Legal Tender Laws and Currency Monopoly
The case for a new currency system.
A major reason why our current currency system is able to continue to persist despite the continuous devaluation of the currency through inflation is the existence of legal tender laws. There is no particular reason why people would voluntarily choose to accept the currency created by the banks. Legal tender laws force people to accept the bank-created currency as payment for goods and services they provide, and for the settlement of debts. Furthermore, governments require that people settle their taxes using the bank-created currency.
Currency Monopoly
The requirements that people accept the bank-created currency, and that people settle their taxes with it, makes it very difficult for alternative currencies to compete with the standard currency. This creates a currency monopoly which, like all monopolies, is not very healthy for the economy. The fact that currency plays such an essential role in the economy, being one half of almost every exchange, makes it especially bad for there to be a monopoly in currency creation. There are several well-known reasons why monopolies are bad and they apply to currency monopolies as well. For example, monopolies disincentivize innovation, and you see that in the currency system which hasn’t changed much in decades. Even the transition from the gold standard to the unbacked fiat currency system was a matter of course and did not represent any true innovation. Perhaps the most important of the negative effects of monopolies is that it allows the holder of the monopoly to engage in price-fixing. Again, we see this in the modern currency system. Central banks, which are the ultimate holders of the currency monopoly, have price-fixing as their main function. The interest rate is the price of money, and when central banks set the interest rates they are effectively deciding what the price of money is. With no competitor to set an alternative interest rate, savers and borrowers don’t have much choice in terms of the interest they earn for their savings or pay for their loans. The central bank can arbitrarily discourage savings, for example, by setting the interest rate too low, which is what a lot of the central banks in the larger economies do. The central banks have no incentive to produce a currency that truly benefits the people because the people have no choice.
Currency Injection
The fact is that any given currency is necessarily created by a subset of society. Currency monopoly means that only one subset, in this case, the banking and financial sector, creates the currency, which gives them undue advantage over the rest of the sectors of the economy. After the creation of the currency, it has to be somehow injected into the general economy. There are two ways this can be done. Either the currency creators use the currency they created to purchase goods and services in the wider economy, or they loan the money to participating members of the economy, charging interest, of course, for their loans. We have already seen that injecting currency into the economy through loans has its problems. The problem is that the total amount of currency in the system is the amount issued in loans but not paid back yet, while the banks expect the loans issued plus interest to be paid back. In other words, the debt owed to the banks always exceeds the amount of currency in the system. This means that society as a whole cannot pay back the loans they have taken from the banks, and as a whole, society is constantly indebted to the banks and financial institutions. This creates a transfer of wealth from the wider society to the banks when people fail to settle their debts.
The second option for injecting currency into the economy is by the currency creators purchasing goods and services with the currency they create. In the current system only central banks can do this, and they usually only purchase financial assets which is how they inject the base money into the economy. Commercial banks are not allowed to create currency and then use it to purchase goods from the public. Obviously, if they did this, even with restrictions, it would also result in a transfer of wealth to the banks. It would seem then that you cannot inject currency into the economy without a wealth transfer occurring. But the free market offers a way out. As I have mentioned previously, the free market is about the exchange of goods and services between parties, at all scales, and currency is just a facilitator of this process. I will present my case later that free market principles show that purchasing goods and services with the currency created is the correct way to inject currency into the system, with one caveat: the currency creators must first provide goods and services of their own to the public, so that their purchasing goods and services from the public with the money they create brings the exchange to completion. The currency is created as a side effect of the exchange. I call this kind of currency an exchange-based currency and it is what the free market principles prescribe as the solution to currency creation and injection.
Exchange-Based Currency System
Further to the problem of currency monopoly, only one subset of society creates currency. Having just one subset of society, namely the banks, creating currency, means that there is no choice for the public in terms of currencies to use. The main problem is that the banks inject the currency they create into the economy via loans. A better alternative would be to have currency creators, not just banks but anyone with the means and trustworthiness, to inject currency into the economy through the process of exchanging goods and services with others. An exchange-based currency system gets rid of the currency monopoly because it allows anyone to create a currency if they wish to. Of course, people would only use a currency if they trust the issuer so not every currency created would be viable. The IOU tokens I have mentioned before are an example of an exchange-based currency system since there can be multiple parties issuing their own brand of IOU tokens. Thus there would be multiple privately-issued currencies in circulation. There will also be a national currency issued by the government, but this will be based on a different kind of token which I will discuss later. This new token is generated from the exchanges between the government and the public, where the government provides public goods to society and society provides members of the government with private goods in return. Like IOU tokens, this new token relies on the contract between the two parties in the exchange to become currency, rather than legal tender laws. Thus as we will see, the public has the right to reject any tokens which the government creates arbitrarily, rather than as part of an exchange between the government and the public. This puts the public on equal footing with the government. While the government has the power to create money, the public has the power to reject it, thus keeping the government in check. The ability of the public to use alternative private currencies is also a big factor in why they can exercise their power to reject the government-issued currency if their government goes rogue.
While exchange-based currencies are not injected into the economy by loans, I want to say here that injecting currency through loans is not necessarily wrong. It is only when you have a currency monopoly that it poses a problem. In a true free market, people should be free to create and use currencies as they please. This means there will be various competing currencies in the system. Some will be injected into the economy by purchasing goods and services, while others will be injected through loans. Here it is okay to inject a currency into the system via loans because there are other currencies available. The other currencies should provide enough to cover for the interest payments so there will be no problem of mounting debt.
To summarise, legal tender laws lead to currency monopoly. Without an understanding of how to properly create and inject currency into the general economy, currency monopoly results in wealth transfer to the currency creators. We need an exchange-based currency as the national currency, existing alongside privately-issued competing currencies, to ensure that that economy is fair and balanced for all participants.
