Establishing an Alternative Independent Currency
by Robert Swann, 1980
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Introduction
To create a governmental monetary system, I think it must
be agreed that some form of reserve in actual commodities
must be used as a redemption system. Many economists are
beginning to recognize that there is a need for a redemption
system so long as governments continue to control the monetary
system. On a radio broadcast, an economist who is also managing
editor of Business Week recently stated that a
few years ago, he would have denied the need for a redemption
system-as have most economists since the 1930s . The recent
experience of inflation, however, changed his mind, he said.
He is now convinced that in order to keep governments honest,
a redemption system is necessary. If such a redemption system
existed and governments could be counted on to honor it,
perhaps a governmental monetary system would be feasible
without inflation.
In his most recent book, Denationalization of Money,
well-known economist F. A. Von Hayek (author of Road
to Serfdom) argues that "convertability is a safeguard
necessary to impose upon a monopolist (i.e. governments)
but unnecessary with competing suppliers who cannot maintain
themselves in the business unless they provide money at
least as advantageous to the user as anybody else." He calls
for competition (among banks) in "providing good money,"
which he thinks would eliminate the need for a reserve system.
Any reserve system other than gold, which he dismisses because"
there just is not enough gold about," would require a storage
system too expensive to be practical.
This argument of "too expensive" has been the conventional
argument used against establishing any redemptive system
other than gold. It was used, for instance, against the
commodity reserve system proposed at the Bretton Woods conference
in 1946 as the alternative to John Maynard Keynes's proposal
to establish the present International Monetary Fund without
any reserve backing. Von Hayek's proposal on the other hand,
calls for a simultaneous development of competing currencies
as the mechanism for insuring honesty among issuers. He
admits, however, that his proposal is unlikely to be acted
on in the near future, partly because of the difficulties
and the complications of such a widespread simultaneous
development. It would seem more likely that a practical
beginning would have to be made through a single issuer
acting as a model and inspiration for the possibility of
an independent or private currency system. If this is true,
then it also seems necessary that in order to develop confidence,
a reserve, or redemption system be established.
Not only is such a redemption system necessary in order
to create confidence for a private system of money issue,
but the protection against inflation that such a system
would create could be, in itself, the force that would bring
about the denationalization of money. Once an available
instrument for the investment of present, add-valuing currency
could be created, the public would-in all likelihood-flock
in great numbers to invest. They would do so to relieve
themselves of the fear of devaluing dollars. Thus a mechanism
would be created for the gradual transfer from a national
money system to a private money system.
Problems and Obstacles to Creating a System for the Private
Issue and Redemption of Money
In the past, the public has used two primary commodities
for investment as a hedge against inflation: gold, and/or
silver; and land, or natural resources. Gold traditionally
has been the primary commodity used in private banking systems
for redemption. Since the early 1930s, however, gold has
lost its function for this capacity. Nevertheless, in today's
world of rapidly increasing inflation, private investors
see gold as protection against inflation and, consequently,
its price has been soaring in international markets. Consideration
is now being given to restoring gold at least as a partial
redemption commodity in the International Monetary Fund.
Nevertheless, the primary reasons economists argued against
gold as a single redemption commodity in the past are as
true today as ever: there is a shortage of gold on a world
basis, and world production of all commodities bears no
relation to the world production of gold. Few economists
would argue for a return to the gold redemption system.
Yet very few economists have come up with any alternatives
for a world desperately seeking to keep money honest.
Land has been used very little as a redemption commodity.
This is true for obvious reasons-the only case of which
I know was in France with the "Assignats." As could
be expected, it didn't last very long. Nevertheless, as
an investment medium for protection against inflation, land
is widely used around the world. In periods of increasing
inflation, such investment has the effect of exacerbating
inflationary forces, and tends to absorb vast amounts of
capital into land, which by and of itself has no productive
value. Thus land speculation is both caused by inflation
and is a cause of inflation.
Moreover, investors who place large amounts of money in
land find themselves in a nonliquid financial condition.
For while the value of land may be appreciating as fast
or faster than the inflationary rate, investors are unable
to utilize the dollars invested without a long period of
waiting for the sale of the land to take place. In the meantime,
other investment opportunities may be missed due to the
nonliquidity of the land. Moreover, land investment usually
is in large units and must usually be sold as a unit, no
matter whether the investor's need for funds is large or
small. Thus, once sold the investor may have to find another
(less favorable) place to invest the bulk of the funds released
by the sale of his real estate. This nonliquidity, and nonflexible
factor in land investment, is the major drawback for investors
who are seeking to find a safe place to invest.
For more information, please contact the
E. F. Schumacher Society:
140 Jug End Road | Great Barrington, MA 01230 USA
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