Academic journal article The Cato Journal

The Troubling Suppression of Competition from Alternative Monies: The Cases of the Liberty Dollar and E-Gold

Academic journal article The Cato Journal

The Troubling Suppression of Competition from Alternative Monies: The Cases of the Liberty Dollar and E-Gold

Article excerpt

Proposals abound for reforming monetary policy by instituting a less-discretionary or nondiscretionary system ("rules") for a fiat-money-issuing central bank to follow. The Federal Reserve's Open Market Committee could be given a single mandate or more generally an explicit loss function to minimize (e.g., the Taylor Rule). The FOMC could be replaced by a computer that prescribes the monetary base as a function of observed macroeconomic variables (e.g., the McCallum Rule). The role of determining the fiat monetary base could be stripped from the FOMC and moved to a prediction market (as proposed by Scott Sumner or Kevin Dowd). Alternative proposals call for commodity money regimes. The dollar could be redefined in terms of gold or a broader commodity bundle, with redeemability for Federal Reserve liabilities being reinstated. Or all Federal Reserve liabilities could actually be redeemed and retired, en route to a fully privatized gold or commodity-bundle standard (White 2012). All of these approaches assume that there will continue to be a single monetary regime in the economy, so that the way to institute an alternative is to transform the dominant regime.

A different approach to monetary reform is to think about ways that alternative monetary standards might arise in the marketplace to operate in parallel with the fiat dollar, perhaps gradually to displace it. This approach prompts us to look at the alternative monetary systems that are currently available, or could become available if allowed. We can try to evaluate the likelihood that members of the public would spontaneously adopt, wholly or partially, one or more alternative systems (White 1989). Of more immediate relevance--and the avenue taken here--is to consider how legal restrictions are currently blocking the process of monetary innovation, and examine the case for removing such obstacles.

In his monograph Choice in Currency, F. A. Hayek (1976: 17) proposed an end to any legal barriers that block the monetary use of foreign fiat currency or gold within any domestic economy: "But why should we not let people choose freely what money they want to use? By 'people' I mean the individuals who ought to have the right to decide whether they want to buy or sell for francs, pounds, dollars, D-marks, or ounces of gold." He believed a government's "claim to a monopoly, or their power to limit the kinds of money in which contracts may be concluded within their territory, or to determine the rates at which monies can be exchanged, to be wholly harmful." Thus, governments should "bind themselves mutually not to place any restrictions on the free use within their territories of one another's--or any other--currencies, including their purchase and sale at any price the parties decide upon, or on their use as accounting units in which to keep books."

Increasing the competition among central banks for market share, Hayek argued, would make each of them more serious about keeping the inflation rate close to zero. Hayek's antimonopoly message bears re-emphasizing in light of tlie new technologies for producing private monies, and the troubling recent government efforts to suppress them in the United States and elsewhere. Open competition would enable ordinary money-users to protect themselves against bad money. It might even elicit better behavior from central banks, much as competition in express package delivery has elicited better behavior from the U.S. Postal Service. For the sake of money-users, legal barriers should be removed not only against traditional gold-and silver-based monies and foreign fiat monies, but also against new types of commodity-based monies and the new noncommodity cyber-monies.

The potential alternative monies include: (1) foreign fiat monies in paper or account-balance form; (2) physical gold and silver coins, and banknotes redeemable into them, for which the Liberty Dollar project provided one model; (3) electronically transferable gold account balances, such as e-gold; and (4) private noncommodity cybermonies, for example Bitcoin and Litecoin. …

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