The Legislative House of the Commonwealth of Virginia is considering the establishing of a joint subcommittee to study whether the Commonwealth should establish an alternative currency in anticipation of the total breakdown of the U.S. Dollar and the Federal Reserve.
The fears of the Virginia legislators are justified: very few economists these days expect the Fed to survive for too long.
The intention of the legislators is commendable: that’s exactly the spirit of the American Republic as it was established by the Founding Fathers, the different levels of government acting as a system of checks and balances to each other, protecting the life, liberty, and property of the people against injustice and tyranny.
The solution, however, is inadequate. The official adoption of an alternative currency – even if it is officially based on specie – is only adding to the problem, not solving it. The problem we have today with the US Dollar and the Federal Reserve will only be duplicated, on a state level. That problem is called “government.” It has been the problem in every economic and non-economic area in today’s world. Wherever we have left the government in charge, the result is exactly the same as it is with the US Dollar: total breakdown. Replacing one government with another, and replacing government paper money with government gold-backed money, is only jumping from the fry-pan into the fire. Even at the state level, even with specie-backed currency the government bureaucrats will have too much power to decide how many dollars per ounce of gold, what price ratio there will be between gold and silver, who gets the privilege to make the coins or the bills, whether the individuals and businesses will be forced to accept the new money as a means of exchange and payment of debts, etc. The breakdown of the US Dollar did not come as a result of lack of gold-backing; it is the result of abuse of monopolistic power by the Federal Reserve. There is no reason to believe that the bureaucrats of the Old Dominion are less susceptible to the same temptation.
Besides, there’s a practical problem: What happens when the US Dollar collapses? In case of an alternative official currency, Virginia will have to switch to the new currency. Such a move doesn’t happen overnight and doesn’t happen smoothly. In addition to the economic turmoil from the collapse of the US Dollar, another factor will be added. The author of this article lived in a nation with a 1000 percent inflation per annum, and then official denomination of the currency to 1/1000 of the previous value. It is painful, it is chaotic, and it creates long-term problems. The switch to the Euro in the late 1990s wasn’t a picnic either. Whole economies had to go through a mini – and not so mini – recession for a couple of years. Even if the bureaucrats of Virginia are the best bureaucrats in the world, and the most honest and hard working bureaucrats, they won’t be able to avoid the chaos related to such a complete overhaul of the monetary system.
There is another practical problem as well: How would we know if the US Dollar has collapsed? How would we know that the Fed has collapsed? For all practical purposes, they already have, and hundreds of economists these days point to this fact. But the dollar is still there on the market, and the Fed is still babbling about “monetary policies” as if this phrase has any meaning anymore. What keeps them alive? Government compulsion. In other words, the legal tender laws. Government compulsion – especially when enforced on a population that is generally law-abiding, as in America – can keep the stinky carcass of a long-dead currency appear alive for many decades, until the whole economy collapses. Europe is replete with examples like that, not only in the Communist countries in Eastern Europe but also in countries like Italy and Turkey. When a people is forced by the police power of the state to accept certain currency for settlement of debts and transactions, hyperinflation can destroy the whole economy without any appearance of collapse in the currency itself. When will we know the US Dollar has collapsed? Should we wait until the whole economy has evaporated to oblivion?
The solution for Virginia – and for every other state in the Union – is much simpler. It has been tried before, ironically, in the very same Virginia that is leading the revolt against the US Dollar. The solution is called . . . LIBERTY.
Legal tender laws must go. Virginia must declare all such laws by the Federal government null and void on the territory of the Old Dominion. Individuals and businesses must be allowed to decide between themselves what currency they want to use for settlement of debts and payments in transactions. No buyer should be forced by law to accept the US Dollar in payment for goods and services. No banker should be forced to deal in US Dollars. No transaction should be evaluated in US Dollars unless the parties concerned agreed to it. And Courts should be obligated to honor any debt contract presented to them for resolution no matter what currency it is specified in, even if it is wampums or tobacco notes.
Talking about wampums and tobacco notes, it was Virginia that gave the world these two great examples of free market money creation. The American colonies didn’t have an official currency, neither did the United States until the 1860s. For all practical purposes the “currency” of the time – gold and silver – had collapsed. They couldn’t be found at all. There wasn’t enough specie to back all the transactions of the colonial economy; the gold deposits of Yukon and California had to wait for yet another two generations to be discovered, and the Mexican silver peso, the first truly global currency, wasn’t available in large quantities to the American colonists because of the low level trade between the British colonies and Mexico. Gold and silver were scarce, and there was no Federal Reserve to print “one dollar” on pieces of paper and force them as legal tender on the population.
But the colonists had the freedom to decide between themselves what is money and what is not. They had carried over the Atlantic the old English custom of payment through “promissory notes,” possible only in a legal system of Common Law based on the Christian mindset of the population. But promissory notes were still only a substitute for gold and silver, and gold and silver were scarce. So the colonists resorted to other means of exchange, unheard of in Europe before. The started using the Indian custom of offering wampums – made of clam shells – as a means of exchange. The Indians seldom used the wampums for payment. The wampums played a rather ritual role in the Indian society. But in the economy of the entrepreneurial colonists the wampums quickly became a means of payment and settling debts. Following the widespread acceptance of wampums as a tender, many townships and colonies changed their laws to prescribe fines, taxes and tolls in wampums instead of silver. Then, when the cash value of tobacco was discovered, another means of exchange appeared: “tobacco notes.” Anglican parsons in Virginia were paid in tobacco notes, and the popularity of tobacco notes spread as far as Brazil and the Caribbean Islands. Many other means of exchange appeared as well. In the cash-strapped colonial economy, the entrepreneurial spirit of the colonists combined with freedom from government interference in the money market, anything could be money, as long as there was mutual acceptance of it.
Contrary to the modern economists’ predictions, such “chaos” in the money supply did not create constraints on the economy. To the contrary, the average American entrepreneur at the time expected a normal rate of return such as to double his assets every 3 to 4 years; anything less than that was considered “slow” growth. Many business tycoons rose in the colonies, not only in the naturally rich of resources South, but also as far north as Maine, where the land wouldn’t produce enough even for bare survival. Americans were getting prosperous even while gold and silver were such a rare occurrence that there wasn’t enough of it for jewelry. (That might have been the reason for the most famous silversmith of the colonies, Paul Revere, to switch to copper and iron after the Revolution.) Liberty and ingenuity overcame the problem of scarcity of cash, and the economy kept growing with a variety of “monies” used for payments and settlement of debts.
There is no reason to believe that the people of Virginia can’t do the same. If freed from the shackles of the legal tender laws, with the US Dollar disappearing – in value – from the market, Virginians don’t need their state legislature to tell them what they can and should use. They only need the liberty to do it.
What will the consequences be of a repeal of the legal tender laws?
The first consequence will be that the residents of the Commonwealth will be able to gradually shift to other currencies. Unlike any government-imposed solutions where the shift to a different currency will have to happen with a short time and across the board, a market freed of government compulsion will give the participants the time to decide when and to what currency they want to switch to. Some will still prefer the US Dollar. Some will start using gold and silver. Some will prefer barter transactions, especially in the local communities. The possibilities provided by the freedom of the market will make many individuals and businesses consider the cash value of different goods and services. May be the old “promissory notes” will reappear. There may be also different ways of making and settling debt contracts unknown to us today, in our regulated economy. (I am sure no one in Europe before the 1600s ever thought of using wampums or tobacco notes for money.) More and more, with the depreciation of the US Dollar, the economy of Virginia will move to other types of currencies, by the free will of the people, and by their ingenuity. The state legislature won’t have to interfere; only the courts should involve when contracts are not honored.
The second consequence will be that in an economy based on many different currencies the US government will see its tax revenues decrease. Since Federal taxes can be based on US Dollar transactions only, IRS will have increasing difficulties tracking transactions that are based on other currencies. The economy of Virginia may increase but the Federal government won’t get its share of this increase . . . unless, of course, the Federal government itself abandons its own legal tender laws and admits other currencies as legal tender as well.
In addition to it, third, the Federal government will find that its depreciating dollars can buy less and less in Virginia. A market that is free will establish free exchange rates between the US dollar and the newly adopted currencies – a price denominated in US Dollars will always include a premium for expected future depreciation. In this way, the Federal government will get a dose of its own medicine, without harming the producers and the buyers in the process.
Fourth, following from the above, many people will be less willing to take federal government jobs – if one is paid by ever depreciating US Dollars, they will be more willing to look for alternatives to a Federal job, for stable currency rather than fiat money. This in turn will free human capital for productive uses, as over against tying that same capital in the destructive process of re-distribution of wealth.
Fifth, if Virginia frees its people from the US Dollar, this will also bring freedom from a banking and loan system that has been exclusively set up upon inflationary basis. In an inflationary system of legal tender laws it’s the banks that have the first access to the newly created money – or even, under the fractional reserve banking rules, create new money themselves – and therefore the banks hold an immoral advantage over their clients. The existing banks will see their power over the economy diminish due to the bad currency, the US Dollar, being pushed out of the market. While this per se is not a guarantee for the establishment of a new, honest banking system, it will at least create the conditions for it.
Sixth, and very important, the very competition to the US Dollar will force the Federal Reserve to stop inflating – unless the Feds want to phase themselves out of existence. This may be the beginning of the actual salvation of the US Dollar. Of course, we all know that if the Fed stops inflating, this will create recession and may be even depression in the economy today; but that is only because our economy is strangled by legal tender laws. Virginia, if her economy is freed from that limitation, won’t have to go through recession since it will have made the smooth transition to free market currencies and won’t be harmed by the Fed’s inflation and deflation measures.
In other words, if the legislators of the Commonwealth are really concerned for the future of the Virginian economy, the solution is simple: Declare the legal tender laws not valid on the territory of Virginia. And then leave Virginians to employ their ingenuity, entrepreneurship, and skill in remaking their economy on the foundation of liberty. They have done it before. They can do it now.