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Could We Have a Free Market in Money?

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We’ve written extensively about the government intentionally devaluing our money. As one economist put it, the intentionally inflationary policies of central banks and governments are “daylight robbery.” But what’s the solution to this problem?

Economist Thorsten Polleit argues we need a free market in money. But is this possible? Wouldn’t this create monetary chaos?

Polleit argues that it would not. He thinks that if people could choose freely, it may not take long for a good to emerge that will be used as money not only nationally but internationally—as a universally recognized medium of exchange.

In fact, we have had what in effect was a free market in money in the past and gold and silver came out the winner. And Polleit says no matter what comes out of the current monetary mess, people should hold gold. Gold’s purchasing power cannot be debased by central banks running the electronic printing presses. In addition, gold does not carry a credit or default risk as bank deposits do.

The following article by Thorsten Polleit was originally published at the Mises Wire. The opinions expressed are for your consideration and do not necessarily reflect those of Peter Schiff or Schiff Gold.

What is fiat money and what does it do?

This is essential to understand since today’s worldwide unbacked paper, or “fiat,” money regime is an economically and socially destructive scheme—with far-reaching and seriously harmful consequences. There is an answer, though, and this lies in ending the money production monopoly of states.

The Problem of Fiat Money

The US dollar, the Chinese renminbi, the euro, the Japanese yen, the British pound, and the Swiss franc represent fiat money.

Fiat money has three characteristics:

  1. Fiat money is money monopolized by the state’s central bank. It is created by central banks and commercial banks licensed by the state.
  2. Fiat money is mostly produced through bank credit expansion; it is created out of thin air.
  3. Fiat money is dematerialized money, consisting of colorful paper tickets and bits and bytes on computer hard drives.

Fiat money is by no means “harmless.”

Fiat money is inflationary. Its buying power dwindles over time, and history has shown that this entropy is almost as irreversible as gravity. Fiat money makes a select few rich at the expense of many others. The first to get new money benefit to the detriment of those on the bottom rung.

What’s more, fiat money fosters speculative bubbles and capital misallocation, which culminate in crises. This is why economies go through boom and bust cycles. Fiat money lures states, banks, consumers, and firms into the trap of excessive debt. Sooner or later, borrowers find themselves in a deep hole with no way out.

Fiat money is easy to come by, so the government can finance its adventures and misadventures. Easy money; easy come, easy go. And the government keeps growing as it keeps spending. As the state expands and grows like weeds in an untended garden, this excessive growth strangles the free market economy, causing production and employment to suffer.

The Economic Effects

After decades of credit and money creation out of thin air, central banks have built up a colossal debt pyramid. The International Institute for Finance (IIF) estimates that global debt amounted to 331 percent of global GDP in the first quarter of 2020. The coronavirus crisis, in particular the politically dictated lockdown crisis, has laid bare the instability of the world’s debt-ridden fiat money regime.

Without economic growth, investors must fear that borrowers will no longer be able to service their debt, so they rush to exit the credit market. As the credit supply dries up, many borrowers are not in a position to repay maturing loans, nor are they able they obtain new funds.

To prevent the fiat money regime from collapsing in the lockdown crisis, central banks have stepped in, suppressing market interest rates and printing new money to prevent financially overstretched states, banks, and firms from defaulting on their payments. Central banks monetize national debt on a grand scale, hitherto seen only in times of war.

The Political Effects

To sit back and think, “Well, monetary authorities have successfully bailed out the system, everything will be fine,” would be a grave mistake. More than ever, central banks are doing severe damage to what little is left of the free market economic system.

Artificially low interest rates and massive amounts of newly created money lead to malinvestment on a grand scale, and under current circumstances, they help make government even bigger, feeding the growth of the “deep state.” The uncomfortable truth is that the fiat money system and all political efforts to fend off its collapse lead to the planned economy or even outright socialism. And from an economic and historical perspective, we know that any form of socialism does not bode well. It makes people poorer, brings chaos, oppression, and violence.

Furthermore, what should worry all of us is that the fiat money regime is instrumental for those political forces that wish to transform, to reshape, the world economy. The political establishment, the “Davos elite,” for instance, undoubtedly favors fiat money and the erosion of the free market system it brings—for they increase the possibilities for the state to interfere in people’s lives. In fact, the so-called new world order that progressives envision—replacing the free market system with a politically planned economic system—if put into practice poses a serious threat to the freedom and prosperity of billions of people around the globe.

I will speak an unsettling truth, which is that if people are coerced into using fiat money, the free economic and free societal order will not survive.

Luckily, There Is a Way Out

What could be the solution? Well, a solution is at hand, and, technically speaking, it is quite simple: make possible a free market in money!

A free market in money means that everybody has the freedom to choose the kind of money he or she thinks is best and that everyone has the freedom to offer his or her fellow human beings something that can serve them as money.

But wouldn’t that result in monetary chaos? Wouldn’t the market be flooded with thousands of new monies? No, it would not! For it is the demand for money, the multiplicity of choices made by individual actors, that would decide what would be used as money. If people can choose freely, it may not take long for a good to emerge that will be used as money not only nationally but internationally—as a universally recognized medium of exchange.

Of course, we wouldn’t know what people would prefer as money in advance. However, looking into monetary history, there is reason to believe that precious metals, gold and silver in particular, would be in the race to become money. Looking ahead, it could also be a crypto unit. Who knows?

Why aren’t people using gold and silver for payment purposes right now? Well, people got used to using US dollars, euros, and the like as media of exchange. What is more, people are not yet deterred by the chronic “inflation tax” on their money balances, which means that the purchasing power of their fiat monies decreases over time. And perhaps even more important: government taxes—namely value-added taxes and/or capital gains taxes—on precious metals make them uncompetitive against official currencies.

But change is underway. As you may know, quite a few US states (like Texas, Arizona, Utah, and Wyoming, to name a few) have abolished sales taxes and capital gains taxes on precious metals, allowing for a level playing field in terms of alternative monies competing with the US dollar.

So if you really seek change, make a strong call for ending the state’s fiat money monopoly, let us establish a free market in money!

The Case for Gold

Whatever comes out of the current monetary mess, regardless of the twists and turns it may take from here, there is good reason to hold on to physical gold.

Fiat money will, as noted earlier, inevitably bring inflation (the loss of purchasing power) and economic hardship. Thinking about gold, former Federal Reserve chairman Alan Greenspan summed it up best when he said in 2014: “Gold is a currency. It is still, by all evidence, a premier currency. No fiat currency, including the dollar, can match it.”

However, gold is not only the ultimate means of payment. It is also a line of defense against the evils of fiat money. Gold’s purchasing power cannot be debased by central banks running the electronic printing presses. In addition, gold does not carry a credit, or default, risk as bank deposits do.

I dare to assume that gold still represents the ultimate means of payments: in extreme situations, fiat money might no longer be accepted as money, but gold will always be accepted, I strongly believe.

There are good reasons to expect that gold, given the current state of macroeconomic factors, offers an attractive upside potential—and also provides protection against the effects of increasing turmoil in the world’s monetary and economic system.

We do not know what the future will bring. But we do know that a world of freedom and prosperity needs sound money, that it cannot possibly function without sound money.

Even if you are optimistic that we as a people will overcome the current problems, that mankind has the potential to move forward and create a better world, there is good reason to rely on gold rather than fiat currencies—for gold will prevail over fiat money.

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