​Musings About a New Money

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Commentary

In my previous column, I expressed strong reservations about the introduction of a central bank digital currency (CBDC) in the United States. If we indeed are searching for a potential new money, let’s keep in mind several important lessons we can learn from history and economics.

Unconstitutional Money

After the horrific experience with the inflated, rapidly depreciating continental dollar (a printed currency) during the Revolutionary War, the founders sought to spare us similar miseries. Therefore, they stipulated in Article I, Section 8, Paragraph 5 of our Constitution that the federal government was to “coin money” (in contrast to “print currency”).

Furthermore, Article I, Section 10, Paragraph 1 stipulates, “No State shall coin Money; ... make any Thing but gold and silver Coin a Tender in Payment of Debts.” When was the last time your state income tax refund was payable in gold or silver coin? According to the Constitution, the money we use is supposed to be precious metals, not paper. Ergo, the Federal Reserve Notes we all use are unconstitutional money.

The Regression Theorem

From time to time, we hear suggestions about returning to a gold standard—having money that’s defined as a certain number of grains of gold. One of the many great contributions of the Austrian economist Ludwig von Mises to the study of economics was his regression theorem. According to Mises, money—defined as the most marketable commodity and the accepted medium of indirect (i.e., non-barter) exchange—originates as something that has a market value that’s nonmonetary.

Take gold, for example: People have always valued gold, even if it isn’t used for money. When gold takes on an additional use as money, whether by individual choice or government decree, it becomes a common denominator, with the price of all other market-exchanged goods expressed in terms of a quantity of gold. Money is thereby anchored in the real world of the goods and services that people value.

Proponents of returning to a gold standard believe that such “hard money,” in contrast to today’s fiat currencies, would put an end to inflation. Such a desirable outcome, unfortunately, isn’t likely. While the concept of “virtual reality” has seemed to be a very recent development, the federal government has been living in a virtual reality fantasy world for many decades. Yielding to the democratic temptation to buy votes by bestowing favors on political constituents, and acting on the progressive impulse to be all things to all people, our elected officials long ago lost touch with the commonsense truth that in the real world, there’s only so much real wealth.

Using the fiat currency known as Federal Reserve Notes, politicians have lived in a virtual reality in which they chronically authorize spending that exceeds the real wealth of the country; hence, $33 trillion of explicit debt, multiples of that in unfunded promises, and a depreciating currency.

The reason that prices have risen—sometimes gradually, sometimes more rapidly—in recent decades is simple: The supply of fiat money and credit has risen faster than the supply of goods and services in the real world.

The virtual reality of the political realm is, therefore, inflationary, and until our leaders live within the limits of economic reality by living within the means of real, actual wealth, there’s no point in adopting a gold standard. The political dynamic of overspending would require repeated devaluations—constantly defining the dollar as an ever-shrinking quantity of gold. Not even gold can save a money from depreciation when government overspends. Constitutional money (see above) requires constitutional (i.e., strictly limited) government.

Gresham’s Law

Do you favor a sounder money than what we have today? Elementary economics suggests a solution. Ask yourself: Why do computers, cars, cell phones, TVs, and other consumer goods improve in quality over the years? Is it not because of economic competition? Those who produce inferior products lose out to those who produce stuff that we consumers like more. Similarly, one would expect that the most marketable commodity—money—would also improve in quality rather than depreciate, that is, get perennially weaker, as Federal Reserve Notes have been.

Actually, there already are alternative currencies available in parts of the United States today. One is called “Goldback.” Goldback Inc. operates in four states. Its name makes it sound as though it offers a currency that’s “backed”—that is, redeemable—for a specific amount of gold. Actually, the Goldback is superior to a gold-backed currency. You don’t have to go to a bank or some other depository institution, because actual gold, measured in increments of 1/1,000 of an ounce, is embedded within the currency notes themselves.

So, why aren’t Goldbacks winning the competition and pushing Federal Reserve Notes out of circulation? The answer here is Gresham’s Law. Named after 16th-century English financier Thomas Gresham, the popular phrasing of Gresham’s Law is that bad money drives good money out of circulation. If there are two or more optional currencies competing for usage, people will naturally hoard the superior currency (i.e., the one that retains its purchasing power better) and use the inferior (i.e., more rapidly depreciating or less valuable in the nonmonetary marketplace) for making purchases as long as people will accept the weaker currency.

The major tool for making people accept a weaker currency is when government imposed legal tender laws that require us to accept the weaker currency (in our case, Federal Reserve Notes) for all “debts [effectively, all transactions] public and private.” I suspect, though, that even if our current legal tender laws were repealed, sheer inertia and habit would result in people continuing to use Federal Reserve Notes. If inflation were to accelerate, that would cause people to race to exchange their depreciating notes for real goods that will hold their value. That would drive more people to buy Goldbacks and like products, first to preserve purchasing power, but eventually, if the Federal Reserve Note collapses, as a replacement currency.

In the German Weimar hyperinflation of the early 1920s, Gresham’s Law came into play. When German currency was worth more in the nonmonetary marketplace (in their case, as fuel for a home’s heat stove) than as money, marks ceased to function as a medium of exchange. I’m not sure what the 21st-century version of money destruction—money already being semi-digital—might look like, but if the Federal Reserve Note collapses, I’m sure there will be a vibrant market for new kinds of money, and the market will determine which kind or several kinds are the best suited for their purposes.

Bitcoin Isn’t Money

Any discussion today of possible new money or currency needs to include Bitcoin. There are those who believe that Bitcoin can replace our present fiat currency. I doubt it. Bitcoin is unsatisfactory as money for two reasons. First, as a medium of exchange, it’s of inferior convenience and utility. A few weeks ago, I received an advertisement for a new crypto exchange that promises to speed up Bitcoin transactions so that they don’t take more than 20 minutes.

To those of us (all of us?) accustomed to completing a transaction via cash or credit or debit card in mere seconds, a 20-minute wait is a huge step backward. I don’t know; maybe some people want to live in a world where they wait 30 minutes for their electric vehicle to recharge and then another 20 minutes to pay for it via Bitcoin, but I’ll pass, thank you.

Second, in light of the regression theorem, I don’t see Bitcoin as money. It has no anchor—no antecedent value—in the physical world. Look, I think blockchain technology will have many practical uses, but not as everyday money. I also think some people can make a killing using Bitcoin as a speculation—especially the first-movers. According to one analysis, fewer than 1,000 people own 30 percent of Bitcoin.

During the periodic bull moves in Bitcoin, when latecomers are scrambling to buy some of the limited number of Bitcoins, those first-movers can laugh all the way to the bank. Indeed, Bitcoin seems like one of the cleverest multi-level marketing schemes of all time.

How Will All This Play Out?

Sorry, folks, I don’t know the future. I’m only an economist. All that can be said with certainty is that our economic future will be more prosperous and secure with limited government, real money, and individual liberty.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.