As for what F.A. Hayek actually says:

Of course coins may be more valuable than their content in metal – no one has ever denied that, Hayek created a straw man for the purpose of knocking it down.

However, this does NOT mean that it is a good idea to have token coins.

What people (not just “private business”) choose to make contracts in (i.e. to use as money) should (of course) be up to them.

However, historically people tend to choose a material – for example gold or silver of a particular quality.

This does not mean that government should freely mint gold and silver into coins – the minting of coins has been in many times and places a private business.

But nor does it mean that banks (or other such) are well advised to call anything they feel like (token coins, notes or computer credit) “money”.

Such things would not likely be “competing currencies” – they would be more likely be based on fraud. As the banks would pretend they were gold (or some other commodity) and then play fractional reserve games.

There is a vast difference between gold-as-money (or silver-as-money or some other commodity in a contract) and a gold “standard” – the latter opens the gates to massive fraud.

And a private currency (or private currencies) that were not even “based on” a commodity (not an “index of commodities”) would not even need the gates of fraud opened as they would be an absurdity from the start.

A government can force people to pay their taxes in its paper notes and credit – but a bank (hopefully) can not. So people would treat this “private currency” of token notes (and computer credit) with the contempt it deserved.

Allow people to choose what commodity they wish to make contracts in (and it will be a commodity) and allow other people to make coins out of this commodity (and to charge for this service).

Allow people to lend out money they actually have (i.e. real savings), but punish as fraud the lending out of money that does not really exist.

SNB has been coordinating rate cuts with ECB and Fed. their independance is a shadow of what it was.
It’s still a relatively strong currency… but things have changed much.

Read “Gold Wars”

“The Swiss Franc is known as a ‘hard currency’. The franc holds this reputation as, until May 2000 fiscal laws required a 40 per cent gold cover for currency in circulation. This enabled the currency to remain very stable, thus making Swiss banks more attractive to international investors.

In the first half of the nineteenth century, the Swiss franc was unregulated and as such was considered to be a highly variable and complicated currency. Before the currency was regulated in 1850 by the Swiss Federal Constitution, the country had 75 entities and 25 cantons – all of which produced their own individual coins. The situation was further complicated by private banks distributing their own banknotes, thus adding to the lack of uniformity amongst the currency.

The introduction of the Swiss Federal Constitution of 1848 and the Federal Coinage Act of 1850 ensured that only the Federal government could distribute currency and that the Franc became the nationally recognised currency.”

“Economic fundamentals. A history of low inflation and current account surpluses.

Strong reserve position. The Swiss franc has always been more than a paper currency – it still is backed by gold. At market prices, actual gold reserves significantly exceed currency in circulation. Switzerland has the fourth largest gold holding in the world, after the EURO countries, the IME, and the US. But reserves do not consist only of gold. Non-gold reserves are almost five times as high as gold reserves. Relative to GDP, the level of international reserves – with or without gold – is far ahead of all other countries.

Sound policies. Because of its autonomy from political influences, the Swiss National Bank has created the world’s best managed currency, concentrating foremost on price stability.”

http://www.iea.org.uk/files/upld-book431pdf?.pdf

Enjoy!

The whole idea of having competing monies is already reality, and hopefully always will be. Currently the most valuable “money” is either a short position in the stock market or a strategic credit default swap. Call it money or call it immoral, either position is still valuable (until the government changes all the rules–they’ve been doing this almost every day).

Elitists have their pet theories about how the system should be changed, but no one has a handle on it. It’s to complicated. We should celebrate that. If “money” could be “perfected” we’d all become serfs again (instead of bloggers). Some tyrant would eventually wrest complete control.

I’m guessing that’s how Hayek saw fre banking working. Many currencies would start out competing with each other and eventually one, or a few, would win in the marketplace because of the issuers’ self-restraint.

Were we to allow foreign currencies as payment in the US, Swiss currency would probably win out over all others because the Swiss inflate so little compared to the US and others.

“current capitalist business cycle downturn”

I don’t know what you mean by that, but this downturn is a result of a bubble created by our monetary policy. The banks are indeed part of that monetary system. You are missing an important fact here, that maybe I didn’t quite make clear before. This sysem is a maifestation of government.
The FED is a government entity. Don’t be fooled by this the fact that it is not officially federal (but private). The Bank of England, or the Bank of Israel for example, are federal banks serving the same purpose as the FED. If the money supply was handed over to the treasury, what would happen? Ben Bernake would work for the treasury. Who cares what the scheme is? You’re describing this like Government is hopeless and it has all these well intentional experts wanting to do what is right, but the FED is in charged. This isn’t the case, the FED was created by congress and can be destroyed by Congress. The person doing the most harm right now is your Secretary of Treasury (Paulson). The system is as is because that’s what they created. It is serving a few bankers very well, but these bankers would be nothing without government. It so happens that this system is serving government also very well. It has control over our freedom!
Having established that the system is controlled and directed by Government entities, you must understand that it is government that caused this mess, so it is certainly not going to do the right thing now. Most of them don’t have a clue even if they wanted to. You think your president elect Obama even knows what fractional reserve banking is? He thinks this is how capitalism works (or he knows very well that it isn’t but he’s exploiting the events to promote his big government socialistic plans).

The only way out of this mess, is to let the free market clean up the system. Government is useless and can only do harm. Government makes no money (it doens’t produce anything), and it has no savings (we are bankrupt). It only confiscates from productive people in order to transfer their wealth to the unproductive (and unearned). Does that sound like something that can help the situation? (forget morality).

P.S
If by any chance, you are influenced by this book “Web of Debt”, then I urge you to look through the Literature and media parts of mises.org and learn a little more in depth sound economics. The author of this book (it’s quite embarassing) has very poor understanding of sound economics, which is why she makes false claims and completly misdiagnoisis the source of the problem. Her theory about why a gold standard won’t work is simply false.

for example, hayek says:
“…very doubtful whether gold was for the purpose of money really a good standard. It would turn out to be a very good investment, for the reason that because of the increased demand for gold the value of gold would go up; but that very fact would make it very unsuitable as money. You do not want to incur debts in terms of a unit which constantly goes up in value…”

“…demand for this money will depend on the issuer being forced to keep its value constant; because if he did not do so, the people would at once cease to use his money and shift to some other kind.”

he doesn’t even make sense in his citing the case of sweden during the great war – the logic is all over the place.

This is what you are basically saying:

If under the current system, we get the FED to increase the reserve ratio to %100, and change the dumb process (meant to deceive the public) of the FED monetizing debt into a straight forward printing money procedure, I believe we achieve what you are asking for.

The main problems with this argument is that Government is still in charged, so you are asking for Government now to start doing the right thing. If government was able to really do the right thing, then a lot of our problems would be solved. The current system is this shape because it is the nature of government to spend and cheat as much as possible, and allows for special interest to get special treatment as in the bankers case. If they still have a monopoly, there is nothing to regulate them exept for their good nature. It isn’t going to happen! It never did and never will. This is why only the free market has natural built in regulatory mechanisms that can ensure long lasting stability and honest money (as described in the article)
The second thing, is that you are wrong about them having tools to stabelize prices. In fact, Hayek himself showed in other works, that the whole price stability target by central banks will always cause a deviation from the natural interest rates (that of a free market) because a steady inflow of artificial credit into the system will induce a higher supply of capital, thus reducing the rates below the natural rate. This fact of lower interest rates below the natural rate will always induce bubbles.
There is no economic justification for price stability, as I believe Murray Rothbard has explained. The money supply is arbitrary and its current supply need not matter. Read “mystery of banking” by Rothbard. At the end of the day, any printing of cheap paper bills is economically equivellant to counterfeiting.

It seems so and that’s a good point. People must be able to semi-accurately place a value on money. At first, people used the commodity values of gold and silver to value the money. Later, they used the value in the recent past. But with a brand new money without commodity backing, how do you place a value on it? It doesn’t have a recent past to use as a guide. Hayek doesn’t seem to have addressed that.

The one argument I have with Rothbard in his “case for a 100% gold dollar” is his statement that if everyone had his own currency, rothbards, yeagers, jones, as he puts it, “then we would have a world of chaos indeed”.

The next statement asks for someone to make an analysis of such a situation.

So, here goes. First I think this is a straw man argument, since even Rothbard’s own writings show that the market will always discount bad monies and favor good monies. This is, after all, the portion of the demand for a money that arises from its use as a medium of exchange. If the money is also a commodity, then it has a combined demand based on the commodity itself and also its use as a medium of exchange. Surely in an ocean of fiat money, someone would again create a commodity based money. And the market would gravitate to that money. Since fiat money has only medium of exchange demand (no commodity demand for it) it has the potential to lose all demand entirely, as no other use would provide a demand for it.

So, what Rothbard mentions cannot occur on the true free market (e.g. no government or other force – free = no force). However, what is a possibility is that one or some small number of private monies will dominate commerce, and the others will fall away, just as happens in any business – the good survive, the bad go bankrupt.

In fact, isn’t this sort of what we have with checkbooks, these personal currencies all have to become backed by some more accepted currency, or their value would be discounted to near zero. And as usual, the market provides a way to determine the value of an individual currency on the spot – the various point of sale check validation methods available. In the current case, a check is either deemed slightly less than 100% (to pay for the cost of assessing check worthiness) or 0%. However, there’s nothing theoretically stopping this from having a check discounted in the range between 0 and 100% of some more common money. And then we would have essentially private individual currency, but backed by a common superior currency.

And yes, I understand all your points about currency. I too sat through 5 years of college reviewing every bit of this. And in 1973 I met Hyeck when he lectured at the University of Portland. But when I got out in the real world and started my own business, a pure free market approach just does not work. If you are going to play the game, you must play within the structure you are playing. You want to play a different game, go to another table.

I am on your side, but if you want to see change, you need to rationalize your approach with current data and information to get people to change. Ron Paul will never get anything done on the House Finance Committee if all he does is lecture people on the benefits of Austrian Economics. And I understand the benefits, it is time to change from theory to applied and you can take this school of thought to the next level.

You did convince me of one thing, notice I used the “enter” key.

While Hayek’s proposal for the denationalization of money may produce a more stable monetary system than any that has existed since the classical gold standard was deliberately abandoned in 1914, it has been criticized by some Austrian School economists, including Murray Rothbard. Rothbard’s analysis and criticism of Hayek’s proposal are presented in his essay “The Case for a Genuine Gold Dollar,” which is contained in the book “The Gold Standard: Perspectives in the Austrian School” (edited by Lew Rockwell, Jr.).

http://mises.org/books/goldstandard.pdf

However, you answers were of no help

I’m not confused by Hayek’s proposition that the value of money under a commodity standard is largely determined by people’s willingness to trade it, i.e., his examples of gold backed money trading above or below the value of gold.

After a currency becomes accepted as “money” it has in effect become an economic good independent of its original commodity standard. I understand that.

This is what I don’t understand: is Hayek is suggesting that a new money can be introduced without any kind of commodity backing so long as people accept it as money ? In a thought experiment that works, but in the real world, short of pointing a gun at them, how do you get people to accept your NEW unbaked (or backed by a basket of obscure commodities) money.

The reason you are not terribly upset that gas prices are down to $1.95 today is that they used to be $4.50 only a few months ago. But I used to pay $0.18 a gallon when I was just starting to drive. That was in the 60′s and they even gave you stamps which if collected you could get other goodies.

The fact that prices have gone up so much is an indication of how much past transfers of wealth have occurred. All the people who were living on fixed incomes were robbed already. Maybe you weren’t around yet, so it was your parents who might have been robbed. It just happened slowly. Maybe that’s why they never bought you that ____ (car, education, – fill in the blank) you wanted.

And of course, there’s no way I can prove to you that you could have been better off – say with the same income but still with cars costing $1000-2000 and gas under 20 cents/gallon. But those are the figures you should be considering. And that flat screen tv you are talking about – well that should have cost about $20. When I was a kid, only one parent worked, and it was because we were freer and wealthier – but we just didn’t have the technology we have today. And guess what, it wasn’t the creation of fiat money that created this new technology.

And just because you can’t see how private money would work, just means you’re not an expert enough on the subject. I’m no expert and I can see umpteen ways it could work. How about simply having special debit cards with point of sale computers automatically converting between different monies. Come to think, we already have that, almost. I buy stuff outside the country on my credit cards and they do the currency conversion math automatically. So, what’s so difficult about having gold (or anything else) backed debit cards.

Of course what the government depends on is the idea that what you don’t know (about the truth) won’t hurt you. And they’re right to some extent, at least you won’t be getting upset or angry at the government – and we all know how much harm stress can cause. So, rest easy – ignorance is bliss.

Oh, one last thing. Could you type the enter key once in a while. It’s kinda hard to read your one long paragraph.

What you’re not getting is that people would not accept money unless it was backed by valuable assets. When people say that the US dollar is unbacked, what they mean is that the dollar is physically inconvertible (i.e., the fed will not buy back its paper dollars with gold). They forget that the dollar is financially convertible: the fed will buy back its dollars with its bonds. Convertibility can be delayed, uncertain, at the bank’s option instead of the customer’s option, etc. The fact that the fed has suspended one kind of convertibility is irrelevant as long as other kinds of convertibility are maintained. Anyone who claims that modern paper money is unbacked would have a hard time explaining why every bank that has ever existed has kept assets against the paper money it has issued.