1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar
Source link: http://archive.mises.org/13076/toward-a-new-monetary-order/

Toward a New Monetary Order

June 25, 2010 by

The global monetary fiasco is a reminder that it is high time to seek monetary reform along the lines of that which is recommended by the Austrian School of economics. It is the only way to protect and maintain peoples’ freedom and economic well-being. FULL ARTICLE by Thorsten Polleit

{ 48 comments }

Allen Weingarten June 25, 2010 at 8:59 am

I agree that the sound approach to the global monetary fiasco is given by the Austrian School of economics. However, that does not mean that now is the time to seek monetary reform. The public, and their political representatives, hold to a different economic view, and more importantly to a different moral perspective. Until there is a critical mass of people (which needn’t be a majority) who recognize the soundness of the free market, and the moral perspective behind the Declaration of Independence, such reform is infeasible.

So whereas it is important to provide Austrian theory, it remains to present it in a commonsensical manner, and to place it within a more traditional moral perspective.

J. Murray June 25, 2010 at 11:31 am

The problem is that recovery simply may not come at all without a complete abandoning of government fiat. That’s what people really need to understand. The longer we hold onto the notion of the Dollar as it is today, the longer we will be waiting to return to prosperity. The prosperity America enjoyed since WW2 was entirely us eating away the savings of a century prior. That well has run dry and won’t start to replenish until we abandon the Dollar.

America will never again enjoy prosperity if we continue to utilize Federal Reserve Notes as a medium of exchange.

michael June 28, 2010 at 8:45 am

J. Murray: How popular do you suppose a program involving abandoning the dollar will prove to be?

Let’s forget the working public, who gets paid in dolars. And the old folks,. who’ve carefully saved dollars to live on. Let’s look to the Powers That Be: the major corporations and Wall Street. Do you think they’ll be sharing your enthusiasm?

Once the dollar is destroyed, so will America fall apart. Is it likely America will be replaced by a happy stateless republic of independent gun carriers, and the store shelves will still be full of products? Or instead will China just look for another market in which it can sell its wares, and share in its prosperity with anyone who holds Euros, or yen, or rupees?

Patrick Barron June 25, 2010 at 10:01 am

Another magnificent essay by Professor Polleit. Do not cease to speak the truth in any forum available. The longer this monetary regime exists, the worse will be the consequences. We are not debating whether government should or should not intervene in some trifle but whether it will destroy civilization. Nothing less is at stake.

Gerry Flaychy June 26, 2010 at 5:25 pm

The ‘monetary regime’ is just a mean, a tool, for a government to realize its inflationary policy.

Mike Sproul June 25, 2010 at 5:17 pm

Government-produced money is like government-produced automobiles. In a free and competitive market it is pointless and expensive to have government production. But a government monopoly is indefensible.

That said, the US dollar is not fiat money. It is backed by the tax-collecting ability of the government, so it is not the “Government-as-counterfeiter” situation that Polleit imagines. The most important reform would be to remove the government’s monopoly on note issue, and its over-regulation of private banks. Once that is done, Bernanke and company won’t be in a position to do much damage.

Slobodan fon Miroslavljevic June 25, 2010 at 8:57 pm

We don’t need to jump into a huge reform. All we have to do is allow competition of currencies. We should remove the barriers that prevent commodities such as gold, silver, and platinum from becoming currencies. The market would then sort out winners and losers. Losers of course being Bernanke & Co of course.

Gerry Flaychy June 27, 2010 at 10:11 am

According to you, what are those barriers ?
Do you think that ‘Bernanke & Co’ could be one of those barriers ?

newson June 26, 2010 at 4:12 am

freebankers, unlike henry ford, maintain that the public, by and large, does understand how frb works, and since there’s been no popular uprising, there must be tacit approval.

maruta June 26, 2010 at 4:55 am

Allen Weingarten June 25, 2010 at 8:59 am wrote:
“Until there is a critical mass of people (which needn’t be a majority) who recognize the soundness of the free market, and the moral perspective behind the Declaration of Independence, such reform is infeasible.”

Yes, IMO too, the critical mass is crucial, yet it seems to achieve such won’t be very difficult, given that the knowledge disseminates fast thanks to e-communications. Mr. Polleit’s opening phrase regarding Ford is just brilliant style, as is his whole article among many other ‘Austrian’ articles, to this end.

FatBeard June 26, 2010 at 5:55 pm

Under privatized money production, people would freely decide on the kind of money they wanted to use. Such a money would presumably be anchored by gold, but it could possibly be anchored by other media (for example, silver or platinum). The government and its central bank would be closed down and lose control over money production. From then on, the interest rate would be determined by free-market forces rather than government action. Mises Daily

Why not common stock?

Common stock as money:
1) allows assets to be purchased directly without borrowing conventional money.
2) shares wealth at the same time it purchases it.
3) Since no lending is required, deflation is not a concern.
4) no lending = no lending at interest thus abiding with Deuteronomy 23:19-20
5) Any price inflation is born by the owners of the issuing corporation since all money recipients are by definition owners of the corporation.
6) The argument about the correct amount of money is rendered mute since the money holders can vote on how much new money (common stock) is to be created.
7) is decentralized since there are thousands of corporations.

Gerry Flaychy June 27, 2010 at 9:51 am

Common stocks already exist and nobody accept them as money (which is a primary condition). So your project is stillborn.

FatBeard June 27, 2010 at 10:21 am

Common stocks already exist and nobody accept them as money (which is a primary condition). Gerry Flaychy

Common stock as money has several disadvantages under current law compared to FRN’s:
1. FRNs are legal tender for all debts including private ones.
2. the capital gains tax applies to common stock but not FRN’s.
3. bank deposits of FRNs are insured by government backed deposit insurance.

Gerry Flaychy June 27, 2010 at 10:56 am

Common stock exist since corporations exist, so long before FRNs existed, and they had never been utilized by the peoples as a medium of exchange.

To be a medium of exchange is the primary condition for something to become money.

FatBeard June 27, 2010 at 11:10 am

Let’s just have total liberty in money creation, usage and acceptance on a level playing field and we shall see, shan’t we? As for government money, let it be legal tender for government debts only such as for taxes and fees not private ones.

As for common stock vs gold, for instance, a common stock company could easily have gold as an asset as well as other PERFORMING assets too. Corporations and banks if unable to loot via government backed fractional reserve borrowing and lending in a government enforced monopoly money supply would be forced to share wealth instead of loot it.

Gerry Flaychy June 27, 2010 at 12:10 pm

If we let common stocks compete against gold, silver, and moreover, ‘government money’, do you seriously think that common stock has any chance at all ?

FatBeard June 27, 2010 at 11:18 am

To be a medium of exchange is the primary condition for something to become money. Gerry Flaychy

Computers and modern communications make any number of private currencies practical. Floating exchange rates would keep the system honest and stable.

David C June 27, 2010 at 12:49 am

1) I think the information age is making it impossible for central banks to lie to people about their money any more, and that will bring fiat money to an end.

2) I don’t think Ford understood out banking system either. If he did, he would have understood that fiat money rewards debt and consumption over production and savings. GM was able to rise specifically because of more consumerism and more easy credit.

Mike Sproul June 27, 2010 at 12:24 pm

Fatbeard:

Historically, tallies made of wood or clay were commonly used as money. The tally consisted of a ‘stub’ held by its issuer, and a ‘stock’, which was the issuer’s IOU. The stocks were often made payable at an upcoming county fair. Some of those fairs came to specialize in the trading of stocks, and became known as stock markets.

FatBeard June 27, 2010 at 12:39 pm

Interesting. Thanks. So “stocks” were once used as money. I had heard of government tally sticks but not private ones. I supposed “stocks” bypassed the bankers and tax man so were suppressed. Time to bring them back, I say.

Gerry Flaychy June 27, 2010 at 4:01 pm

Tally (‘stock’) is a form of ‘IOU’, like bank note and checkbook money.

Common stock is a share in a company or corporation, which is not even an IOU.

I have also a stock of cigars at home.

It is not because we use the same word in different situations that this word has the same sigification everywhere !

FatBeard June 27, 2010 at 6:18 pm

Good catch! In a sense, a share of common stock is an IOU that can never be redeemed unless the corporation goes out of business in which case the unencumbered assets are split among the share holders.

Gerry Flaychy June 27, 2010 at 7:18 pm

Shareholders are owners, not creditors.
A share is not a debt.

Secondly, a shareholder who wants his money back may always sell its share(s) on the market: no need to necessary wait the dissolution of the company.

FatBeard June 27, 2010 at 7:26 pm

Secondly, a shareholder who wants his money back may always sell its share(s) on the market: no need to necessary wait the dissolution of the company. Gerry Flaychy

Assuming your form of money survives in a truly free market. I maintain it wouldn’t. Folks would trade common stock directly, completely bypassing conventional money.

Let’s just be free and see, eh?

FatBeard June 27, 2010 at 12:24 pm

If we let common stocks compete against gold, silver, and moreover, ‘government money’, do you seriously think that common stock has any chance at all ? Gerry Flaychy

Yes, common stock appears to be an ideal money form that could easily incorporate precious metals and government money as assets as well as other performing assets such as factories. So common stock as money has all the advantages of precious metals but none of the disadvantages such as tying the growth rate of an economy to the mining rate of a metal.

But most importantly, common stock requires no borrowing or lending. Money is the lifeblood of an economy; it is absurd that it need be borrowed into circulation. Furthermore, lending at interest to one’s countrymen is forbidden by Deuteronomy 23:19-20.

But let’s let a truly free market decide. Only inferior money forms would require government privilege.

George June 27, 2010 at 5:40 pm

Do you really think the governments will voluntarily legislate themselves out of existence? Nope, the only new monetary order we’re going to be seeing is the progression of monetary systems toward MMT; modern monetary theory. The next step might be telling the bondholders to screw off and just issue money, with or without their support.

For a real free-market alternative, the hope lies in projects like BitCoin or RipplePay.

FatBeard June 27, 2010 at 8:48 pm

For a real free-market alternative, the hope lies in projects like BitCoin or RipplePay. George

Excellent! Sadly, I predict that if they become too successful then the IRS will persecute them. Still, I am extremely willing to be proven wrong. Let’s hope the power of liberty exceeds that of tyranny and I believe it will!

Matthew Swaringen June 27, 2010 at 11:56 pm

BitCoin is based on anonymous p2p, so absent the government making encryption illegal the other advantage of the system is it’s very difficult for them to track what’s going on inside the system.

What I’m not sure of is that the logic of the system is thought out well enough for it to last, and then there is another flaw I think to your view that common stock/etc could be used as money also. That is that the money has to be understood by those using it for them to trust it as a medium of exchange. I don’t think most people are going to understand BitCoin or similar services unfortunately, even though it sounds like a rather neat system from a development perspective.

Peter Surda June 28, 2010 at 4:44 am

Well, most people do not understand fractional reserve banking and central banking either but use it, so this shouldn’t be a showstopper. The challenge is to provide user-friendly “interface”.

The Kid Salami June 28, 2010 at 5:39 am

“Well, most people do not understand fractional reserve banking and central banking either but use it, so this shouldn’t be a showstopper. The challenge is to provide user-friendly “interface”.”

Well, that doesn’t really make sense as an objective analyis – the current system is an abomination, so saying that BItcoin and the like aren’t a showstopper because the present non-functioning system is also hard to understand (and yet the government has conned people into using it) is no reason at all. We need to establish why/how this has happened in the current system and not repeat these mistakes but avoid them.

Complexity itself isn’t a showstopper. Cars and planes are complex – but there very often is no way to travel as fast and as easily without them, so the complexity is deemed to be worth the cost (though the market should be free to “change its mind” at any point).There is a very very simple solution to the problem of monetary system – using metal coins and instantly redeemable money substitutes. Anyone advocating more complex solutions needs to demonstrate why the simple one is deficient.

Peter Surda June 28, 2010 at 5:53 am

There is a very very simple solution to the problem of monetary system – using metal coins and instantly redeemable money substitutes.

There is an even simpler solution: let the market pick.

FatBeard June 28, 2010 at 6:45 am

Anyone advocating more complex solutions needs to demonstrate why the simple one is deficient. The Kid Salami

The burden of proof should be on those who’d restrict liberty not on those who advocate it.

The Kid Salami June 28, 2010 at 7:13 am

I agree, let the market pick – I reckon commodity money has in the past taken hold and would eventually – if the government stayed out of it (no central bank, legal tender laws etc) and once the the whole generation of people raised on paper money is purged – do so again. If I’m wrong and Bitcoin were to take hold instead of gold, then I’m wrong. I doubt it though.

Fatbeard, you say “The burden of proof should be on those who’d restrict liberty not on those who advocate it.”. Well, I agree. FRB for example vioates property rights and thereby restricts the liberty of those whose rights are violated – this does not occur using commodity money. Can we demonstrate this for these new electronic monies? The distortion of the price system is the way this rights violation manifests itself.

FRB is just idiotic.Would you both say that “let the market decide how much fiduciary media is the right amount”? This is what Steve Horwitz was saying on the thread about this a week or two back.

FatBeard June 28, 2010 at 7:45 am

FRB is just idiotic.Would you both say that “let the market decide how much fiduciary media is the right amount”? The Kid Salami

FRB is idiotic. Who would willing accept a currency that is likely to deflate in purchasing power and has only a probable chance of redemption? Still, let’s let a truly free market crush it. It is not worth being abolished.

FatBeard June 28, 2010 at 7:54 am

Can we demonstrate this for these new electronic monies? The distortion of the price system is the way this rights violation manifests itself. The Kid Salami

Let the buyer beware and have the alternatives that a free market provides. Our current problem is we have no plausible alternatives to FRNs since they are so heavily privileged by government.

The Kid Salami June 28, 2010 at 9:00 am

I don’t really disagree – let the market get on with it. And I think that it would be crushed without government intervention.

But that doesn’t mean that we cannot go another step, that there is not some sense in which the actions of the banker can be deemed “illegal” because they vioate property rights. Any society wouldn’t (I’m pretty sure) allow the market to decide that murders are ok – we would all agree that violating people’s property rights in this fashion is illegal/punishable (however this might be defined) and anyone doing so can expect not to just go out of business gradually by losing customers but to be actively targeted in some way by some authority, free market or otherwise.

Why can’t we do the same thing for money? If someone is “maturity matching”, then that is one thing – they may at times fall into a position where they are insolvent but they will be obliged by “law” (by the same authority that makes murder illegal) to take immediate steps to address this situation. If they don’t manage to get back to solvency and people who deposited/traded with them lose their money, then that’s part of the deal and the market either works with good information or has temporary bad information which is quickly overridden with good information.

However, if gold is money and a banker builds up credit for a long time and then decides to print up and lend out instantly redeemable gold-receipts for more than the value of the gold he has, then he violates property rights in a systematic, rather than accidental, manner (and in doing so chucks the price system is out the window). I think this behaviour could be formalised sufficiently clearly (though there would no doubt be grey areas, these exist with murder/manslaughter/accidental death etc. as well, they can’t be avoided) and that it could, eventually, be banned.

My view is that it is only the misunderstanding of what money is and the properties it ought to have that prevents this. We are a long way from this now, as no’one has the slightest clue what money is – you’d need a society that first used commodity money for a while and learnt what money is via a free market, as you advocate, and only then after than would you be able to to get people to agree to make it “illegal”.

The Kid Salami June 28, 2010 at 9:33 am

“However, if gold is money and a banker builds up credit..”

Poor choice of word by the way, I meant builds up a good standing in the community, not credit in the monetary sense….

FatBeard June 28, 2010 at 12:23 am

… and then there is another flaw I think to your view that common stock/etc could be used as money also. That is that the money has to be understood by those using it for them to trust it as a medium of exchange. Matthew Swaringen

It might take time. Rome was not built in a day. Meanwhile, people would use what was most familiar to them; government money and gold and silver.

FatBeard June 28, 2010 at 10:05 am

Why can’t we do the same thing for money? If someone is “maturity matching”, then that is one thing – they may at times fall into a position where they are insolvent but they will be obliged by “law” (by the same authority that makes murder illegal) to take immediate steps to address this situation. Kid Salami

The power of fractional reserve lending is that is is done in a government enforced monopoly money supply. So, allow bankers to practice it in their own private money supplies if they can find suckers who will accept their money. But they won’t in a truly free market unless they share their “loot” with the money recipients. Hence, common stock as money.

Sure, let’s require 100% reserves for banks using government money. If additional money proves desirable, then let it be private money not additional (fraudulent) claims on government money.

FatBeard June 28, 2010 at 11:12 am

Poor choice of word by the way, I meant builds up a good standing in the community, not credit in the monetary sense…. The Kid Salami

I knew what you meant. You have a good understanding of money, IMO. I encourage you to sharpen your knowledge and be guided by the principles of liberty and the rule of law. Also, the Old and New Testaments are filled with wisdom that will not lead you astray. Mises was a great man but still he was only an agnostic. I’ll take Jesus and Moses over Mises, any day.

michael June 29, 2010 at 7:21 am

Correct me if I’m wrong… please, all jump in. But the whole tone of virtually every article and comment I read here is that the economy is greatly overextended and needs to contract indefinitely until it reaches some kind of rock bottom. And that in the meantime, the currency has to collapse, banks built on fractional reserve lending have to all crumble, the government must fail, and so be unable to bail anyone out, wholesale unemployment must take place without any safety net, the consumer economy must falter and manufacturing wait until such a time as it can begin to grow again ‘naturally’, manufacturing shrink until it’s small enough to fit the smaller number and smaller size of pocketbooks out there, and everything has to stay that way for a very long time until the medicine finishes working its magic.

And that all this has to be done for a single purpose: that we no longer have inflation rates that normally stay well under five percent.

Do I have that all right? Is that why everyone must endure so many years of pain? Because the new system you propose will be so much more elegant? And that the money will be worth so much more because there will be so much less of it for the public to share?

FatBeard June 29, 2010 at 8:59 am

Do I have that all right? Is that why everyone must endure so many years of pain? Because the new system you propose will be so much more elegant? And that the money will be worth so much more because there will be so much less of it for the public to share? Michael

Michael,
I am afraid you are correct. But please don’t lump me in with the Austrians. I propose a legal tender bailout of EVERYONE, debtors and savers alike before any monetary reform (except for a 100% reserve requirement in government money to prevent the problem from reoccurring). That should not at all be deflationary if the amount of new legal tender was sufficient. Plus, I advocate the allowance of new private monies to fill the need for money. And those monies would not depend on precious metals either though as a libertarian I would not forbid them.

The problem with the Austrians is that they think deflation is good because inflation can be harmful. OTOH, the Keynesians are wedded to borrowing and lending money when it most cases it is mere electronic bookkeeping entries.

michael June 29, 2010 at 4:28 pm

I’m with you on some of this. But I have to disagree here:

“Plus, I advocate the allowance of new private monies to fill the need for money.”

That didn’t work so well in the Confederacy, with the City of Vicksburg issuing dollars and the State of Georgia issuing dollars, etc. They would be worthless outside your municipality. You wouldn’t, for example, be buying anything made abroad. Nor would you be buying much oil or gas.

Stores would all have signs up in their windows: “We accept Sam’s dollars, Jake’s dollars and gold bonds. We do not accept Virginia or Maryland money, or credited exchange tokens…” The sign would be 400 lines long. Giving correct change would be a nightmare. It would be like Latvia, the year after the fall of Communism. Everyone had to carry a bag around full of kroner, lire, yen, drachmae, nickels and dimes and marks. Every deal you struck was an original transaction, agreed to after much haggling over definitions.

The world needs a single reserve currency, a yardstick against which all the others can be measured. And for a variety of reasons, all the world’s creditors prefer to use our Federal Reserve Certificate. You can cash it anywhere money is exchanged, and at a good rate.

FatBeard June 29, 2010 at 5:03 pm

The world needs a single reserve currency, a yardstick against which all the others can be measured. And for a variety of reasons, all the world’s creditors prefer to use our Federal Reserve Certificate. You can cash it anywhere money is exchanged, and at a good rate. Michael

Wrong. Computers and modern communications make any number of private currencies practical. Let the free market decide the correct balance between convenience and other factors. If it selected a single currency then fine but let it always be able to choose. Otherwise we are advocating tyranny and I’ll have none of that when it comes to money creation or much of anything else for that matter.

Tyler June 29, 2010 at 8:50 pm

Michael, it’ll all have to come to an end one way or another. Let’s hope it’s a slow and gradual process allowing everyone to adjust. Or at least giving everyone the chance to. :)

MRawlings July 4, 2010 at 10:27 pm

“There is no means of avoiding the final collapse of a boom brought about by credit expansion (exponential growth of every significant metric you would care to measure: population, debt, resource consumption, # of dollars, massive entitlement liabilities, species extinction, ecosystem degradation, water consumption). The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment (we wake up) of further credit expansion, or later as a final and total catastrophe of the currency system (society) involved.”

Modern Human Civilization is a credit bubble.
Regulations aren’t going to save us. Democracy is not going to save us. Jesus is not going save us. And Economists sure as hell aren’t going to save us. There is no saving this massively bloated, destructive mess. We have a system that demands limitless exponential growth and we live on a finite freakin’ planet. Here in the USA we are 5% of the world’s population and we use 25-30% of the world’s energy and resources.
Do you think the United States of America is just going to go quietly into that goodnight? Do you seriously think that this transnational house of cards is going to fall into neat piles? This system has all the momentum of a runaway freight train. The status quo will be maintained (more likely worsened) at all costs until this system breaks. You folks need to start figuring out new ways to make the world work with drastically reduced resources and billions more people. We have been high-grading every major resource on the planet for the last 100 years, especially oil. Oil production has been flat for the last 5 years or so despite significant rises in price and increases in demand- that my friends is what they call Peak Oil. Oil is the life’s blood of the global economy. When cheap oil ends everything will cost far more to purchase, operate and transport. More and more of our time and money will need to be spent providing for basic means of survival. Who do you think is going to buy all the I-Pods and designer jeans, let alone cars and appliances or so much of the useless garbage brought to us by the magical wisdom of the Free Market? What happens to the global economy when economic growth stops, then declines? We have squandered the resources that could have created a comfortable, safe, sustainable planet. And you economists are just now beginning to understand that there may be a problem with our monetary systems?

Don’t believe me? Check out the Crash Course at:
http://www.youtube.com/watch?v=XnXZzx9pAmQ

michael July 7, 2010 at 5:06 pm

All excellent points, MR. Regardless of what basis we use to print our money, everything that requires energy to produce or provide is going to be MUCH more expensive in the glorious new economy. And that’s the case regardless of whether we are governed by capitalists, by communists, by Islamists or we have no central government at all.

As the years go by, more people will join the global economy. And all those Indians, Chinese, Brazilians, Egyptians, etc will want to drive nice shiny new cars, just like the Americans do. Meanwhile oil production per capita is going to be declining. And sharply. So we had better start economizing and adjusting. Say what we will about cap-and-trade, at least it’s an attempt to begin thinking about our great common problem.

I doubt that this is a problem amenable to a libertarian solution. When each of us determines that the total supply of energy is shrinking, we’ll all make the rational decision to hoard it, and use it up while we still can. It’s the famous “tragedy of the commons”. Any rational decision as to how to manage dwindling resources would best be made collectively.

A major portion of our profligacy is the dominance of the world’s major militaries. They use up dwindling resources faster than anyone else, in their perpetual attempt to enforce control over everyone else. And here I fear that neither the collective not the individualist mode will be effective in convincing them to pipe down and let everyone live their lives, free from armed oppression.

Another subject no one’s exploring now is the fact that with efficiencies of production, more and more consumer goods can be produced with fewer and fewer people employed in production. Yet the paradigm we now use for resource distribution requires that each of us who wants to survive have money, ostensibly an income derived from one’s role as a producer.

This is a train wreck in the midst of happening. Fewer and fewer of us are required to contribute our labor. More and more of us get born, and all want to share in the good things in life. At some point, someone’s going to have to address this issue.

tungsten watches July 23, 2010 at 4:19 am

The economic crisis led to the American economy, the dollar’s status, America, has also appeared in the international exchange is the only measure of standard, but we must recognize that the diversification of international development, now has been unable to stay in the development mode of before.

Comments on this entry are closed.

Previous post:

Next post: