Forget Gold, Let's Denationalize Money

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The 40th anniversary of the post-Bretton Woods monetary regime has brought with it an existential crisis for fiat money. The separate collapses of the dollar and the euro, while not as dramatic as that of some currencies in history, are increasingly recognized as inexorable. The euro is under attack by political forces seeking self-preservation against the economic parasitism required to sustain it, and the dollar is failing through controlled but untenable devaluation. Whenever a human system fails, competing factions rush in to have their replacement solution implemented. Man abhors a political vacuum.

Two competing paradigms of the future of the monetary system are emerging from the right. The first is the gold standard. Advocates of the gold standard seek a return to a past system, or some variation on it, when the dollar was pegged to the metal through some formal government mechanism.

The other paradigm, developed by Hayek and emerging from Objectivist intellectual circles, is the denationalization of money. It is the idea that private entities should issue and regulate currencies. It is premised on the idea that government monopoly currency itself is the problem and that government barriers to private currency should be removed.

As a former gold standard advocate, I concede that I was wrong on the issue. I ask the reader, particularly gold standard proponents, to reconsider their position as well and to reflect seriously on the ideas presented in this essay. I will make the case for denationalization and explain why the gold standard as an alternative is both impractical and morally wrong.

Hayek's theoretical case for denationalization is straightforward: Market competition will discipline currency issuers, resulting in the most superior currencies possible. Currencies which offer constant purchasing power would remain in continuous demand. Market demand would provide the necessary incentive to issuers to keep their currencies stable. (Governments, having a legal monopoly on currency, have no incentive to avoid depreciation). Issuers would achieve this stability by regulating the quantity of issue. The private regulation of the quantity of issue would be the best of all possible methods for regulating money.

Hayek envisioned a system wherein banks would announce the new issuance of non-interest bearing certificates or notes through loans or sale against other currencies. They would prepare to open accounts in terms of the new currency, which would be a brand or trademark. Imagine a J.P. Morgan talent, a Goldman bar, or a BB&T rand in your wallet. They would announce a legally-binding floor for the currency in terms of the government currency as well as a target value in terms of a commodity basket. They would be prepared to redeem the notes in another currency out of reputational concerns but reserve the right to change the standard as experience and market demand require.

If the currency's value remained stable, it would sell at an increasing premium to government monopoly currencies. The increasing premium would attract competitors. If the bank needed to buy back its currency to support its value, this would primarily be accomplished through liquidation of carefully chosen assets, particularly the loans extended by the bank.

Regardless of how private currency operations would work in practice, this is primarily a moral issue. Free marketeers need to realize that money under the gold standard is still fiat money. Fiat means by government diktat. Under a gold standard, the government at a minimum is dictating the currency standard. At its worst, it is issuing the money and decreeing it legal tender. Government should not force any currency or monetary standard on the population. People and institutions should be free to issue, use, and accept whatever form of currency they wish from whomever they wish.

The gold standard's unsolvable problem

The gold standard also suffers from being highly impractical. Firstly, its advocates do not even have a realistic plan of how to transition back to it without causing disruptive pain somewhere - to gold owners, real asset owners, or everyone else. There is simply not enough gold in the world to return to the gold standard such that it does not cause a drastic dollar revaluation.

It has been suggested that the fractional reserve concept could be used to overcome this problem, e.g., reserve levels could be set at 25% the world supply of gold. A moment's reflection reveals why this is a nonsensical idea. Most money is created in electronic form and issued by private financial institutions. To implement this idea, a government committee would have to use some formula to ration money issuance capacity among all the private sector players. (Even the Basel capital regimes do not ration among banks). This is hardly in line with classical free market principles. It would result in severe financial sector dysfunction, and it is morally objectionable.

At any rate, transition is the least of the gold standard's theoretical problems. Even under the gold standard, currency instability exists. We forget that under Bretton-Woods, there was inflation over the decades. Federal Reserve opponents will argue that the inflation was due to the Fed printing money and that there was no inflation under the gold standard. However, their definition of inflation is a decrease in the value of the dollar relative to gold, and this is a tautology. If the value of the dollar is pegged to a given quantity of gold by law, then the price of gold in terms of dollars will not change, but there could still be general price inflation, indicating monetary oversupply.

The question, then, is whether there was general price inflation under the gold standard pre-Fed, to which we have an answer. The modern system of national banking under the Treasury did not exist until the National Bank Acts of 1863 and 1864, and the gold standard went into effect in this system in 1900. The period to observe is therefore 1900-1913, and there was indeed general price inflation in these years, up to 5.3% in 1910, averaging just under 1% per annum for this time period. (Price deflation also occurred in some years). This compares to an average of about -1% per annum in the last decade of the 1800's.

How could there be inflation under a gold standard with no Fed? The gold standard suffers the same problem as that of any other public ownership scheme. Inflation is inherent to a fiat currency system no matter what the central bank or Treasury policy, because credit creators (banks) have no incentive to restrain their lending to maintain the value of the dollar. This is the tragedy of the commons principle applied to currency.

The formal restraint on indiscriminate credit creation by banks is the Basel capital regime, but a government-mandated capital regime cannot impart stability on a public currency (nor is it designed to do so). Government monopoly currencies represent a breach with reality and are inherently unstable over time. The Basel regime represents the artificial boundary of the financio-economic world we have created around fiat currency, our very own global financial Matrix. If we were to look underneath it, we would find a vast nothingness.

Let us not deceive ourselves. People of today complain about 40-to-1 leverage ratios extant during the financial crisis and demanded a return to "more reasonable" 8 or 15 percent reserves. Their grandchildren will be complaining about 200-to-1 leverage ratios and demanding a return to more "reasonable" 1 percent reserves.

We might see some fractional reserve creep under denationalization as well, but if so, it will be supported by risk management models, and the desire by banks to keep up the pace of loan issuance for profit will be balanced by the need to maintain currency stability for profit.


Unlike a transition to the gold standard, denationalization is evolutionary, would not involve mass pain, and is the next logical step in the march of history. It has the advantage that no extensive effort by the government or the public is needed to make it happen. A single piece of legislation with several provisions could accomplish it.

The first provision is to sunset legal tender law. In the U.S., this law is the U.S. Coinage Act of 1965, which makes Federal Reserve notes legal tender. This is absolutely necessary because of Gresham's Law ("bad money drives out good").

The second provision must specify that private currencies, and the assets and liabilities denominated in them, are exempt from Basel or any follow-on capital regime. The capital regime under denationalization is whatever ratio of liabilities and assets must exist to maintain the value of the currency at the specified target. Government-imposed capital regimes would be a contradiction to this basic purpose. (In fact, denationalization could not logically co-exist with Basel. As Hayek noted, liabilities including notes issued may well exceed assets on an ongoing basis, which would constitute insolvency under current notions).

Another provision must address, i.e., abrogate, the behemoth role that the FDIC plays in the banking system. Private currency schemes that exist online such as Bitcoin are not insured by the FDIC. To be fully accepted and function on an industrial level, currencies must be backed by private insurance. However, the government has monopolized deposit insurance. Barriers to private deposit insurance must be removed, and the sale of the FDIC to the private sector is preferable.

Another provision must exempt private currency issuers from accounting rules. Accounting rules undermine the value-control operations of currency issuers. Since these banks would not be backed by public insurance anymore, there should be no objections to this.

Another provision must specify that the Fed is prohibited from monetizing debt in private currency. That too would render banks unable to control the value of their currencies. The "central bank" for a private currency is the bank that issues it.

Finally, a safeguard should be put in place to ensure that private currency in and of itself is exempt from taxation. It is an open question at this time whether taxing private currency would amount to unconstitutional double taxation since money is not a good or service but merely a store of value, but it is best to provide as much up-front protection for currency issuers as possible.

The World Trade Organization should then be persuaded to seek via treaties the maximum freedom of movement of private currencies across borders.

Then governments and populations would merely have to allow currencies to appear and be accepted voluntarily on the market.

Possible Objections

The idea of denationalization invariably raises knee-jerk objections, and I will address the common ones here. The first is the idea that government has to print money for national security reasons. In fact, there is no reason to believe that private currency usage would make a population militarily vulnerable. Governments do not need to issue currency (although they may). They can accept taxes in any currency, and they can account in any currency. To function, they merely require receipt of money - that which represents value and which provides a means of exchange.

Another objection is the notion that the government provides value or security to money by implicitly or explicitly guaranteeing it in some way. This is an ancient formal fallacy known as valor impositus, and the reader is recommended to research it to his satisfaction.

A related idea is that we "need" legal tender, else there would be economic chaos. In fact, there is no reason why the government must enforce a currency or currency standard. The government need only enforce contracts as written. Market participants can decide for themselves what currency suits them.

A misapplication of Gresham's Law leads to the fear that bad fiat money would drive out good private currency. However, Gresham's Law only applies where fixed rates of exchange have been set and enforced by law. In a free market, the good currencies will flourish, and the bad will die off.

A more realistic concern is that having multiple currencies about would act as an economic epoxy, while a single accepted currency greases economic activity. Experience in Europe before the euro shows that this is not the case. The existence of more than one currency in a geographical area offered business owners options, i.e., it allowed people to escape the bad currency and get the proper value in return for their goods and services. At any rate, Hayek hypothesized that most issuers would likely eventually converge on a single best commodity base standard (or at most, two or three in a given geographical area), as the market demanded more uniformity. Most issuers would denominate in this standard.

There is historical precedent for private currency. While the gold standard is often credited for being the monetary system that powered the Industrial Revolution, in reality, it was not the gold standard, but the private manufacture of currency, especially in England. The Parys Mine Company and the Soho mints in particular provided the scale of privately manufactured coins which was indispensable to the expansion of the British economy, the epicenter of the Industrial Revolution. In America, private bank note issue was also common until Andrew Jackson issued a major legal tender executive order, the Specie Circular of 1836, causing a major panic.

Historical monetary systems were much different than the one we have today, but the common principles concerning competition and the efficacy of free markets are timeless.


As the old saying goes, if a trend can't continue, it won't. Our monetary regimes are collapsing, and the only solution is to recognize that fiat currencies are inherently unstable and to enact denationalization legislation. Money is not a proper function of government, regardless of historical precedent. Government control of the currency is both immoral and impractical, and currency production, like any other industry, should be denationalized.

Wendy Milling is a contributor to RealClearMarkets
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