Fiat Currency vs. Commodity Currency, and the Crime of Private Money

On Facebook, my friend Brett posted Silver-Mad Small Investors Fueled an Epic Rise and Fall, about a crash in the value of silver. (The Facebook post, which will be viewable to you depending on Brett's privacy settings, is here.)

His friend Roberto commented, "As I believe I commented before, this, among many other reasons, is why non-fiat currency is bullshit."

I replied,

‎... and I suppose you're arguing that fiat currency cannot inflate, LOL? Last time I checked, the Federal Reserve has caused the dollar to lose 95% of its value. There's something perverse about arguing that because silver is not entirely stable, that we should therefore use something even less stable. City A has a relatively high crime rate, so everyone in City A should move to City B, where the crime rate is even higher. Yay!

Furthermore, silver is not the only commodity out there. You also have gold, platinum, palladium, antique furniture... Silver is like any commodity: its value changes. No one claimed that they are immune to changing in value, the same way that the value of anything can change. When cars were invented, the value of horses would have probably plummeted, but did people complain and petition that cars be banned to save the horses industry?

The ideal currency would be a non-coerced one, i.e. one without any legal tender law. Let people negotiate transactions in whatever currency they desire. If they want to negotiate transactions in United States Treasury Notes, then let them, by all means; they are free to do so. It's just that no one should be coerced into using a given currency against his will. So ideally, we wouldn't even have a gold standard or a silver standard; we'd just have a liberty-of-contract standard.

Like I said, if people want to voluntary trade in Treasury Notes, they should be free to do so. They simply shouldn't be coerced into using Federal Reserve notes against their wills. Keynesians are strangely reluctant to answer the following question: if their policies are so superior, then shouldn't they be able to prevail of their own intrinsic excellence? That is, if government money is so much more stable than the free-market alternatives, then why do you have to force anyone to use it? If it is so much better, then people ought to voluntarily gravitate to it, naturally and organically, without coercion. The very fact that the government must coerce people into complying with its policies, shows how vacuous the government's claims are, how naked the emperor truly is. You don't have to pass a law against yelling "the emperor is naked", unless he really is naked. If you have to pass a legal tender law, it means that you know your currency is worthless. To quote John Witherspoon, "Essay on Money", "The measure [of legal tender laws] carries absurdity in its very face. Why will you make a law to oblige men to take money when it is offered them? Are there any who refuse it when it is good? If it is necessary to force them, does not this demonstrate that it is not good?"

Roberto replied,

The difference between commodity and fiat currency -- really, the ONLY difference -- is that you can control the rate of inflation or deflation for a fiat currency in most cases. You can't with a commodity since it's tied to speculation and what comes out of the earth. That's why every nation on earth uses a fiat currency today; it simply works. Nobody is coerced into using any form of currency. Media of exchange are purely defined by what it accepted. ... ‎"Value" is just a number. Purchasing power is what counts, and purchasing power has largely held steady. Which, with advances in technology and infrastructure, mean purchasing power has in real terms massively increased.

I responded,

"That's why every nation on earth uses a fiat currency today; it simply works."

No. It's because fiat currency gives the government an amazing ability to monetize the debt. Likewise, no, it does *not* give YOU an ability to control inflation; it gives the GOVERNMENT ability to control inflation in whatever way will work to the government's favor. In fact, the Federal Reserve was founded when banks complained that having to have specie on hand to back their paper, cramped their style and prevented them from promiscuously over-inflating the currency via fractional reserve banking. The banks were being held accountable, and they didn't like it, so they asked the government to cartelize the industry. The government agreed as long as it got a cut of the plunder, via monetization of the debt.

Nobody is coerced, eh? What about when FDR outlawed the private ownership of gold and nullified all contractual gold clauses? That doesn't strike you as coercive.

By the way, having a human able to control inflation is inherently a very bad thing. It is precisely because specie currency cannot be controlled by any human, that it is so attractive. You have offered the best argument *against* fiat currency. Thank you, sir.

"'Value' is just a number. Purchasing power is what counts"

So you care nothing for people's savings? As long as people's wages rise commensurately with inflation, you don't care about those who have been saving their incomes for the long term, or even those who don't have incomes?

In other words, you have no regard for the poor who must save their money over time to purchase expensive goods, nor do you care about the elderly.

So you hate the poor and the elderly. Good to know. I bid you adieu, you asshole.

Brett's friend Matthew gave a valuable defense of my arguments:

This whole thread makes me laugh, then incredibly sad over and over again.

The difference isn't between "fiat" and "commodity" currency. It's between what people with guns say is money and what everyone else says is money.

Speculators can be the life and death of either. You will see this happen in just a bit, when no matter how high yields go on Treasury bonds they simply won't sell.

The question is, should everyone be allowed to switch currencies- use whatever medium of exchange they want- or should people with guns enforce a monopoly on this exchange. Whether printed currency is backed by commodities or not is irrelevant if the exchange rate is centrally controlled.

The Austrian school is for free money, not a gold backed currency. (Though they do recognize that gold is harder to tamper with

Roberto retorted,

Everyone can use any medium of exchange they want, Matthew. Seriously, go over to a local Mom-and-Pop store and try offering the owners something not in the form of dollars in exchange for goods and services (I recommend a fairly rare commodity that is commonly valued as a semi-liquid form of exchange, like gold or diamonds). If you offer 'em enough of something they want, I guarantee they'll provide to you in exchange for whatever it is you're willing to give them in exchange. This is done ALL THE FUCKING TIME in EVERY ECONOMY ON EARTH. :P

I responded to Roberto, saying,

@Roberto:

You said, "Everyone can use any medium of exchange they want, Matthew."

The United States government begs to differ: http://mises.org/daily/5184/The-Crime-of-Private-Money

Regarding Bernard von NotHaus's Liberty Dollars, for which he was convicted with counterfeiting, Robert M. Murphy has two salient comments:
(1) "It would be naïve to conclude that von NotHaus would have been safe had he taken more care to distinguish his coins from those of the US mint. For one thing, the government's case was internally contradictory: On the one hand, von NotHaus is accused of counterfeiting, in other words, trying to pass his coins off as authentic US coins. On the other hand, von NotHaus is accused of undermining the 'legitimate' US currency by offering a product to compete with it. Indeed, von NotHaus advertised his Liberty Dollars as inflation-proof substitutes for the "genuine" US currency. So which is it? Either von NotHaus was trying to pass his coins off as regular quarters and dollars, or he was trying to convince people that his own coins were superior."

In other words, von NotHaus was convicted of both counterfeiting ( = imitating US currency) and of competing with it ( = deliberately NOT counterfeiting, and offering something patently unlike US currency for the express purpose of highlighting how it is NOT US currency). He was damned either way.

The government's indictment of non NotHaus read, in part, "Along with the power to coin money, Congress has the concurrent power to restrain the circulation of money not issued under its own authority, in order to protect and preserve the constitutional currency for the benefit of the nation. Thus, it is a violation of law for private coin systems to compete with the official coinage of the United States." I will note in passing the fact that the Constitution nowhere authorizes the federal government to prevent competition with its own currency; indeed, the states alone ratify currency as legal tender, and they are perfectly entitled to ratify FOREIGN NATIONS' currency as legal tender! In fact, the US dollar was originally just a rebranded Spanish dollar! But aside from this fact, the point is that the United States government has announced that it will crack down on COMPETITION with its currency.

So Roberto, when you said, "Seriously, go over to a local Mom-and-Pop store and try offering the owners something not in the form of dollars in exchange for goods and services", you were advocating that Matthew violate the law. Roberto, you are guilty of sedition, of active and explicit advocacy that Matthew ought to break the law.

(2) Murphy's second comment is this: "As a college professor and lecturer at the Mises Institute, I have always had some difficulty explaining exactly how the government kept everybody using fiat money. Students would often think that legal-tender laws explained everything, but I would point out that they weren't the whole story. ... I would argue that if any attempts to circumvent the dollar actually got off the ground, then the government would find some legal pretext to shut it down. So it was pointless to study the legal code and come up with loopholes, because the government wouldn't play by the rules. It would find a way to shut down a genuine threat to its monopoly on money, meaning no entrepreneur would spend the resources and time trying to launch an alternative system. The fate of Bernard von NotHaus has vindicated my musings."

Edwin Vieira has a different explanation than Murphy about why private currency has not taken off. His argument is, that once FDR outlawed all private gold clauses, people forgot about the possibility of such clauses even after they became legal again. But Vieira's argument, though different than Murphy's, does not make the government look any better.