Gordon Haave, blogging at Daily Speculations raises a point I’ve been thinking about a lot, lately.
Prior to the Federal Reserve, there were private bank notes. They traded freely, such that if a bank was deemed to have too few reserves, the notes traded at a discount. In the late 1800s there was a big information problem, not only on the quality of the banks, but also authenticity of notes, because of distance. Does someone in St. Louis recognize a bank in New York?
All those problems would be gone today. Citibank and B of A would issue currencies. They would be backed with real assets (like a money market fund, sort of). Everyone would have a real interest in bank solvency, and if banks did silly things, their notes would trade at discounts and their customers would be miffed.
To recap, I’m not a “gold bug,” and never have been. It’s the state monopoly, stupid. Whether the federal government backs its currency with “full faith and credit,” dynamically intervening in the credit markets with interest rate adjustments, or with gold, seems hardly relevant to me. It’s a monopoly currency, and that’s the problem, assuming there is one. And given what I think I know, credit offers a lot more flexibility than some commodity backing. I recently blogged about all this. Promises to repay, issued by responsible people and institutions, have value to anyone with any sense. In short, I think that a gold standard would be economically stifling. And besides all that, much of the “printing press” money libertarians lament is actually secured by real property and other assets (cars, boats, airplanes, machinery and equipment).
On the other hand, if money were created by separate banks, worldwide, at will with no external restrictions, then they themselves could determine their own proper balance of securitization with warehoused commodities, financial securities, real property, consumer goods, capital equipment, and unsecured promissory notes. Then these currencies all trade on the world market.
You, as a “consumer” (I loath the term), could actually maintain a portfolio of currencies (you can now, only they’re all government monopoly currencies) issued by various banks. Banks could even issue a number of different currencies, backed by a different mix of things (like institutions offer mutual funds in different risk, volatility, growth, and income categories and combinations). You could hold them or trade them, just like you can do with stocks, bonds, mutual funds, and ETFs. You might have 70-80% of your currency portfolio in ultra conservative currencies (gold backed, 100% reserve, or whatever), and then have some risk spread for the rest, from moderately volatile to “insane” venture capital sort of risk where you invest lots of pennies, lose most of them 100%, and even now and then, one grows from one penny to 10,000 pennies.
And then everyone could operate on whatever standard they wish, that the market will provide. This would not have been possible for most people even a dozen years ago. It has only been since the advent of online brokerage accounts over about the last decade that this has become possible — for both individuals and institutions.