This Part II is about the gold standard (to the extent there’s a libertarian position on this, they’re for it) and fractional reserve banking (libertarians tend to be against). When I wrote Part I, I thought I had some original observations on the matter, but it turns out that others were on the case at about the same time and I was beaten to the punch by Brad DeLong, Paul Krugman, and Noah Smith. They have much much longer CVs than mine, and much bigger megaphones, so just go read them if you want the full blow-by-blow. (And while it was disappointing to be less original than I thought, it was reassuring to be in good company.) For my part, I’ll just highlight the angles on the issue that seem to me particularly worth emphasizing.
First, fractional reserve banking is a creature of private choice. It’s true that the Federal Reserve supports the operation of the fractional reserve banking, but the practice isn’t a scheme thought up by “the bankers” to rip us off. At root, it’s a voluntary transaction among banks and borrowers: you make a promise to pay later, and we’ll vouch for you.
So what to make of the idea that we should get away from fractional-reserve banking? The only way to do it is to empower the government to interfere in a kind of voluntary contractual arrangement. As I said in a slightly different context in Part I, that position isn’t very … libertarian.
In fact, the essence of the entire banking system is a set of interrelated promises—promises voluntarily made and voluntarily accepted. One bank vouches that it’ll cover payments that you want to make (up to an agreed amount), another bank vouches that it will cover your friend’s payments, and so on. And you and your friend and so on are vouching that you’ll provide payment back to your respective banks. Payment in what? Payment in other people’s promises.
A piece of it is payment in Federal Reserve notes or (more likely) transfers of balances that the banks have with one of the regional Federal Reserve banks (like New York, Boston, San Francisco, …), and those things have a solid foundation underneath their value because the government will accept them as payment of taxes, and the government is going to insist that most people pay some sort of tax or other (pretty much everyone, actually, once you include sales taxes).
Money itself is a kind of society-wide promise: take this token in return for your work, or in return for that good that you own, and we (society) promise that somebody else will willingly take the token in the future, in return for their work or for some good that they own.
If people think that money is something more than that, if they think it's somehow more “real” than that (whatever more “real” might mean), I’m not sure that's a problem with how money works—it’s just a misconception on some people's part.
But let’s say it is nonetheless a problem. Since libertarians are big advocates of private initiative, let’s look at how that might apply here. As I discussed in Part I, there’s nothing stopping you from setting up your own currency, as groups have done in Ithaca, NY, and in western Massachusetts. In those cases, the currency is backed by nothing more than people’s expectation that enough other people will continue accepting it. But there’s nothing stopping you from setting up a local currency backed by gold.
A bank could make people the following offer: Bring us an ounce of gold, and we’ll hand you 100 “gollar” certificates. And anyone who comes into our bank with 100 “gollars” can walk out with an ounce of gold. Word will get around, and as long as everyone trusts the bank, people should be willing to accept “gollars” in payment for … whatever. After all, you know that at any time you can take whatever “gollars” you have, go the bank, and get gold. But you probably wouldn’t bother. You’d just spend the “gollars” on something else, which you’d be able to do, because everyone else knows that that any time they can take their “gollars” to the bank, …
So a private gold standard is perfectly feasible now. “But what if First Bank said that an ounce was 100 ‘gollars,’ but Second Bank said that an ounce was 57 ‘bullionatoes’? There’d be confusion in the marketplace, the conversions would cause people trouble.”
You might be tempted to say that this called for government regulation. Any bank can issue gold-backed certificates, but they all have to be 100 units to the ounce (or 57 units to the ounce, or 239—it really doesn’t matter, so long as it’s consistent). But any libertarian who would advocate that is a libertarian who hasn’t eaten her Wheaties.
The more consistently freedom-loving answer is that the market will solve this problem. It’s true that people won’t like awkward conversions between 57-to-the-ounce bullionatoes and 100-to-the-ounce gollars. But one of these currencies is going to have an edge, maybe because it was first, or because it has issued more certificates, or because the bank behind it is more trusted. So people will be reluctant to accept the disfavored currency.
“You can pay me 57 bullionatoes, or 115 gollars. … Yes, I know that I only need 100 gollars to get an ounce, just like 57 bullionatoes, but getting the gold is a nuisance, and using gollars is a nuisance, so I’m charging you extra for the privilege of paying in gollars. … If you don’t like it, you can go to First Bank, get your ounce of gold, take it to Second Bank, get your 57 bullionatoes, and bring ’em back here. … Hey, lady, it’s a free country!”
It won’t take long for everyone to do just that: trade their gollars for gold and their gold for bullionatoes. As the gold moves toward Second Bank, they’ll be able to issue new bullionatoes to keep up. We get the convenience of a unified currency without the icky feeling of having had to have had any dealings with the government.
So a (private) gold-backed currency is already possible, just like a private denationalized currency is already possible—except that local currencies that aren’t gold-backed already exist, whereas a gold-backed one doesn’t. Perhaps the market is trying to say something?
But this little exercise is sort of beside the point, because the goldbugs aren’t looking for a voluntary gold standard, they want a mandatory one: The government shall issue only as much currency as it can back with its gold reserves, and banks shall make loans only to the extent that they can back them either with their own gold or with government currency (which is backed by gold).
But remember, the system of money and banking that we have is a set of voluntary agreements. Banks decide to extend loans to people and businesses that they think will pay them back—and they create money in the process. People and businesses agree to accept checks written on accounts at banks that they think are sufficiently solvent that they can cover the promise represented by the check. (Or they accept checks written on accounts at banks covered by the Federal Deposit Insurance Corporation.) You don’t have to accept checks in payment unless you know they’re from a bank that backs all deposits with gold, just as you don’t have to accept Federal Reserve notes in payment (as long as you make clear up front that you won’t accept them). There’s no coercion.
And as described above, a private gold standard is possible now. In fact, it’s theoretically conceivable that a private gold standard could largely displace the dollar. People would accept as many dollars as they needed to pay their taxes, but beyond that point, they’d prefer bullionatoes. So if folks really believe that a gold standard is a superior monetary system, and if they really believe that people know what’s in their own interest, and if they really believe that free markets allow people to achieve what’s in their own interest, then the absence of a spontaneous gold standard ought to give them pause. But it doesn’t. Instead, some of them double down.
As I mentioned in Part I, Paul Ryan’s addition to the GOP ticket has brought renewed attention to the subject of gold, including Ryan’s stated enthusiasm for a particular monologue in Ayn Rand’s Atlas Shrugged. The part that’s more about money can be found here or here; the part that’s mostly about sex can be found here or here. (Reading the sex part, it’s hard to believe it’s not some sort of broad parody, or a not-very-good computer program trying to emulate a narcissistic human, but if you read the comments at that last link, you’ll find that there are people who take it seriously, as I suspect Rand herself did :-o ... ) That speech includes the following passage:
Not an ocean of tears nor all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow. Those pieces of paper, which should have been gold, are a token of honor–your claim upon the energy of the men who produce. [Emphasis added]In other words, it’s not even good enough to have a paper currency backed by gold—we should have gold coinage in place of paper. But what do you do if people don’t want gold coins and would prefer paper? “Well, that’s unpossible.” No it’s not. You don’t have to take my word for it. You can go back to the good old days, before modern central banking corrupted the meaning of money, before the insidious welfare state enshackled men’s souls and enfeebled their wills. In 1797, Robert Owen found that “the toll collectors of the Glasgow-New Lanark turnpike preferred the notes of the local banks to gold coin.” [Footnote, p. 75, D.S. Landes, The unbound Prometheus, Cambridge University Press]
There is no perfect way to run a monetary system—there are merely better ways and worse. A gold standard is a pretty bad one that involves more government coercion than the system we have now. And gold-only coinage is even worse.
This fall, you get a chance to vote on someone who seems to think they’re both good ideas. Ain’t democracy grand?