Questions For Libertarians – Without the State, How Will Money Work?

Another question from @simonr916

Without the state, how will money work?

I’m not an economist so this is genuine musing here but the monetary system, as it currently works, relies upon states to under-write and guarantee currency, set interest rates and control supply. I have no idea how this whole system would work in a libertarian world.

This is a relatively simple one.

In the beginning of society trade took place by way of barter. If I wanted your pig and you wanted my goat, we would agree and simply swap. If we agreed that your pig was worth more than my goat, I might have to throw in a chicken or two to close the transaction.

The problem with such a system is that it is very inefficient.

If I want shoes and I have hens and you have shoes but want turnips then we can’t trade directly. I have to find a third party who will trade hens for turnips before I can get the shoes I want.

When people can’t trade for directly what they want, they will trade for items that have a larger potential trade audience. E.g. If you offer singing lessons, you would rather exchange them for corn, which many people will want, rather than quantum physics lessons, which have a much smaller market.

Over time certain trade goods gain the status of currency. Everyone will trade for them and everyone will accept them. In many societies the trade goods that gained the status of currency were precious metals like gold and silver. These had the benefit of being durable and divisible and relatively easy to store. Nobody was forced to accept them in exchange but almost everyone did.

Economies have functioned for thousands of years, using precious metals as money.

One of the modern problems with precious metals is that for large transactions they can be quite cumbersome and dangerous to move around. The solution was to store the precious metals in private bank vaults and instead transport around and deal with certificates of ownership.

The gold could stay secure in the vault and you could buy for example a house by simply transferring the ownership certificate to the gold in the bank vault.

Any private bank could hold gold deposits and issue their own certificates of ownership. Referred to as Bank Notes. Ownership entitlements could of course also be transferred by cards, cheques, etc.

This is how money would work in a libertarian system and how money worked for most of human history.

The state changed the free market system in three main ways:

1. Granting itself a monopoly on the issuing of bank notes in the USA in 1863  in the United Kingdom in 1844

2.By breaking the link between currency physical trade goods, i.e. gold. This happened as recently as 1971 when the United States totally abandoned the Gold Standard

3. Allowing Fractional reserve banking. This gives the bank a legal right to issue more notes than there is gold in the vaults.

A libertarian society would revert back to the system used in the free market from the dawn of the first trading nations up until the time of  these three catastrophic state interventions.

For further reading on money and banking try:

The Mystery of Banking – Murray Rothbard
The Theory of Money & Credit – Ludwig Von Mises

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  • @simonr916

    Of course, the gold standard was abandoned because economic growth outstripped gold production.

    This isn’t a problem in itself. It just means that gold prices rise. But, like other precious metals, gold has other uses. Gold is particularly useful in electronics – every mobile phone contains gold. So a return to gold standard would have significant economic effects.

    • http://twitter.com/LibertarianView Murray Rothbard

      True, but the main effect of removing the three changes would be to restrict government’s ability to create paper money out of nothing and interfere with the natural functioning of the economy by manipulating interest rates.

      The bubble economy is caused by printing money that doesn’t represent physical wealth and borrowing money at artificially low interest rates.

      • @simonr916

        So are you still advocating a return to the gold standard, which would serve to create deflation and to cause massive supply problems for an incredibly useful material?

        If not, then you still haven’t explained how money would work without the state.

        • http://twitter.com/LibertarianView Murray Rothbard

          I am advocating a return to a tangible wealth standard. Gold would seem an obvious choice, but a basket of materials would serve as long as they are non perishable, divisible and of recognized value.

          • @simonr916

            And of agreed/equal value – otherwise you’re going to the shops with a pound of steel note and 3 coffe cup coins!

          • http://twitter.com/LibertarianView Murray Rothbard

            You might find these interesting: