Hard money notes
It occurred to me while reading this that one useful talking point about hard money is that it’s not necessarily literally “hard” in the sense we would all have to carry only potentially inconvenient coinage. Paper certificates, checks and debit/credit cards aren’t going to be outlawed. Rather, commodity money (as opposed to government fiat money) is “hard” money in the sense that “hard science fiction” is “hard” — honest and meticulously realistic.
It should be noted that under free market banking, the actual commodity used by any private currency issuer could be gold, silver, labor hours contractually secured, plutonium, metric tons of iron, board feet of lumber, grams of cocaine, pork bellies or whatever. This isn’t a matter of gold being fetishized. It’s about stopping the political class elite from screwing the ordinary person by inflating the money supply to subtly rob us all of purchasing power.
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There’s a problem with labor-based money. Everyone’s labor has a different value.
Metal money is superior to labor money, because a metal coin represents a certain fixed amount of scarcity value and labor value. Labor is not fungible; the value of everyone’s labor is different. Metal coins are fungible; every .999 fine 1 ounce silver coin is equivalent to every other .999 fine 1 ounce silver coin.
There’s nothing intrinsically evil about fractional reserve banking in a truly free market. Under a pure gold standard or gold/silver standard, trusted paper promises for gold or silver LEGITIMATELY expand the money supply. If the volume of gold or silver is insufficient for the amount required for trade, then trustworthy paper promises for gold or silver legitimately increase the money supply.
Fractional reserve banking is only evil when you have government regulation of banking and forced taxation. Government regulation of banking creates a barrier to entry to the banking industry. This means that the existing banks can act as a cartel, and fix prices. When banks act as a cartel, they can expand/contract the money supply and raise prices over the free market level.
Forced taxation also increases the demand for bank money. Taxes must be paid, under threat of government violence. Taxes are only payable in money that is obtained from a bank. This allows banks to raise their prices over the free market level.
Also, fractional reserve banking and demand deposits are incompatible. A fractional reserve bank that tells its customers that they have demand deposits is technically insolvent at any given instant, and is committing fraud. If a fractional reserve bank issues loans with an average duration of 90 days, then it should tell its depositors that they are only allowed to withdraw 1/90 of their balance each day. Under normal business circumstances, the bank would repurchase customer deposits for their face amount, unless there was a “run”.
Fractional reserve banking is evil when government regulates the banking industry. The government sometimes allows banks to close during a “run”. Banks are sometimes allowed to default on their promises to depositors, while still collecting payments on their loans.
Without government, fractional reserve banking is an honest business. In a truly free market, depositors would demand to check the books of the banks, ensuring that no fraud is occurring.
re: labor-backed currency…
While I agree with you that labor is not the ideal commodity to back a commodity currency with, I wanted to stress above that it’s perfectly valid in that role (as is any other commodity) in terms of libertarian political theory. That’s despite the free-market libertarian tendency to be econ-geek show-offs at the expense of uniting people around Liberty itself. To often, we so want to pose as someone who can authoritatively tell you what markets supposedly will do, that we forget to stress that markets are a discovery process and are amicable to a concurrent diversity of approaches.
The Marxists usually say or imply that the commoditization of labor is dehumanizing. This neglects the potential for workers self-help/mutual aid through the literal commoditization of labor by voluntary associations of the true owners of that commodity — laborers. To “poo-poo” mutual banking ideas just because labor hours might not technically work as well as gold as a commodity to back a private currency with seems a bit cavalier when workers have little or no gold but plenty of labor.
re: fractional-reserve banking in a freed market…
It’s not clear what prompted your remarks on this matter, as I didn’t say anything about it directly myself.
I appear to mostly agree with you about fractional-reserve banking in a freed market scenario, as my own approach to the topic is similar to my approach to mutual banking above…
That is to say, I have no issue, in terms of political theory, with fractional-reserve banking “per se” under truly open competition — even if in terms of economic theory I suspect it’s usually sub-optimal compared to other options. That’s an important distinction, however, because it’s the difference between political ideology and opinions about particular business plans.
In other words, let the freed market decide.
The article you linked to was very critical of metal-backed money and fractional reserve banking.
Regarding labor-backed money:
If you want to pay me with your labor, and I know that you’re a skilled worker and will give me a good effort, I’ll accept that as payment. I would be reluctant to accept money backed by anonymous labor, because there’s no assurance the labor will meet certain quality standards.
If you’re a skilled laborer, and you know you can sell your labor for 2 ounces of silver per hour, you can directly pay me with a paper promise for 2 ounces of silver instead of a promise for one hour of labor. Then, I can issue paper promises for silver if I trust you.
re: “I would be reluctant to accept money backed by anonymous labor, because there’s no assurance the labor will meet certain quality standards.”
While there is a natural variability in the potential maximum productivity of any given worker, relatively successful businesses have been built around aggregating pretty darned near anonymous labor and assuring it does indeed meet certain minimum quality standards.
Example: Labor Ready.
I’m not aware of any reason why a non-profit association or a for-profit contractor to a non-profit association couldn’t do the same.
re: “If you’re a skilled laborer, and you know you can sell your labor for 2 ounces of silver per hour, you can directly pay me with a paper promise for 2 ounces of silver instead of a promise for one hour of labor. Then, I can issue paper promises for silver if I trust you.”
I’m not really arguing that point. I’m arguing for a diversity in approaches to the promotion of freedom.
If you need a hypothetical counter-point in favor of mutual banking just for fun, though…
You seem to be replying to this:
“To ‘poo-poo’ mutual banking ideas just because labor hours might not technically work as well as gold as a commodity to back a private currency with seems a bit cavalier when workers have little or no gold but plenty of labor.”
There are some scenarios in which the resiliency of social networks could potentially make commoditized labor contracts a more secure and trustworthy alternative to physical gold in a remote storehouse among a broad user base suspicious of a hostile elite and its favored metal. I’m thinking of Baghdad, right now, as an example. [ADDENDUM: In other words, it would be easier for governments/bandits to steal several thousands of ounces of gold than to abduct several thousand people.]
There’s more that could be said, but I should perhaps leave it to those who specifically advocate mutual banking as a non-state social agenda. I’m not arguing for use of a particular commodity, just the freedom to create and use commodity currencies (any commodity).
A right to keep and bear arms discussion would be getting off-track if it became a back-and-forth between advocates of Glock versus Smith & Wesson. Same principle, IMO.
A mutual banking scheme with metal-backed money works even if the community itself contains a small amount of metal.
Suppose the community decided to use silver as its basic monetary unit. Currently, silver costs $13/ounce. Silver is plentiful and cheap.
Suppose that A buys something for B for 2 ounces of silver. B buys something from C for 2 ounces of silver. C buys something from A for 2 ounces of silver. No physical silver needs to change hands, even though all transactions were made in silver. As long as the value of what someone buys equals what someone sells, no physical silver needs to be traded.
I call this monetary system the “Social Credit Monetary System” on my blog.
If you replace “2 ounces of silver” with “1 hour of labor”, there might be some haggling over whose labor is most valuable. Making transactions denominated in metal coins simplifies things. The community only needs a small supply of metal for things to work.
Most large corporations cater to the least-common-denominator for labor. All workers are treated as interchangeable cogs. If you’re setting up a mutual banking scheme, your first users will be highly intelligent people who are disgusted with the current monetary system. They probably won’t accept a system where everyone’s labor is valued equally.
Besides, if you specialize in writing software, your labor isn’t useful to me if I need a doctor.
Metal coins are a form of money that has stood the test of time, before government started meddling with the economy.