Samuel Peterson Scholarship Essay 2021
A March 15, 2020, Federal Reserve press release reads, in part, “…the Board has reduced reserve requirement ratios to zero percent….” Simply put, banks were no longer required to have any cash in their vaults for their depositors to withdraw. Since this statement was released, trillions and trillions of dollars were created out of thin air in a little more than 16 months. The effects of these policy decisions are only starting to be felt, with the distortion of the market reaching far beyond this decade, harming future generations. The United States’ monetary regime is anything but a free market. Headed by the Federal Reserve, America’s cronyist system has lead to skyrocketing debt, inflation, and countless business cycles that would not exist in a free market.
Historically, gold, silver, and copper (commonly called commodity monies) have been the primary currencies of choice in a free market. Part of this has to do with a fundamental economic law: supply and demand. As the supply of a good increases, it becomes less scarce and thus less valuable due to its decreasing marginal utility. Gold does not grow on trees, nor does it fall from the sky. Gold must be mined out of the ground; a time-consuming and difficult process. In other words, commodity monies, like gold, have a high degree of scarcity. Other qualities necessary for a currency to be adopted include its portability, uniformity, and divisibility, all qualities that commodity monies like gold and silver have. Economist Jörg Guido Hulsmann explains the phenomena of gold and silver in his book, The Ethics of Money Production: “Gold, silver, and copper have been natural monies for several thousand years in many human societies. The reason is, as we have said, that their physical characteristics make them more suitable to serve as money than any other commodities.” If the monetary system became a free market, these commodities would most likely reign supreme, as their characteristics (scarcity, durability, etc.) are highly valued for currencies. Gold, silver, and copper are sound, and a free market would likely demand them as currency for that reason.
Despite Keynesians arguments to the contrary, free markets do not lead to stagnation. Any free market system would be highly innovative. A term coined by the late Joseph Schumpeter, “creative destruction,” occurs in free markets: old processes are replaced with more efficient new ways of production. Possibly the greatest hindrance to gold being used on a free market today is its portability. For hundreds of years, gold was minted into coins to verify and identify the amount of metal that was in the coin. In an age where paper and plastic rule the day, it is possible that people would be unwilling to switch to coins, which are a more cumbersome form of carrying money. Luckily, there is already a potential solution to this problem. The Goldback, manufactured by a company named Valaurum, allows holders to carry gold in a dollar bill-like format. The Goldback has gold in denominations ranging from 1/1000th to 1/20th of an ounce plated between two polymer sheets. This process creates an incredibly lightweight product that can be used for small to medium-sized transactions, thus solving the portability problem gold coinage might have today.
Furthermore, a free market in money would allow banks to unleash their monetary potential. In, A History of Money and Banking in the United States, Murray Rothbard discusses the role private institutions had in issuing banknotes. He states, “In contrast to government paper, private banknotes and deposits, redeemable in specie, had begun in western Europe in Venice in the 14th century.” A free market would likely handle money in a very similar way today. Banks would be able to print their banknotes, certifying that the person who holds the note could redeem it for X amount of gold. Individuals, in turn, could go to financial institutions to redeem banknotes for gold or use them as a form of money and trade. Banks could also turn to alternative methods of creating money, like the Goldback, if they see profitability in doing so. It is also possible that banking institutions could enter into the production or acceptance of goldbacked cryptocurrencies or other digital mediums of exchange. All of these options, whether they be the Goldback, digital currencies, or traditional banknotes, are likely to emerge in the absence of government intervention because they allow the market’s likely preferred medium of exchange (gold and other precious metals) more transportability and ease of use.
Ultimately, it is impossible to know how a free market would handle money precisely; as Hulsmann explains, “…freedom of choice assures, so to speak, a grass-roots democratic selection of the best available monies—the natural monies.” Some businesses may opt to use digital currencies, and others may choose monies backed by gold; many may even use a mix of both digital and gold. And this is okay. Markets emerge spontaneously from the actions of individuals, and these individuals all have unique subjective preferences for how and what they prefer as money. Historically, free markets used gold as their preferred medium of exchange. Yet, as times change and new technologies emerge, preferences for what is to be used as money change as well. A free market’s future money is unknown; however, it is undoubtedly clear that any free market system in money would be preferable to the present because markets are subjected to the constraints of profit and loss and are removed from the edicts of a central planner.