January 21, 2015 Ryan McMaken
The Swiss central bank’s recent move to de-peg the Swiss franc from the euro reminds us of the importance of choice in currency.
By pegging the Swiss franc to the euro, the Swiss central bank was in effect subsidizing the euro by refusing to compete with it. If carried into the long term, this would have meant a de facto monetary union between the euro and the franc. Fortunately for most people however, the Swiss central bank maintained its legal independence from the euro and the peg was eventually ended, thus freeing the holders of Swiss francs from the new round of money-supply inflation that is expected from the European Central Bank.
Those who have their savings in euros are not so lucky. Those in the Eurozone who work hard to save and invest will have the value of their euros reduced to further subsidize and bail out politically-connected investors who have financed southern European governments. All the while, the government of the European Union will enrich itself and its friends through the money-creation mechanism. Such are the expected results of the expansion of government’s money monopoly in the Eurozone.
The Government’s Money Monopoly
The European monetary experiment illustrates anew for us how a monetary monopoly is an indispensable component of an effort to achieve political unity and more powerful government. As Philipp Bagus has noted, the currency known as the euro is just as much a political instrument as it is an economic one. It greatly enhances the monopoly power enjoyed by the nascent state known as the European Union without having to first achieve true de jure political union. The central bankers of a unified Europe are far more powerful than the central bankers of any one European state could ever hope to be.
Although much further down the road in this respect, the United States is subject to a monetary union similar in many ways to that of the European Union. In the eighteenth century, state currencies were abolished with the victory of the new American Constitution in 1788, and the First Bank of the United States was created shortly thereafter. At that point, the central government’s control of the money supply was far from complete, however. A true functioning monopoly over the money supply did not arrive until the twentieth century with the Federal Reserve System, which through its regulatory power was able to impose a de facto money monopoly on the United States.
Today, it is nearly impossible to conduct business in the United States without using US dollars, and the federal government, which tightly regulates the financial system, greatly discourages to the point of utter impracticality the use of privately-produced or foreign currency for daily business in the US.
Why Currency Competition Is Important
From a central planner’s perspective, the ideal monetary situation is a single global currency controlled by a single central bank. With only one currency, a government could inflate at will without threat from any competing currency save a black market trade in commodity monies, which would of course be outlawed. In other words, the less competition a central bank has from other currencies, the better.
Toward the other end of this spectrum is a global economy with at least dozens of competing currencies. Some currencies would be more stable and respectable than others, but all would be at least somewhat restrained by the knowledge that every currency, if devalued too much, will at some point be abandoned in favor of a more reliable and stable currency.
Thus, if one wishes to restrict the power of states, and to enhance personal and economic freedom, one of the most meaningful first steps must be to oppose state control over the money supply, and failing that, to weaken the state’s monopoly through competition and secession.
Baby Steps Toward Currency Freedom
Interestingly, in spite of a century of a totally centralized money supply, and a constitutional prohibition on state-issued currency, some American states still imagine themselves as having a role in the monetary system. In the wake of the 2008 financial crisis, for example, lawmakers from thirteen states suggested their home states take advantage of a loophole in the Constitution (of sorts) and make gold and silver coins legal tender in their states as a hedge against economic disaster. Utah went slightly further:
Utah became the first state to introduce its own alternative currency when Governor Gary Herbert signed a bill into law [in 2011] that recognized gold and silver coins issued by the U.S. Mint as an acceptable form of payment. Under the law, the coins — which include American Gold and Silver Eagles — are treated the same as U.S. dollars for tax purposes, eliminating capital gains taxes.
Since the face value of some U.S.-minted gold and silver coins — like the one-ounce, $50 American Gold Eagle coin — is so much less than the metal value ... the new law allows the coins to be exchanged at their market value, based on weight and fineness.
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