You want to create a fiat money system under government control with central planning. Money should be created by private enterprise for the private sector is always better and more efficient than government bungling.
Not many fiat systems have been managed strictly by government. The Federal Reserve is a private system loosely overseen by Congress. The Reichsbank that was responsible for the hyperinflation in Germany was privately managed similar to our Federal Reserve. During the last year where hyperinflation went to Biblical proportions money was completely privatized and private issuers were competing to see who could print the most money.
Private goldsmiths ripped people off and deceived them for centuries by creating fiat money backed by gold that didn’t exist.
As far as being stewards over our money, private enterprise has not proven itself to be reliable whereas the best examples of good currency in history has been that which is managed by the State.
I share the view of our Founding Fathers that as a whole the fewer powers the government has, the better, and the power of the individual should be honored when possible.
But even though these men were rebels against Big Brother they did acquiesce and give the government power over two important categories. These are (1) defense and (2) the creation of money.
So why did they select these two departments to be under government control?
Defense should be obvious. Suppose we left defense to private hands and then had to fight World War II. There’s no way we could have mobilized a few ragtime private militias into a unified Army, Navy and Air Force to defeat Hitler without government involvement. Even though government is much less efficient than private enterprise it has the advantage of being able to create a unified force when needed.
The same goes for creating the nuclear bomb or going to the moon. These could never been accomplished in such a short time frame by leaving it up to private enterprise. A government has the power of mobilization and unification of purpose that the diverse private sector cannot achieve.
As far as money goes, again its unifying power is needed to create a usable currency. The central government in the United States has always regulated the value of money as specified in the Constitution but there have been times that private banks have issued notes and when many such banks have done this numerous problems resulted. In 1860 there were over 1600 private banks issuing 7000 different types of notes. If you were in a different area or state than where the note was issued you had to exchange it at a discount. The discount was at least 10% and sometimes as high as 40% if the reputation of the issuer was not solid.
Many economic fundamentalists want us to have a completely private money system but few have stopped to think of what would happen if such a thing were in place. Perhaps it would be useful to paint a picture.
Apple decides to issue its own money backed by its products. The value is determined by the iPad, which equals 100 units or Apple dollars. Even though Apple has a great reputation less than half the retailers accept Apple dollars. Apple retail stores accept them at face value but others do not. Walmart, which also has its own currency, accepts them at a 10% discount and Apple in return discounts Walmart currency 10%
A number of retailers and manufacturers follow Apple’s lead and create their own private money. All of them only have a full redemption on their own products and are discounted everywhere else – some up to 40%.
Hundreds of private banks create their own money of many different variations. Some create 100% fiat currency and others have a currency backed by a 10% supply of gold or silver and others are 100% backed by gold or silver. Others still are backed by Apple dollars or a combination of dollars. A couple banks have their money backed by an average value of 20 different types of dollars in circulation. Still others have their money backed by oil, wheat, pork bellies or other commodities.
At first, a lot of customers gravitated to the 100% gold backed dollars. This seemed to be the best bet until one day China dumped 3000 metric tons of gold on the market to pay for oil leases. Within three days the price of gold dropped 35%. This caused a selling frenzy and many traded their gold dollars for Apple and Walmart dollars. This added to the panic and the value of gold dollars dropped to 50% of their previous value.
China then saw an opportunity and bought up 4000 metric tons of gold at a 50% discount and within another three days the price of gold tripled. This had several negative effects. No one felt safe putting their money anywhere and China decided to place their gold profits in building up their military.
In addition to large companies and banks creating money smaller companies and even private individuals started doing it.
There was one guy in particular that seemed very successful and was trusted but within a couple years his whole system fell apart. He was compared to Bernie Madoff because he sold all the gold that backed his money and when it was discovered that customers could not redeem their money for gold all his currency value fell to nothing.
This scam rocked all private money systems and the value of many of them fell 10% overnight.
After existing ten years on an all private money system there were literally thousands of entities attempting to circulate thousands of different bills all having different values.
Machines looking like ATM’s started springing up all over the country. If you punched in your PIN number you could exchange one currency for another but the exchange rate was high because the fraud rate was high. The exchange rate was between 10-20%. A lot of people who were paid in one form of dollar really grumbled when they had to lose 10% in an exchange.
Small businesses were linked to these devices. If you went to a flower shop to buy a dozen roses they may list three currencies they would accept. All others would have to be converted through the ATM machine.
On the internet, PayPal did not issue their own money but had a system where all other currencies were converted into PayPal dollars. Apple and Walmart dollars were the most stable so ten of their dollars were converted into nine from Paypal. Many were surprised that gold-backed dollars did not have the highest exchange rate, but since the price of gold was not set by the government it could go up or down in value 20% within a year and the Chinese made it fluctuate 100% in a couple days. To protect themselves from fluctuations PayPal only gave eight PayPal dollars for ten gold ones. Out of the thousands of different currencies PayPal only accepted the best twenty. All other currencies had to be converted to one of these twenty if they wanted to use PayPal dollars at all.
A research company did a study on the average loss that a worker suffered from having to deal with the exchanges necessary to spend his paycheck on the necessities of life. It turned out that the average family lost about 14% of their income through their various exchanges.
Now when one thinks of this situation in the light of reason this does sound like it would be a fairly probable outcome of an all-private system.
I am a big supporter of private enterprise and believe that in the vast majority of circumstances the private sector can trump the public bureaucracy any time. But major problems occur when a person becomes black and white in his view and needs to consider the wisdom of Solomon who said:
“To every thing there is a season, and a time to every purpose under the heaven.” Eccl3:1
While it is true that private enterprise is very innovative and can be very efficient, there is a time to use the central authority of the government and the Founding Fathers wisely saw that defense and money were two categories that the power of government could be used beneficially.
Isn’t it so much more convenient to have one universal currency that we can all use instead of the cacophony that was described in the above example?
Does this mean we have the best possible money system now?
No. It does not. We can create a much better one as we shall see.
Read This entire series. Here are the links.
- The Economy – One Last Chapter
- Creating Sound Money
- The Gold Standard, Part 1
- The Gold Standard, Part 2
- The Gold Standard, Part 3
- The Gold Standard, Part 4
- The Gold Standard, Part 5
- The Gold Standard, Part 6
- The Gold Standard, Part 7
- The Fed and Common Sense
- Additional Points
- Alternative Currency
- Giving Away Our Power
- Parable of Money Systems
- To Fiat or Not Fiat
- Fiat Money of the Past, Part 1
- Fiat Money of the Past, Part 2
- Fiat Money of the Past, Part 3
- Fiat Money of the Past, Part 4
- Fiat Money of the Past, Part 5
- Fiat Money of the Past, Part 6
- Examining Fiat Money
- A Flawed Money System
- The Ideal Money
- A Time for All Things
- The New Greenback
- Narrowing the Focus
- People Taking Charge
- Creating Wealth
Copyright 2011 by J J Dewey
Index for Older Archives in the Process of Updating
Easy Access to All the Writings
For Free Book go HERE and other books HERE
JJ’s Amazon page HERE
Gather with JJ on Facebook HERE