Well-known scholars thus far have understood that the private banking system is the root cause of the perpetuating debt and unsustainable growth that many countries have been experiencing.
These problems have forced many leaders to propose solutions to the current monetary system.
This movement is known as Monetary Reform, and within the movement there are quite a few different camps. These include;
Fiat Debt-Free Money Reformers (FDF)
Modern Money Theorists (MMT)
Post Keynesian Reformers (PKR)
Islamic Banking Advocates (IBA)
Social Credit Reformers (SCR)
Land Reformers (LR)
Hard Money Reformers (HM)
Currency Competition Reformers (CCR)
In earlier articles we discuss several proposals for monetary reform such as full reserve banking, and gold standard systems.
This article analyzes the proposals in implementing yet another, and growing proposal – currency competition.
Currency competition involves two or more currencies operating in parallel with each other in the economy.
Proponents argue in favour of this option because it allows for the decentralization of power over money creation.
Thus it facilitates in shifting the balance of power over money creation away from the state and private banks, and into the hands of savers.
Proponents argue that governments often inflate the money supply in order to benefit the financial sector through bank bail-outs, being to the detriment of productive society.
In order to protect society from future mismanagement of fiscal and monetary policy, these proponents advocate in abolishing existing legal tender laws.
While proponents unite in calling for the decentralization of the monetary system, they differ on the form that currency competition should take.
These reformers reflect different political philosophies, and thus have different implementations for a workable solution.
Thus, three different kinds of currency competition have been proposed;
A Floating Silver Currency
These proposals are addressed below.
A Floating Silver Currency
Advocates for a floating silver currency vehemently oppose government intervention in the economy. A floating currency changes in value relative to the change in the value of another currency.
So for example if the U.S. dollar went down, then the floating currency (i.e. Silver) would relatively rise in value.
Austrian economist and U.S. congressman Ron Paul is a major supporter of such a system.
Paul argues that the Federal Reserve (the U.S. Central Bank) has a monopoly over the control of money creation, and claims that the adoption of currency competition will reduce their monopolistic status in the economy.
In 2009, Paul introduced a bill into the U.S. congress titled: HR424A Free Competition in Currency Act, in order to implement a currency competition as a viable solution.
Paul elaborates on the nature of the bill in Congress, when he says
My bill introduces competition in currencies. The Federal Reserve System and the dollar standard are run by a cartel, a monopoly, and they don’t allow competition in currencies because they know they can’t compete. Just as we have competition in the Post Office with FedEx and UPS, I think the U.S. Federal Reserve deserves a little competition…But there are three major things we must do to do that, and the bill does this. We repeal the legal tender laws and remove the monopoly control of the federal reserve…But the other important reform that would have to occur for money to circulate and compete against the monopoly control of the Federal Reserve would be to take taxes off money, and the constitution said only gold and silver can be money, and only that can be legal tender, so you can’t tax it and allow it to be competitive.
Another major supporter, President of the Mexican Civic Association, Hugo Price, also advocates for the adoption of a silver competing currency.
Price outlines his proposal in an interview with financial journalist Max Keiser where he says,
I have been striving to reintroduce silver into people’s lives so that they have something to fall back on, which is the situation in Greece now, if they go back to the drachma that is not a good prospect to fall back on…But if they put a silver coin into circulation in parallel with the drachma, that will change the whole situation…The people are going to use these [silver] coins for savings, they are going to put them away for their savings and they are going to use the drachma for everyday work and the government can continue its social programs with the drachma. Inevitably they will have fiscal deficits and the drachma will devalue, but the savings of the people will not be devalued.
Keiser also calls attention to the benefits of currency competition.
Keiser outlines its benefits in an interview with George Noulas on Greece’s Sunny Channel where he says,
You have your Euros, but now you have a floating silver drachma [coin]. And every time the banker’s commit more criminal activity, more bailouts, more stimulus, then you can raise the price of silver and your savings are continuously preserved and continuously increasing.
He also states that currency competition would naturally ward off inflation, since the alternative currency (silver in this case) would command a higher price relative to the inflationary fiat currency.
Yet another form of currency competition is being proposed as well. Supporters of a self-issued credit system also argue that it counters inflation, and represents a more decentralized version of the silver competing currency system.
Self-Issued Credit System
Under a self-issued credit system, every individual would be empowered to print their own credit (money).
This ‘credit’, usually in the form of a voucher, would represent a promise to deliver goods and services to the person that would be holding the credit.
For instance, suppose a carpenter were to issue a voucher to a woodworker in exchange for some wood. The woodworker can then redeem the carpenter’s voucher in exchange for his services as a carpenter.
Note that the woodworker can refuse to accept the carpenter’s voucher, similar to how companies can refuse to accept an individual’s private cheque.
If the woodworker were to reject the carpenters voucher, then no exchange of goods could take place, since the voucher would have no value on its own.
The value of the ‘credit’ is determined by the needs of the public not by the amount of credit in circulation. In this way, self-issued credit eliminates the issue of inflation.
The concept of a self-issued credit system is not new, and had been echoed by many prominent academics of the 19th century including economists Silvio Gesell and Edwin Riegel.
Gesell had been well-known for his theory of Freiwirtschaft, where he postulated for three changes in the economy;
- Freigeld (Free Money)
- Freiland (All land is owned by the government)
- Freihandel (Free Trade)
Gesell had postulated for free credit creation in Worgl (an Austrian city), where his ideas on demurrage based currencies gained popularity. More information on the case of Worgl can be found in the Pt 13 of this series.
Edwin Riegel also spoke favourably towards a self issued credit system.
As early as in 1944, Riegel had called for the issuance of public credit in his book titled: The New Approach to Freedom where he wrote,
To trade goods and services is a natural right of all people. To issue the money necessary to make these exchanges is also the natural right of all people who are intelligent enough to do so. We need not beg for money. We do not need to be money slaves: we can be money masters.
Riegel had been an ardent proponent for the freedom and liberty of all human beings. His stance on freedom led him to challenge the then monetary system, when he argued that people had the power to create their own money.
Later on in his book Riegel added,
It is a remarkable fact that no constitution of any state, nor any declaration of human rights, has ever proclaimed the right of freedom of money issue. Yet this right is inseparable from the right of bargain or exchange, which is the very foundation of liberty. Man’s ignorance of the laws of money has blinded him to the very touchstone of freedom. You are indeed sovereign…if you realize that the citadel of power is your own home and that yours is the majesty and sovereignty, sadness will be dispelled by gladness. To bring this transformation, you must comprehend the power of money and that you are the money power.
Modern day supporters of the self-issued credit system argue that it has numerous benefits over the current monetary system.
These benefits include;
- Honest individuals with productive capacity will be able to generate credit to back their products. In this way, no one will be deprived the right to create their own money.
- The public will have the power to refuse payment of any particular creator’s credit coin. This ensures that the public will have the power to boycott fraudulent credit creator’s.
- If an issuer were to lend more credit than they have in the products to support them, any defaults that occur will greatly reduce the value of their coins.
- There will be no inflation since the coin’s value will not be determined by the amount of coins in circulation. Instead, inflation will occur if the Issuer raises the price of their product relative to the value of their credit.
The works of Gesell and Riegel had an enormous impact on the self-issued credit movement, and influenced many other economists such as John Maynard Keynes, as well as Canadian journalist documentary maker Paul Grignon.
Grignon, strongly advocates for the self-issued credit system.
He adopts the principles of self-issued credit in his proposal for a digital coin money system.
Digital Coin Money System
Grignon describes these mediums as; Perpetual Coins, and Credit Coins.
1. Perpetual Coin
The perpetual coin would act as the unit of value (measurement) for all goods and services in the economy.
For example, under a digital coin system, a flower would be worth 2 PC (perpetual coins) instead of $2 dollars.
The perpetual coin would be similar to many other modern currencies in use today that also act as a unit of value for goods and services.
While the perpetual coin concept is very similar to modern currencies (ex. U.S. dollar), there are several key differences between them;
- Perpetual coins would remain permanent in the economy, meaning that they could not be destroyed
- Perpetual coins would be issued in limited quantities in order to retain their value over time
Perpetual coins would also offer many unique advantages over other forms of money such as gold coins.
Grignon claims that under a digital coin system, gold-backed currencies would not be as stable as perpetual coins since gold could be destroyed (i.e. such as when building circuits and electronic chips) or created (through mining).
He also states that perpetual coins would be less susceptible to theft since each coin would have its own unique serial number.
In addition, perpetual coins would also accelerate the rate of transactions in the economy since they can be digitally transferred from one individual’s account to another.
However, perpetual coins present a potential problem as well. Since these coins would remain permanent in the economy, individuals may choose to save (hoard) them.
In order to address this problem, Grignon proposes in implementing a complementary demurrage trading medium known as Credit coins. Demurrage involves the controlled and predicted devaluation of currency, in order to incentivize spending in the economy.
2. Credit Coin
Grignon also advocates for credit coins as the other medium of exchange that would be used to facilitate the transfer of goods and services in the economy.
Grignon describes the mechanics of credit coins in his article titled: Digital Coin In Brief, where he writes,
Credit Coin is a form of stock in the Issuer, in which the Issuer guarantees to buy back the stock with product. Dividends are paid in additional product or service. Or, put another way, the Issuer honors its own Credit Coin at a higher value than Perpetual Coin or any other Issuer’s Credit Coin. This is adapted from the principle governing consumer-producer cooperatives in existence today. The essence of the idea is that, if a customer gives a farmer money for carrots in April, that customer gets more carrots than someone who just shows up to pay for the farmer’s carrots in September. This is deserved because the April customer has made a commitment and taken a risk on that particular farmer, as the price and quality of the carrots is not guaranteed, only the “share of the harvest” represented by a lower price. Thus the April customer is clearly an investor not a lender.
The credit coin would be similar to the perpetual coin, in that they would both be digital (transferred electronically).
The difference between the two would be that the credit coin would not remain permanent in the economy, since the credit coin’s creator could choose to eliminate it or devalue it over time (demurrage).
Despite the strong case presented in favour of currency competition, several critics have cast doubts about how such a system could operate.
Physicist Benjamin Klein argues the self-issued credit system would cause an inflationary cycle since each currency issuer would try to out-appreciate the other.
Klein outlines his arguments in his book titled The Competitive Supply of Money where he writes,
It is true that if, for example, a new money producer could issue money that was indistinguishable from an established money, competition would lead to an overissue of the particular money and the destruction of its value… The larger the new firm’s money issue the greater its profit; therefore profit maximization implies that the new firm will make unlimited increases in the supply of the money, reducing the established firm’s profit share close to zero (unless it too expands).
Thus Klein argues that the adoption of currency competition would lead to the excessive creation of money and inevitably result in hyperinflation.
American economist Henry Hazlitt also criticizes the self-issued credit system.
Hazlitt poses several questions pertaining to the feasibility of a currency competition system in his book titled Inflation Crisis and How to Resolve It where he asks,
How does a private issuer establish the value of his money unit in the first place? Why would anybody take it? Who would accept his certificates for their own goods and services? And at what rate? Against what would the private banker issue his money? With what would the would-be user buy it from him? Into what would the issuer keep it constantly convertible?
Hazlitt’s questions reveal some of the fundamental drawbacks of the self-issued credit system.
These drawbacks include;
- Limited scope and acceptance of the self-issued credit. For example, if no one were to buy John’s product, then John would not make any money.
- Since everyone would act as their own business, they would face high operating costs. As a consequence of this, many issuers may cut corners on their products or mismanage their accounting books.
- There would be no system of enforcement. No one would enforce the issuer to provide goods and services to the credit holder.
- Issuers afraid of issuing credit (based upon fears that their product will not be popular), could result in the lack of goods and services for people to purchase.
Despite these criticisms, a self-issued credit system is gaining more fame and recognition.
Bitcoin is another, real-world example of a competing currency system, that follows the movement for currency competition.
Bitcoin started off as a network back in 2009, as a electronic digital networking system developed by Satoshi Nakamoto.
His system uses Bitcoin (BTC) which is a virtual currency. This currency is issued independently of a central authority (Central bank) and is issued collectively by the Bitcoin network.
The network is programmed to increase the money supply at a steady rate until the total number of bitcoins in circulation reaches 21 million BTC (this is the maximum number in the money supply).
Under the Bitcoin system, the people serve to act as their own central bank, capable of increasing the Bitcoin money supply through their own labour.
As the money supply reaches 21 million BTC, the rewards for Bitcoin members will gradually decrease towards zero over time. When it reaches zero, Bitcoin members will have to earn Bitcoins through charging transaction fees.
In this way, Bitcoins share a similar quality with fiat money, in that they are not backed by a specific commodity, good, or service.
Supporters argue that Bitcoins are better than fiat money in the sense that they have better monetary divisibility. Bitcoin clients can divide each Bitcoin coin down to eight decimal places. This means that clients can transact in 1/10th of a Bitcoin or even 1/20th of a Bitcoin if necessary.
Bitcoin’s unique system has attracted a variety of popular academics and institutions.
Its popularity is so great that many modern institutions are now recognizing and accepting Bitcoins. These organizations include; The P2P Foundation, Wikileaks, Freenet and the Singularity Institute.
Journalist Max Keiser is an ardent advocate for a Bitcoin based money system. He argues Bitcoin is vastly superior to government fiat paper since it is backed by cryptography and operates on a limited money supply.
Keiser expresses his arguments in interview with Stacy Herbert where he says,
Bitcoin is backed by cryptography which gives it legitimacy and gives it soundness. The U.S. dollar truly is backed by nothing because anytime America needs to pay its bills for foreign creditors it simply prints more dollars…So here’s a currency Bitcoin that is backed by something of actual value. It has true anonymity and it has true scarcity value in the way it is constructed.
Founder of the P2P Foundation, Michel Bauwens also calls attention to the benefits of using Bitcoins. Bauwens has even started to pay his staff using Bitcoins.
Bauwens’ describes their benefits in his blog post titled: Why the P2P Foundation is paying its salaries in Bitcoin , where he writes,
Value storage through Bitcoin has profound political implications… Bitcoin’s value storage is revolutionary as it deflates the dark power of debt, and allows [us] to envision a world where this power of debt is no longer at the origin of economic activity. Bitcoin draws its value from peer-to-peer network dynamics, and mints new currency not through debt but through raw computational activity… This does not mean that Bitcoin is necessarily the final and perfect answer to our needs, but it is an important step in demonstrating that it CAN be done. It is to demonstrate our commitment to such developments, that we will now pay our collaborators in a mix of currencies, and part of it will be in Bitcoin. Starting today, the P2P Foundations will accept Bitcoin donations.
As the movement towards Bitcoins gains in popularity, so to does the level of opposition against it.
Many of the criticisms volleyed against Bitcoin center on the question of security.
Critics argue that the Bitcoin system is susceptible to online hacking, and not a safe method of transacting.
These criticisms are well founded in light of the 2011 security breach into Bitcoin’s system. The security breach caused the leaking of usernames, emails and MD5 hashed passwords of over 60,000 users onto the Web.
Other criticisms center on Bitcoins’ similarity to fiat paper money. Critics argue that it is actually worse than fiat paper, since Bitcoins are not enforced by legal tender laws.
As of June 5, 2012, the value of 1 Bitcoin is equivalent to $6.6 CAD/U.S. on the Mt.Gox Bitcoin Exchange.
Interestingly, while Bitcoin have no legal tender laws enforcing their use, they are worth several times more than the fiat money of many countries.
An unfortunate side effect of its high value has led individuals to speculate on Bitcoins.
It is this type of speculation that Henry George originally denounced, in his proposals for Land reform.
Grignon expresses similar criticisms about the Bitcoin money system in a comment on the Digital Coin website, where he writes,
For their money system[Bitcoin], the inventors chose the primitive concept of money as “a single uniform commodity in limited supply”. This is a money concept made necessary in the past because we had no way to transfer value over long distances except by means of physical “money”, portable (small) items of high value, such as gold and silver coins. We overcame that technological limitation long ago. In Money as Debt III, I argue that this is the ROOT MISTAKE of our current money system, money the value of which is based on its scarcity. BitCoin also makes the next fundamental design mistake of money, making it an unredeemable token of exchange subject to speculation. It is designed for pump-and-dump volatility.
New Keynesian economist Paul Krugman also criticizes bitcoins in his blog titled Golden Cyberfetters where he writes,
What we want from a monetary system isn’t to make people holding money rich; we want it to facilitate transactions and make the economy as a whole rich. And that’s not at all what is happening in Bitcoin…There has been an incentive to hoard the virtual currency rather than spending it. The actual value of transactions in Bitcoins has fallen rather than rising. In effect, real gross Bitcoin product has fallen sharply.
Yet, more criticisms against Bitcoin center on its various extralegal uses.
The online black-market place dubbed Silk Road, conducts all transactions in Bitcoins. Although transactions between Bitcoin users are logged, the users involved in the trade remain anonymous.
U.S. senator Chuck Schumer attacks Bitcoin, claiming that it is akin to money laundering. Schumer’s arguments are expressed in the following video, where he says,
Bitcoin is an online form of money laundering… anonymous, secure and untraceable; a lethal combination before it escalates any further, we are going to see that it gets shut down and shut down now.
Many academics have reserved judgment on Bitcoins, particular since it is still an experimental system.
Post Keynesian economist Steve Keen expresses a neutral stance towards Bitcoins in his tweet where he writes, “Not opposed but not enthused either.”
Ironically, much of the criticisms against Bitcoin serves to promote its popularity around the world, however it is still too soon to disregard its paths toward monetary reform.