One area in which I find major problems with the Austrian school of economics, is their counter-intuitive support of a currency based on the Gold Standard. That is, a money which is backed by gold in that the ratio of money to owned gold is fixed. Granted, if the US did this, they would not be able to inflate their currency at whim, but why do the Austrians concede the point that the government should have a monopoly on issuing currency in the first place and that the monopoly should be based on their choice metal?
The Gold Standard is counter-intuitive because is goes against the basic premise that markets are a good thing. If a free market is good in the case of health care, schools, and any other good, why not money as well? If there was a free market in issuing currencies, then the free market would decide the best way to value the currency.
For example, if there was a bank issuing notes on fiat (no precious metal backing it up) but they did not inflate their currency, it might in fact be worth more than a currency backed by a resource that might be found in troves by random discovery. The best part about the free market system is that it does not matter what we think is value, the free market will auto-calculate the relative values of currency without our conjectures.
In the various countries in which private currency have been tried the system tended to work fairly well.* Lawrence H. White and George Selgin write :
The history of private currencies in Scotland, Sweden, Canada, and many other nations shows otherwise [that private currency holds large exchange costs]. As a rule, bank-issued currencies circulated at par (face value).
The real reason private currency in the US was eventually outlawed by the US government was so that the government could inflate the currency (a tax on those who hold currency).
If a free market worked well in the past, think how much easier would this be in today’s electronic age. Imagine the world currency exchange, but at a local level. Consumers wanting to hold cash would no longer have to worry about inflation eating their savings. Governments could not just inflate their money without the consequence of it being abandoned as the de facto currency. Free markets would ensure only the best currency survives.
Of course, in the free market system, the government might benefit by printing its own currency still, for tax collection purposes, but that currency would be less susceptible to inflation due to competing currencies. If the government inflated its currency, people would only hold on to it long enough to pay their taxes, and the taxes would either keep going down or tax increases would be extremely visible.
It is true this debate is a little dated, now with electronic means of converting currency to just about any currency on earth. But just because things are getting better, does not mean they are the best it can be.
*HT to George Selgin for correcting my quote when I misleadingly stated the US held its value fairly well. In fact it did trade at a discount (due to anti-branching regulations), but better than popular assumptions.
Your claim that, in the article linked above, Larry White and I hold that US antebellum “currency held its value fairly well” is rather misleading. In fact, although we mention systems in which banknotes almost always traded at their precious-metal standard face values, we then go on to state the following:
“U.S. experience prior to the Civil War, when the U.S. currency stock consisted mainly of notes issued by some 1500 state-chartered banks, is the major exception to the rule. Instead of commanding their full face value, many state bank notes traded at discounts. The discounts reflected non-trivial costs of redeeming the notes for gold or silver, and in some cases a risk of non-redemption.”
Although it’s also true that even the antebellum US system worked better than many persons realize, it did not represent the general consequences of freedom of banknote issue. Instead, antebellum banknote discounts illustrated one of many perverse consequence of restrictions on branch banking.
Sir, I am honored you read my post and responded. I will footnote your correction of my quotation. Thank you for touching on the perverse bank regulations pre-Civil War. I look forward to any further articles by you on the topic.