use at face value a constantly depreciating currency.  He suggests that religious, ethical, and moral leaders should rightly speak out against this money monopoly.

He also suggests that in a free-money system, one need not fear inflation:

If no one can force bad money on anyone, it cannot do any harm.  If individuals have the choice to refuse bad money or accept it at its market value stated in gold weight units, bad money will only harm the issuer.

I am not even sure why Sennholz need add the qualifier “stated in gold weight units….”  The freedom to accept or reject any form of money will ensure that the market prices will adjust to reflect the perceived quality of the money.  The buyer of the money will pay market price, while the issuer of the money is required to redeem at face value.  This will ensure that issuers of bad money must either greatly limit the practice or face the risk of insolvency.

In a monetary order without legal tender and a money monopoly, there could be no inflation.  Printing and issuing new money would not raise the prices of goods and services, but would merely lower the exchange rate of the issue in terms of other competing moneys.  Good money would drive out bad money.

Here Sennholz rightly captures Gresham’s law, as the bad money drives out good money only if the bad money is afforded legal protection in its exchange.  Left free, good money will drive out bad, or more properly, the exchange rate between the alternatives will reflect the value perceived by the market.

Sennholz states that while he would not require gold and silver to be the basis of a monetary system, he believes these would ultimately be chosen in the market as they have been for thousands of years.  With this in mind, following is his list of objectives to restore sound money:

1)      Mint gold and silver coins denominated only by weight and purity.
2)      Repeal legal tender laws and permit specific performance of payments.
3)      Permit financial institutions to issue private notes, and permit banks to accept deposits denominated in foreign currencies and weights of gold and silver.
4)      Permit free entry into banking.
5)      Permit interstate banking.
6)      End mandatory membership in the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and any other agency or cartel.
7)      Prevent tax discrimination against all forms of money.

I note (with joy) that he does not include on the list the requirement that any idea of 100% reserve backing – neither does Mises, under whom Sennholz received his doctorate.  The list prepared by Sennholz (when one adjusts for the view that he has inserted gold and silver not by direction but by his belief that these would prevail in a free market) is a good one for clarity and detail, however I believe it can be much simplified:

1)      Allow for contract to determine money.
2)      Disallow any and all government actions favoring one form of money over another.

Sennholz allows for the continuance of government money, as long as it doesn’t come with any forms of protection or allowances that differ from those allowed for market derived money.  He believes that competition will properly determine the winners and losers.

Markets have solved problems that are much more complex than the problem of money.  In any case, this problem of money was solved thousands of years ago in many societies, none of which had the technical capabilities we are blessed with today.  Money does not require government intervention to bring it forth.  The government intervention exists solely because money is the single most important aspect of a division-of-labor economy, which makes it the most useful aspect to control.

Sound money and free banking are not impossible; they are merely illegal.  This is why money must be deregulated….freedom of money and freedom of banking, these are the principles that must guide our steps.

I can offer no better conclusion.

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