Monday, August 27, 2012

Libertarian-Gold smackdown

(gold coins from
The addition of Paul Ryan to the Republican ticket has occasioned some renewed attention to the monetary theory of Ayn Rand, anchored on Ryan’s statement in 2005 that he was inspired by her work, especially by the wedding monologue of a character called Francisco d’Anconia. The enthusiasm of Ron Paul’s supporters also kept the idea of a gold standard in the public eye.

There’s been yeoman work dealing with this topic, particularly by Barry Eichengreen. But in the marriage of libertarian thought and goldbug inclinations there are two particular aspects that I haven’t seen addressed and that I think are worth considering.

First, some of what libertarian goldbugs want is perfectly legal to do right now, today—it’s just that nobody’s doing it. If I were a libertarian, that would suggest to me that nobody actually wants to do it.

And then there are other parts of the libertarian goldbug program that would actually involve very intrusive state action into private transactions. If I were a libertarian, I would think that was a bad thing. For that matter, I’m not a libertarian and I still think it’s a bad thing.

This post will deal with what’s legal but not being done, and I’ll leave the stuff that (fortunately) the government isn’t making us do for a follow-up.

As Eichengreen writes:
In his 1976 study, The Denationalization of Money, [Hayek] emphasized the government’s monopoly on printing money as the thin edge of the wedge that restricted individual decision making and gave the state additional resources with which to expand its powers. Moreover, the government’s control over currency led to instability in the market economy: “its susceptibility to recurrent periods of depression and unemployment.” It is a cycle that, once started, has no end.
Hayek’s contention was that, if there were multiple issuers of currency, with people free to choose which one(s) to use, competition would give each issuer an incentive to keep its own particular currency stable—given a choice, people would migrate away from a currency with a greater tendency toward inflation.

But the premise itself is wrong. Government doesn’t actually have a monopoly on printing money. It has a monopoly on printing Federal Reserve notes (if you look at the green paper in your wallet, you’ll see that each piece is a Federal Reserve note for a specific number of dollars). There’s no law stopping you from creating your own currency—in fact, if you’re in Ithaca, NY, there are numerous businesses where you can use Ithaca Hours to pay at least some of your bill, sometimes the whole thing; if you’re in western Massachusetts, the same is true of BerkShares.

But what about that language on those Federal Reserve notes that says, “This note is legal tender for all debts, public and private”? Doesn’t that mean you can’t use other stuff? Hardly.

Let’s say you and I write up a contract: I promise to build you a garden shed, and you promise to pay me $1,000. I build the shed, then I show up to collect my payment. You offer me an envelope containing 50 Jacksons. At that point, I have two choices. I can say “Thank you,” take the envelope, and walk away, and our contract will be fulfilled on both sides. Or I can say, “I don’t want those stinkin’ useless greenbacks,” refuse the envelope, and walk away—and our contract will still have been fulfilled on both sides. I built a shed, you offered me legal tender. The fact that I refused to take your legal tender is my problem, not yours.

So that sounds like the government does have a monopoly on money after all, but that’s not true. My mistake was that I didn’t specify the form of payment beforehand (and get you to agree to it). We could draw up a contract that you would hand over 800 euros. Or 8,000 yen. Or some quantity of gold bullion. Or a picture on your wall that I particularly like. We can’t legally agree that I’ll build a shed and you’ll hand over your firstborn to me into bondage, but that’s because slavery is illegal, rather than that the government has some sort of monopoly on money.

We could even specify payment in chickens, though then we’d probably have to have all sorts of additional specifications: not merely how many, but also their average or minimum weight, whether free-range, conventional, from a local farm, or you have to have raised them yourself, are they live or slaughtered, was the slaughtering kosher … Aw, screw it! let’s just use money.

Given all those possibilities, that business about “legal tender” is actually a really useful role of government. If we want to specify payment in gold, or pre-euro Italian lira notes, or cans of sardines, that’s our right. But if we want to save time, we can just say, “Payment for the shed will be US$ 1,000,” and that has a legally clear, enforceable meaning without us having to spend time hammering out any further details of the means of payment.

So much for private debts—what about public ones? Those may seem more nefarious at first, but when you dig into it, you see that the difference isn’t really about money; rather, it’s about taxes.

There are two kinds of public debts: money the government has borrowed and therefore owes; and taxes that you owe the government. So there are two implications of Federal Reserve notes being legal tender for public debts. First, if you own a $1,000 government bond that has matured and you go to collect payment, the government can hand you 50 Jacksons and be done with it. Second, if your tax bill is $1,000, you can hand the government 50 Jacksons, and they have no further claim on you (for this year, anyway).

“See?! See?! The government is despotically forcing me to accept worthless paper! It’s tyranny! Hitler! Zblrg!” says the irate bondholder. Well, no. Not tyranny, not Hitler, not zblrg, not even forcing you to accept paper, worthless or otherwise. Because the government didn’t force you to buy the bond. You chose to buy a bond that said, “Bring this in on June 30, 2012, and the government will hand you $1,000,” and when you bought the bond, those green pieces of paper already said, “legal tender for all debts, public and private.” If that form of payment was unacceptable to you, you had two choices: Don’t buy the bond, or try to get the government to agree to a special contract where your payment would be in some other form. But once you bought the bond as it was offered, you entered into a contract with pretty stable and widely recognized terms, including means of payment. If, now, you want to complain about those means of payment, you’re asking for a revision of the contract after the fact, which doesn’t seem very … libertarian. (After all, it’s (some) libertarians who object to laws forbidding restaurants from refusing service to people based on race, and part of their argument is that such laws are an illegitimate restriction on the freedom of contract.)

There’s still the tax issue (I’ve left the trickiest for last). Here, here surely we have oppression. Government is forcing us to pay taxes and limiting our choice of how to pay them. How can that possibly be anything but tyranny?

The thing is, taxes are themselves a kind of contract. Of course, they’re not a voluntary contract, except to the extent that you’re able to move to another country and choose not to. In practical terms, the government decides what your taxation will be, based on how much income you have and from what sources, and there’s your contract.

Isn’t this tyranny? Well, remember that whole “No taxation without representation!” thing that was such a big deal for the original Tea Party folks? That suggests that taxation with representation is actually OK. Representation doesn’t mean you’ll necessarily like the outcome, nor does it mean that you would individually choose to enter into the taxation “contract” that the government has decided on for someone of your income. But it’s how taxation works. It’s how taxation has to work. (The free-rider problem is a real problem.)

Like any contract, this involuntary one the government is imposing on you needs to specify means of payment. And by far the simplest way to do that is for the government to specify that you have to pay in the government’s own currency. If it were to accept other currencies, it would have to make some choices as to which ones it would accept. The whole idea of competition in currency assumes that some currencies will be more reliable than others, so the government would have to establish some sort of standard of “reliability” or strength of alternative means of payment.

And there’s the possibility of political shenanigans. There have been proposals for investing the Social Security trust fund in stocks rather than in government bonds, so as to get the higher return that the stock market (on average) provides. In response, there’s a reasonable fear that the government could play favorites—the trust fund is pretty large, and the government’s choices of what stocks to buy with it would have an enormous effect on financial markets, with correspondingly huge potential to help its “friends” and hurt its “enemies.” Similar mischief could be done if the government were to use its taxing power to decide which issuers of private currency were “legit” and which weren’t.

So the requirement that you pay your federal taxes in the government’s own currency turns out to be a sort of de minimis feature of rational taxation.

It probably plays another role as well. The chartalist school of thought argues that the government’s currency gets its value precisely from the combination of the imposition of taxes and the requirement that those taxes be paid in the government currency. As Ithaca Hours and BerkShares demonstrate, you can create your own currency and get a fair number of people to use it in at least part of their daily business. But neither of those currencies has anything more than novelty value once you get away from their home base. Even within their home bases, acceptance is far from universal. But everyone in both those places will accept Federal Reserve notes if that’s what you offer to pay with.

When you accept Ithaca Hours, you know you’ll be able to respend them at numerous other businesses in the Ithaca area. When you accept Federal Reserve notes, you know you’ll be able to respend them anywhere in the U.S. The chartalist view is that such universal acceptance is not merely convention, and not even the result of that “legal tender” language printed on the bills. Almost everybody has to pay taxes to the federal government. (Some folks make a lot of noise about the fact that only slightly more than 50% of people pay federal income tax, but anyone with a wage pays Social Security and Medicare taxes.) So almost everybody has to get their hands on some greenbacks, or on bank account balances exchangeable for greenbacks. And as long as most people have a legal need to get some government currency, there’s sufficient demand to support the currency’s universal acceptance.

Note how local currencies are treated for tax purposes. You’re free to accept Ithaca Hours in payment for services rendered, but you have to report that income to the IRS, in terms of dollars (1 Hour = $10). And you have to pay taxes on that income, just as if you’d been paid in dollars. And the IRS won’t accept Hours, they want dollars.

So we get the benefit of a currency that is accepted across an economy of over 300 million people, and other places as well. At the same time, if you want to start up another currency and try to convince other people to use it, it’s not the government that’s stopping you.

So why not, as Hayek proposed, “denationalize” money? Because what he was asking for either makes no sense or already exists.

But there’s no pleasing some people.

(See Part II here.)

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