Dr. Jordan’s article appeared in the Spring/Summer 2015 edition of the Cato Journal.
“I am convinced we shall never have good money again so long as we leave it in the hands of government. Government has always destroyed the monetary systems.” Friedrich A. Hayek (1978)
In the next issue of Cato Journal, I discuss the tax and regulatory obstacles that must be overcome on the path to successful launch of a private currency alternative to the government-issued fiat currencies of the world. Restoring gold and/or silver backing to government currencies is not an idea I think is worth spending any time on. Instead, currency competition offers the best avenue for achieving and maintaining monetary discipline.
The key to success of a private, sound-money alternative to government fiat currency must be in constitutional protection of property and sanctity of contracts. There is reason for optimism. When the US government made it illegal for Americans (in the “land of the free”) to own gold in the 1930s, the economic (substantive) due process provisions of the constitution were also effectively suspended. For half a century the “takings clause” of the constitution was not invoked, but finally in the 1980s the Supreme Court began the restoration of protections of property and enforcement of contracts. Further progress will be essential to the success of a private currency.
Both tax-treatment and regulatory-treatment of private competitors to Federal Reserve fiat currency will have to be changed. Governments make no secret of the intention of policymakers to deliberately erode the purchasing power of monopoly, managed, fiat currency. Consequently, any private sound-money alternative will appreciate in value relative to the government-issued currency. Such appreciation is simply the stable purchasing power of the private currency compared with the debasement of the government currency. Tax authorities must not be allowed to impose capital gains or income taxes on the rising relative value of the private alternatives to government money. Avoiding the wealth-loss of a depreciating currency is not a gain!
Reforming regulatory treatment of alternative currencies is equally important. Without affirmative legislation to require currency and transactions neutrality, regulators and supervisory authorities in the financial services industry will presume guilt of “something to hide” on the part of individuals and firms who are predisposed to seeking alternatives to the official national currency.
With full restoration of the protection of property and enforcement of contracts by the U.S. judicial system, a gold-backed, market-driven private currency would not suffer the same vulnerabilities to political whims as gold backing of the official currency. While the experience of the 1930s was that the judicial branch of government would not overturn decisions of the executive and legislative branches of the federal government with regard to gold ownership, private, voluntarily negotiated contracts involving payment of gold-backed private currency are more likely to enjoy constitutional protection by the judicial branch.
Advocates of Sound Money should begin with “End the Monopoly.” Competition in the international arena between government-issued fiat currencies does not provide any hope of monetary discipline when all the monetary authorities are determined to accelerate the erosion of purchasing power of the currencies. A private alternative that is “as good as gold” should be allowed by governments to compete on equal terms. That requires changes in tax and regulatory treatment of private money.