Money without Governments

Jonathan Fauth asked about this in the "Gold!" topic of the General Forum. In order to frame the discussion, I recommend highly that anyone interested in the operation of markets for currency in a truly capitalist society read FRACTIONAL MONEY by Neil Carothers. Writing for Stack's, Q. David Bowers (widely regarded as "the dean of American numismatics") said about this book:

One of my interests is financial history, a subject that ties nicely into coins and paper money. With the exception of Fractional Money, by Neil Carothers, published in 1930, relatively little useful information is available in this regard. Carothers, whose Fractional Money has to do with coins of fractional value (less than a dollar) blends numismatics, economics, minting, and the marketplace nicely, but other writers typically concentrate only on one of these subjects.
Dave's Notes - Archive - April 2004
www.stacks.com/davesnotes/dnApr04.aspx

This book was recommended to me by Stuart Segan who was the "Trends" (coin prices) editor at Coin World when I was the international editor there. Carothers delivers a detailed history in a lively style. His facts are unassailable. His thesis is that a fractional currency -- indeed any currency -- does not need to have intrinsic value as long as it is freely convertible. Other facts support this.

The Bank of England via the Royal Mint withdrew and reissued gold coins that had worn past their acceptable weights. (See http://en.wikipedia.org/wiki/Gold_sovereign) This was a dead weight loss made up for from other incomes. In our world "plastic gold" debit cards would solve the problem.

As for private money, we can begin with an intelligent MAINSTREAM summary from the Federal Reserve Bank of Cleveland. Private money does have a working history. There is no need to speculate about "what ifs."

The list of those who have issued private money in the United States is long. Besides state and national banks (that is, banks established by state or federal charter), transportation suppliers such as canal, turnpike, and railroad companies have issued money. Coal mining and lumber companies have issued money, often called scrip, to pay workers. Merchants, farmers, and community groups have created their own money, too. Each of these examples of private money arose to serve purposes that were not well served by government-provided money. These purposes include having a currency suited for making small purchases, having a medium of exchange in remote locations, and having a means of exchange during financial panics
http://www.clevelandfed.org/research/Commentary/2007/010107.cfm

Through the 19th and 20th centuries many kinds of tokens, chits, and other media were common. (Postage stamps have served as emergency money, during the American War Between the States, as well as Russia after World War I and other times and places. However, even into the 1960s, small mail order purchases could be made with stamps, as stamps were easier and safer to mail for amounts too small to merit a bank draft.) The American Vecturist Association is a society for people who specialize in transportation tokens. http://www.vecturist.com/ The Token and Medal Society (TAMS) homepage at http://www.tokenandmedal.org/ has a link for "Mavericks." These are tokens that specialists cannot identify and the aficiandos post information about them until they can be catalogued. Note that these are a special problem, a small fraction of the thousands of kinds of tokens that circulated as money, often created locally to serve local needs. Numismatists know HARD TIMES TOKENS of the Jacksonian Era and CIVIL WAR TOKENS that fall into "patriotic" or "store card" categories. The study and collecting of these fiduciary media are supported by large compendia because there were so many types. Private money -- especially the coinage used in daily commerce -- has been well known until our own time.

However, even now, we still have transportation tokens. Moreover, new private moneys have been created. Phone cards are one example. I have a cell phone. I still carry a phone card, just in case. Some cell phones have "prepaid plans" which make the phone a kind of currency. Gift Cards are another example of stored value media that are money, but seldom perceived as such. Whether you pay cash or put it on your credit card (see below) makes no difference, but does, in fact have a dramatic impact on the definition of "money." We think nothing of coffee shop punch cards, but, they too are money, a 10% escrowed savings plan monetized in coffee, if you will. None of these is actually tracked by the government as part of the money supply.
Again, in our world, the Federal Reserve has identified 14 or 15 different kinds of money. In our college economics classes, we learn about M0 and M1 and so on. The Federal Reserve tracks another dozen. Stock market derivates are an example; "degree cooling days" and "degree heating days" are traded by energy companies and other entities. In point of fact, M0 -- coins and paper money -- hardly matter, being only about 8% of our commerce, perhaps less. Furthermore, according to the Fed, credit cards are not a form of money.
(See "Dr. Econ" from the San Francisco Fed:
http://www.frbsf.org/education/activities/drecon/answerxml.cfm?selectedurl=/2005/0509.html)

This is especially significant as debt is an important form of money today. According to an 800-page report summarized by the Fed of St. Louis, in 2004, the average US Household carried a burden of $55,300.
http://stlouisfed.org/publications/re/2006/c/pdf/digging_into_debt.pdf
CBS News has some interesting charts and graphs here:
www.cbsnews.com/stories/2004/01/06/national/main591633.shtml
Actual measures might go over $100,000 per family.
See mwhodges.home.att.net/nat-debt/debt-nat-a.htm

We have always had "private money."
We have more kinds of private money today.
What kinds and how much is ultimately uncertain.
Yet here we are.

Apparently, we do not need the government to "manage the money supply" simply on the empirical fact that it does not do so and likely never has. All the government can do is manage its own supply, admittedly, a sizable amount, but still just as we say, "e pluribus unum" or "one out of many."

Addendum --
Different Wikipedia articles cite different reliable and authorative sources and provide different raw numbers. Make of it what you will whether the per capita debt is 38,000 or the per household debt is 120,000.
Total U.S. household debt, including mortgage loan and consumer debt, was $11,400 billion in 2005. By comparison, total U.S. household assets, including real estate, equipment, and financial instruments such as mutual funds, was $62,500 billion in 2005.
U.S. public debt on 30 December 2005 was $8,170 billion (or $8.1 trillion),[41] which is nearly six times the amount of United States currency in circulation (M1 Money Supply), estimated to be $1,372 billion.

U.S. official gold reserves are worth $160 billion, foreign exchange reserves $63 billion and the Strategic Petroleum Reserve $55 billion.

Whether or not the government can "manage" or "control" money or the money supply is also the subject of some doubt WITHIN the government itself.

"The historical relationships between money and income, and between money and the price level have largely broken down, depriving the aggregates of much of their usefulness as guides to policy. At least for the time being, M2 has been downgraded as a reliable indicator of financial conditions in the economy, and no single variable has yet been identified to take its place." -- Alan Greenspan, 1992
In 2000, when the Humphrey-Hawkins legislation requiring the Fed to set target ranges for money supply growth expired, the Fed announced that it was no longer setting such targets, because money supply growth does not provide a useful benchmark for the conduct of monetary policy. However, the Fed said, too, that "�the FOMC believes that the behavior of money and credit will continue to have value for gauging economic and financial conditions." Moreover, M2, adjusted for changes in the price level, remains a component of the Index of Leading Economic Indicators, which some market analysts use to forecast economic recessions and recoveries.
In March 2006, the Federal Reserve Board of Governors ceased publication of the M3 monetary aggregate. M3 did not appear to convey any additional information about economic activity that was not already embodied in M2. Consequently, the Board judged that the costs of collecting the data and publishing M3 outweigh the benefits.
http://www.newyorkfed.org/aboutthefed/fedpoint/fed49.html

(Edited by Michael E. Marotta on 1/05, 8:51am)

Post 1

Saturday, January 5, 2008 - 8:32am

What would an unregulated money supply look like?
We can start with some kind of 19th century scenario and imagine an alternate universe without government money. This is not so strange. In both 1800 and 1802 Jeffersonian republicans in the US Congress introduced bills to close the Federal Mint at Philadelphia. It was an expensive operation that cost more to operate than it earned. While Congress had the right to coin money, that did not mean that it always saw the necessity to do so.

Imagine by contrast, a world with government shoes. The constitution promises each citizen a pair of shoes on their birthday. What would shoes be like? Then, imagine that you argue for the privatization of shoes without government regulation. How could you predict the existence of sports shoes that light up when you step?

So, too with private currency. We can only imagine based on what we know. Money would be whatever commodity was convenient. By common tradition over time, coins of copper, silver and gold would be most likely, but we might have coins of aluminum, nickel, platinum and palladium, and other metals or alloys. They would come in a variety of shapes and sizes, weights and finenesses. They would celebrate a wide range of ideas, events, places, and people. The ones from known institutions with good reputations would be accepted widely. Coins from local sources would tend to circulate closer to "home" however that might be measured.
People would know their money and do their arithmetic in their heads. Merchants would have scales and calculators and charts. Some people might carry their own pocket-sized versions of these. Eventually, there would be automatic electronic devices and probably some form of self-validating readers. Electronic cards backed in other commodities (oil, wheat, lumber) would be known.

As gold especially is inconvenient to carry because it loses value in circulation, gold promissories would be common. Competing with them might be paper money backed in uranium, molybdemum, cadmium, tobacco, etc. Banks that issue these would depend heavily on their reputations. Bank failures would be treated like any other business closing, whether a shoe store, pharmacy or appliance store.

Businesses with heavy consumer or consumables trade could create their own media backed by their own products or services. We know of tokens called "good fors" that were issued primarily by bars and restaurants. Even today, these advertising media are known. Without government-issued small change, these would be common on a local basis, good for bread, milk, etc., or good for a haircut, an hour at a spa, or entrance to a movie.

The history of money is numismatics and we have some discussion of that here on RoR. Numismatics is important to the present subject because these are facts from which we derive theories and conversely, any new theories must explain these facts. That said, we still have many misconceptions to overcome. Among them is the myth that debt is evil, a topic posted here on RoR and enthusiastically received by several nominal Objectivists. In point of fact, debt is money. You can buy and sell commercial paper of many kinds. During the 1980s, one of the innovations in bonds was for one holder to keep all of the interest coupons and sell the bond as principle only. The bond holder still had a collateralized stake in the corporation. Those "stripped" bonds still fluctuated in price. In other words, even shorn of the interest, the debt was refungible. Also, the coupons could be sold separately. This is an example of two new kinds of money not expected in the 19th century.

Consider a thought-experiment in an "all-gold economy,." If a gold bank lends its own gold or gold specifically lent to it for this purpose at interest, the interest is created by the borrower's increased productivity. A man with a new electric motor, for instance, borrows 100 ounces to start a factory. The factory is profitable. If the banker (Old Midas) decides to retire -- not quit or go on strike, but just do more fishing with his friend the retired philosophy professor -- any long-term agreements will also be sold. The 30-year bonds of Galt Static Power, Inc., represent debt that can be monetized when Midas sells his bank to the young Danneskjold boys, Mortimer and Randolph. They can, as above, sell the interest and keep the capital, which, perhaps, they might exchange for shares of Galt Static Power, Inc. common stock, for instance, or for any of several other kinds of money to any imaginable market entity.

People who call themselves liberals or conservatives are equally likely to want to the government to regulate this business. Some -- strict Muslims or Christians, for instance, but communists, as well -- might want to prohibit the lending money at interest. Objectivists know better.

(Edited by Michael E. Marotta on 1/05, 10:28am)

Post 2

Saturday, January 5, 2008 - 4:00pm

Michael:

I continue to be impressed with your encyclopedic knowledge of numismatica. But, what would transpire if there actually was a movement to allow alternative currencies in the US? Imagine a perfect storm in favor of Ron Paul, who advocates such a position. (Whatever you might object to wrt Paul's position on foreign affairs, you gotta applaud him for his domestic policies.)

In the next several months the US economy really tanks � comparable to 1929. The electorate is so traumatized (justifiably) that they are finally able to understand why government management, i.e. the Fed, was the real cause of the collapse. Ron Paul is elected president and allows alternative currencies to compete with the greenback.

At the risk of over-touting my proposal for an alternative gold currency, people slowly accept that it is gold that has the real and enduring value, not fiat money, and their mental computations of what the gold represents in purchasing power gradually diminishes and, more and more, goods and services become primarily stated in grams of gold rather than dollars. Contracts are written with the sum payable being in grams of gold.

This is a gradual process, but it spreads. The demand for this currency in terms of physical gold causes the commodity price to rise. Those who have continued to hold gold find that they have profited in terms of purchasing power. This can be considered as a natural interest rate, unregulated by any government manipulation � it is determined just by the market forces of supply and demand.

Foreign governments become paranoid with this development because they fear their loss of control, so the movement is slow to evolve as a world-wide phenomenon. The purchasing power of gold increases to accommodate the requirements for commercial liquidity. Jewelry becomes more expensive to justify and more and more of it enters the monetary stream.

Eventually, a dynamic equilibrium is reached whereby all international transactions are stated in terms of gold and the purchasing power of it reacts to the level of global economic activity. If world-wide prosperity doubles, the purchasing power of a gram of gold doubles. If there is a world-wide pandemic whereby half the population is wiped out then the purchasing power of a gram of gold is halved � all done automatically by the invisible hand. International currency exchange rates are a thing of the past and all commercial transactions are free from the uncertainty of individual countries arbitrarily revaluing their currencies. The mis-managers of a nation's economy have nowhere to run from reality.

For what it's worth

Sam

(Edited by Sam Erica on 1/05, 8:49pm)

Post 3

Saturday, January 5, 2008 - 5:36pm

M.E.M writes:

Consider a thought-experiment in an "all-gold economy,." If a gold bank lends its own gold or gold specifically lent to it for this purpose at interest, the interest is created by the borrower's increased productivity. A man with a new electric motor, for instance, borrows 100 ounces to start a factory. The factory is profitable. If the banker (Old Midas) decides to retire -- not quit or go on strike, but just do more fishing with his friend the retired philosophy professor -- any long-term agreements will also be sold. The 30-year bonds of Galt Static Power, Inc., represent debt that can be monetized when Midas sells his bank to the young Danneskjold boys, Mortimer and Randolph. They can, as above, sell the interest and keep the capital, which, perhaps, they might exchange for shares of Galt Static Power, Inc. common stock, for instance, or for any of several other kinds of money to any imaginable market entity.

People who call themselves liberals or conservatives are equally likely to want to the government to regulate this business. Some -- strict Muslims or Christians, for instance, but communists, as well -- might want to prohibit the lending money at interest. Objectivists know better.

Bob responds:

This trick or work around the prohibition of charging interest was first work out by Orthodox Jews (the technical name is "prozbuhl", I think) and is discussed in the Talmud. The reasoning behind it is thus:

Lending money to a poor person to acquire food or shelter is a life and death matter. That is why charging interest on such loans to a fellow Jew was prohibited. But lending for business purposes is a different sort of thing. It is an allocation of capital to produce a business that will turn a profit. Unfortunately the rules were written in such a way as they could not be directly violated (the rules are called Commandments). So the formation of a partnership was the workaround. It was a workable scheme. The business got the capital it needed and if it were profitable the lending partner could sell his share an recover the lent money plus and increment without transgressing a Commandment. The principle actors were happy, God was happy and all was well. During the same area (it was the time of the dispersion or diaspora) Jewish businessmen worked out a system of letters of credit so that capital became very portable. Credit could travel as fast as a letter could be carried. Think of it as Early Internet. Money and credit became very abstract (and therefore flexible and portable). A letter weighed far less than a bag of coins and was less likely to be stolen in transit.

Later on Christian and Muslims used the same workaround the prohibition on lending with interest. As it says in Ecclesiastes, Ain Chadashot takhat ha'Shemesh -- There is nothing new under the Sun.

Bob Kolker

Post 4

Sunday, January 6, 2008 - 4:59am

Sam, your idea for a gold wire plastic card is clever and practicable. Allow me to reflect on a few points without in any way denigrating the proposal.

First, you could profit from this idea by producing the cards. You know that 1/10 Eagles and other small gold trade at hefty markups over bullion. Also, the Austrian Mint produced these 1- 2- and 5-gram "Mozart" cards, little wafers in credit card sized plastic laminations. Money is money, but the cards let you advertise as pay. I would have many uses locally for paying with cards that read "Marotta Associates: Security Consultants and Guard Services."

The card itself can be further authenticable via holograms, magnetic stripes, etc., which also are barriers to counterfeiting. It would be convenient to be able to pass the card without an ohmmeter, even one that is on a keyring.

The conductivity test is fine and readers (ohmmeters) would be easy enough to mass produce, far less complicated than today's credit card readers which are ubiquitous.

I see a use for these in daily commerce for small transactions. Right now, a gram of gold is about a tank of gasoline. (12 gals in my Camry.) We spend about $100 a week on food or 1/8 ounce or under 4 grams. At some level, the cards become cumbersome. You want them perhaps no thiicker at all than 2 standard credit cards and exactly one thickness would be best. Can you get an ounce of wire into something that size? I don't see how.

As I envision this, the wire needs only to "show" at two points. You have to minimize wear, right? But within the card, it can snake around to whatever length is required. So, the two points can be close to each other, letting you have an ohmmeter whose reading head is like a 1-cell keychain flashlight or smaller, perhaps. Do I picture this correctly?

A chipped, nicked, cracked or broken card would be a problem.

Just a point about jewelry. A few years back, I interviewed the PR person for Krugerrands and he said that most of the world's gold goes into jewelry. Coins are a small fraction of the inventory. In much of hte world, jewelry is money, especially for people who have no pockets or who need to display status or who have no other safe storage.

(Edited by Michael E. Marotta on 1/06, 5:43am)

Post 5

Sunday, January 6, 2008 - 5:39am

Bob Kolker noted: So the formation of a partnership was the workaround. It was a workable scheme. The business got the capital it needed and if it were profitable the lending partner could sell his share an recover the lent money plus and increment without transgressing a Commandment. The principle actors were happy, God was happy and all was well.

When I learned about how Sharia allows Muslims to get around the problem of interest, I found it elegant and perfectly within accepted practices according to my own expectations. In fact, one of the features of "conspiracy theory" is that in lending to governments, banks get a seat on the board, so to speak, thus short-circuiting the constitution. The Board always represents the shareholders (stocks and/or bonds; dividends and/or interest). Whenever you borrow, you always take on partners ... whether you think about it or not... whether you see them all or not...

Compound interest is just one kind. I guess there would need to be a "theory of interest" to decide how to calculate it. When you buy a corporate bond (US Savings Bond; T-bill), you get say 3% per year for 30 years, but just that: $30 per $1000. But this comes to a $1900 pay back, not the compounded $2427. Neither is it viewed as an amortization or an annuity, both of which are other ways to view the time value of money.

My problem with the commandments and sharia etc. is that they preclude all of those other ways to think about the future. They make life on Earth harder. It is as if there were rules against forecasting the weather. Don't laugh -- one of the reasons that religions forbid astrology is that it is wrong to predict God's will and it is wrong to not trust in God's plan. The value in astrology aside, the prohibitions were actually about planning for the future. You are supposed to have faith, to put your trust in the Lord... In God we trust...

PS: Robert, do you know how to use the Quote function at the upper right of the Menu tabs? Drag and highlight the text, then click Quote. The only thing is that if you want to enhance the text, you have to do it after the quote, not before.

Post 6

Sunday, January 6, 2008 - 8:28am

Michael:

The card itself can be further authenticable via holograms, magnetic stripes, etc., which also are barriers to counterfeiting. It would be convenient to be able to pass the card without an ohmmeter, even one that is on a keyring.

Certainly, further authentication is possible, but unnecessary. The very fact that foolproof electrical testing is available will deter counterfeiting. I don't look at every dollar bill that I receive to see if the watermarks and other security features are intact.

At some level, the cards become cumbersome. You want them perhaps no thiicker at all than 2 standard credit cards and exactly one thickness would be best. Can you get an ounce of wire into something that size? I don't see how.

I agree, but you are assuming that the if you're going to buy a car or a house that you'll pay for it with the gold cards and that the purchasing power of gold remains at a low level. Most people don't do their normal shopping with $100 bills; they use a substitute such as a check or credit card and there is no reason why these would disappear.

As I envision this, the wire needs only to "show" at two points. You have to minimize wear, right? But within the card, it can snake around to whatever length is required. So, the two points can be close to each other, letting you have an ohmmeter whose reading head is like a 1-cell keychain flashlight or smaller, perhaps. Do I picture this correctly?

No. The strip of gold is in a transparent region of the card so that the color is visible and that it stretches in a straight line. With ordinary laminations that you can do at Kinko's any advertizing and identification has to be done on an absorbent medium like paper so that the adhesive can react, but a thin gold ribbon can be inserted at the bottom where the covering plastic is transparent.

A chipped, nicked, cracked or broken card would be a problem.

As is a credit card.

Also, the Austrian Mint produced these 1- 2- and 5-gram "Mozart" cards, little wafers in credit card sized plastic laminations.

I am interested in this. Can you provide a link?

Sam

Post 7

Sunday, January 6, 2008 - 9:17am

All this commenting about how they got around Shari law, etc., in circumventing the religious only goes to show that civilization advance IN SPITE of religion, NOT because of it - that those so-called advances gained during the heavily religious periods of history, whether Christian or Muslim or whatever, were done IN SPITE of the religion, even as those who did them were religious [which, considering, was more a matter of life/death than true devotion]...

Post 8

Sunday, January 6, 2008 - 9:30am

Robert Malcom writes:

All this commenting about how they got around Shari law, etc., in circumventing the religious only goes to show that civilization advance IN SPITE of religion, NOT because of it - that those so-called advances gained during the heavily religious periods of history, whether Christian or Muslim or whatever, were done IN SPITE of the religion, even as those who did them were religious [which, considering, was more a matter of life/death than true devotion]...

To which I reply:

While the Muslims (prior to the 13th century c.e., were obeying Shariah, they were also inventing algebra, optics, surgery that could be survived. In short, the Shariah (also the hal'lacha in the case of Jews) did not prevent rational actions in many areas of life. Religious custom, per se, does not necessarily prevent or pre-empt rational behavior. In fact it might enhance it. In my youth, I used to attend Talmud-Torah studies and some of the subtle arguments in the Babylonia Talmud enhanced my ability to abstract and analogize. It was a significant boost to my mathematical performance. Of course you have to be there to see it. I can assure you going through the tractate "Eyzah ha'zahav" (what is gold?) caused me to sweat bullets the same way a course in closed cartesian categories does.

If you wonder why there is a disproportiante number of Jews in the mathematics, physics and computer business, it can be attributed (in some cases) to earlier religious upbringing. I don't know how it goes with Muslims (I am not Muslim) but Judaism is the only religion where one is virtually commanded to think critically (in some contexts). The habit carries over to other areas of life quite readily. So in some cases it is BECAUSE and not IN SPITE OF. The Y'shivah boys ace the mathemtics section of the S.A.T. for good reason.

Bob Kolker

Post 9

Monday, January 7, 2008 - 7:44pm