It's private!

In the midst of my previous argument about the gold standard, a number of libertarians advocated private money. Perhaps it would work. But there's a big empirical hurdle to overcome, notably, why doesn't it already exist? There's no reason that you couldn't start your own currency now; sure, you couldn't pay your taxes with it, but assuming a reasonable exchange rate, even that wouldn't be a problem.

We already have credible currencies with pretty strong competition between them. Why would anyone adopt yours? If you think you have a good answer, you should start a bank.

Comments

I'm curious how expensive it is to keep a currency from being counterfitted?

Posted by Ryan W. | September 17, 2007 6:24 PM

I have 3000 gold in the World of Warcraft bank. Does that count?

Posted by Michael | September 17, 2007 6:36 PM

Michael beat me to it. Gold pieces, platinum pieces, and Linden dollars are quite liquid.

Posted by Kwyjibo | September 17, 2007 6:40 PM

The major driving force behind a money's value is, "how many *other* people use it?" This network effect/path dependency is extremely difficult to overcome; a money must be pretty bad before people will consider something else.

I think you're understating the impact of "you can pay taxes with it". That utility generates a disproportionate network effect. Even if you don't need much money to personally pay taxes with (and you do), all that matters is that you'll be buying from someone who will. Or you'll be buying from someone who will be buying from someone who will. Ad infinitum. (Another source of utility for US dollars is the historical fact that so many debts have been denominated in dollars.)

That said, there are private currencies popping up, mainly MMORPG money units, and they do have stable exchange rates with USDs.

Posted by Person | September 17, 2007 6:40 PM

There's no reason that you couldn't start your own currency now; sure, you couldn't pay your taxes with it, but assuming a reasonable exchange rate, even that wouldn't be a problem

Actually, there are both extant private currencies and legal barriers to their usage. The Liberty Dollar (and federal reaction to it) provides an example of both. While it hasn't been banned outright, I can see how the significant legal ambiguities surrounding private currencies would limit their adoption to people trying to make a point.

Nor have they been historically unheard of - privately issued currencies were common in the first half of the 19th century.

Of course, necessity is the mother of invention, and it's not uncommon to see reversion to improvised commodity currencies when the official currency in an area is being seriously mismanaged.

Posted by MattXIV | September 17, 2007 6:46 PM

I know a guy who tried to create his own currency. It didn’t work out so well. Here’s a partial transcript:

Dwight: Very good. You have earned one Schrute buck.

Stanley: I don't want it.

Dwight: Then you have been deducted 50 Schrute bucks.

Stanley: Make it a hundred.

Dwight: Wh...don't you wanna earn Schrute bucks?

Stanley: No. In fact, I'll give you a billion Stanley nickels if you never talk to me again.

Dwight: What's the ratio of Stanley nickels to Schrute bucks?

Stanley: The same as the ratio of unicorns to leprechauns.

Posted by Thorley Winston | September 17, 2007 6:52 PM

How about a completely electronic currency (backed by gold) housed in off shore servers for people who want money that can't be traced. (From the novel Cryptonomicon by Neal Stephenson)

Posted by will perkins | September 17, 2007 7:03 PM

you couldn't pay your taxes with it,

As I recall, you can't pay your taxes with Linden Dollars, but the IRS was looking at taxing you on the Linden Dollars you make, since they are convertible into US dollars.

Posted by Al | September 17, 2007 7:09 PM

"Start your own bank."
That's exactly what happened in the 16th century, before governments made it illegal. Goldsmiths, trading of deposit notes, and so on. The only real difficulty was fraud, which we today call "fractional reserve banking." The government solution put at east most of the concerns over fraud by... legalizing it.

Please read more Rothbard before posting about gold again. Please.

Posted by Noah Yetter | September 17, 2007 7:11 PM

We already have private currencies. They are called travelers checks.

Posted by Bruce Bartlett | September 17, 2007 7:28 PM

Gold pieces, platinum pieces, and Linden dollars are quite liquid.

I bought 3,000 WoW gold to get my epic mount, and an interesting thing happened: Blizzard intercepted one of the money drops and disappeared it. I received an ingame mail with 1,400 gold attached and a confirmation email to my Yahoo account; later, I received a confirmation email to my Yahoo account telling me that 2,000 had been sent, but I didn't receive it ingame. The confirmation email mentioned that I should retrieve it as soon as possible, because Blizzard scans for money drops like this and deletes them.

I bought from an outfit with live chat support, so I jumped on and complained. They rescheduled a delivery and I got the 2,000 a couple hours later. But all the hype about the actual liquidity of virtual gold seemed pretty hollow after that, with the ability of the platform administrators to erase that liquidity on the basis of arbitrary policy decisions unrelated (or even hostile) to the health of that market.

Posted by Justin JJ | September 17, 2007 7:30 PM

Barter systems take on some of the roles of money, with the notable exception of taxes. I've run into them in the SF Bay area and Portland, Oregon.

Posted by Lorenzo | September 17, 2007 7:36 PM

For once, I want someone to explain to me what the alternative is to a fractional reserve banking system.

Posted by Kwyjibo | September 17, 2007 8:06 PM

Is this guy serious? "I remember when gas was $.29 a gallon." And you know whose fault it is? The Federal Reserve.

http://www.lvrj.com/opinion/9676142.html

Posted by Matt B | September 17, 2007 8:30 PM

Kwyjibo and all: Google "paul birch honest money" for an explanation of a non-crank alternative. That essay, by way, has some interesting insights.

Posted by Person | September 17, 2007 8:32 PM

Governments are always (and rightfully) hostile to private money. That's why Lincoln had to get rid of it in the 1860's.
When we went off gold the first time (well, counting the gold suspensions before, maybe the fifth time) it was because private money was displacing government money and causing inflation. Or more precisely, keeping the government from profiting from inflation.
That's why issuance of private banknotes is taxed, regulated, and effectively prohibited. It's not the tax issue. I think there are a lot of people who would cheerfully pay the legal 10% tax on private money, it's that the government has made it clear that it doesn't want people to have private money and will issue new regulations anytime anyone figures a way around the ones we have now.
Rich people got around this with "Bearer Bonds" for a while, but even those were later made effectively illegal in the seventies and eighties. Too convenient for tax evasion by rich people.
The issuance of bonds payable in gold was made illegal by the Roosevelt administration. Want to bet what would happen if you tried to issue banknotes backed by gasoline, sugar, or wheat?
Commodity traders can have the rules changed at any time, but at least the government has to persuade the group of people running a commodity exchange that they need to go along with it.

Posted by wkwillis | September 17, 2007 8:43 PM

Suprynowicz is greatly misrepresenting what the Fed did. The Fed did NOT do anything analogous to giving free money to people. It loaned a few banks money for three days, that they had to pay back with interest. It did not buy up their bad debt. It required them to put up their highest-grade bonds as collateral, not the subprime junk.

People forget that the inflationary effect of new dollars is offset by the greater demand for dollars that its injection produces, since it comes in as a loan.

Posted by Person | September 17, 2007 8:44 PM

The WSJ reported on the expansion of a private currency in China, QQ coins. Trade in QQ totaled $900 million last year.

Posted by Alejandro Gonzalez | September 17, 2007 9:24 PM

Money should be an adjective, not a noun. You can look at stock certificates as a form of money - fiat money, yes, but when traded they have a market value, and companies do use them to buy and sell each other and to pay employees.

Posted by Kevin Marks | September 17, 2007 9:34 PM

""Start your own bank."
That's exactly what happened in the 16th century, before governments made it illegal. Goldsmiths, trading of deposit notes, and so on. The only real difficulty was fraud, which we today call "fractional reserve banking." The government solution put at east most of the concerns over fraud by... legalizing it.

Please read more Rothbard before posting about gold again. Please."

"When we went off gold the first time (well, counting the gold suspensions before, maybe the fifth time) it was because private money was displacing government money and causing inflation. Or more precisely, keeping the government from profiting from inflation.
That's why issuance of private banknotes is taxed, regulated, and effectively prohibited. It's not the tax issue. I think there are a lot of people who would cheerfully pay the legal 10% tax on private money, it's that the government has made it clear that it doesn't want people to have private money and will issue new regulations anytime anyone figures a way around the ones we have now."

"I think you're understating the impact of "you can pay taxes with it". That utility generates a disproportionate network effect. Even if you don't need much money to personally pay taxes with (and you do), all that matters is that you'll be buying from someone who will. Or you'll be buying from someone who will be buying from someone who will. Ad infinitum. (Another source of utility for US dollars is the historical fact that so many debts have been denominated in dollars.)"

"Actually, there are both extant private currencies and legal barriers to their usage. The Liberty Dollar (and federal reaction to it) provides an example of both. While it hasn't been banned outright, I can see how the significant legal ambiguities surrounding private currencies would limit their adoption to people trying to make a point.

Nor have they been historically unheard of - privately issued currencies were common in the first half of the 19th century."

Posted by MEH | September 17, 2007 9:46 PM

btw, thanks, offered, to the, above, quotees

Posted by Mark E Hoffer | September 17, 2007 9:48 PM

All states controlling money monopolies gravitate to legal tender laws. That boilerplate on your dollar saying "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS PUBLIC AND PRIVATE"? That's not boilerplate, Megan. It's a law. It means I can pay you back with the fiat dollar regardless of what you want. You must accept payment with the privileged currency.

So, say I borrow $10000 some fancy new gold-backed currency from you, owing you $20000 after 10 years. In 10 years, the Fed has devalued the fiat dollar such that for me to repay you in gold would require me buying $30000 in gold. Guess what I do?

Gresham's law thus reigns: bad money drives out good.

Posted by Leonard | September 17, 2007 10:03 PM

Have you heard of the Ithaca Hour? It's local currency system started in Ithaca, NY, in 1991.

Posted by Avram | September 17, 2007 10:09 PM

Leonard:

That's not boilerplate, Megan. It's a law. It means I can pay you back with the fiat dollar regardless of what you want. You must accept payment with the privileged currency.

No, it means that debts in U.S. dollars can be repaid in U.S. currency. You are free to agree by contract that assets lent must be repaid in cash, in kind, or in whatever form you wish.

Posted by Kwyjibo | September 17, 2007 10:19 PM

Don't forget Canadian Tire Money... which is primarily used as script at Canadian Tire, but is also used as actual currency in some parts of Canada. eBay Canada even recognizes it as an official form of payment.

Posted by Nick | September 17, 2007 10:26 PM

As I recall, your former employer once characterized airline frequent flier miles as a quasi-currency--hyperinflated, at that, and due for a major crunch. But, if viewed as a currency, it is one of the world's largest, and least noted.

Posted by Kosmo | September 17, 2007 11:09 PM

Megan, one reason why it is difficult to have a private currency is that in the US you have to pay capital gains tax on income from currency appreciation. So if there were a private currency with zero inflation and dollars had positive inflation, holdings in that currency which were later converted to dollars would be subject to taxation, because the private currency would appreciate relative to the dollar over time (PPP). The US government uses the capital gains tax as a barrier to entry in the currency market.

Posted by Eli | September 17, 2007 11:46 PM

Berkshire Massachusetts, in fact, prints its own money -- just under $1,000,000 of it is in circulation. It's meant to be spent just on small, local businesses, but it's taking on a life of its own.

http://abcnews.go.com/WNT/Business/story?id=2903049

Posted by Ivan Hoyne | September 18, 2007 7:28 AM

Emperor Norton, call your agent.

Posted by jonathan | September 18, 2007 8:34 AM

And in some sense, we already have "competing moneys," namely the demand deposits of commercial banks. These are privately produced (of course, based on reserves not-privately supplied by the Fed) and compete with each other for customer business. With the development of debit cards and their increasing substitution for cash for small purchases, we are moving a step closer to even more competitive money production.

The problem, of course, is that paper currency, because it is monopolistically produced by the Fed, also counts as bank reserves. I'm far less worried, as a libertarian, about finding private alternatives to paper currency for consumer transactions (as technology is getting us there) than finding ways to freeze or eliminate the Fed's control over reserves. That's where gold or other proposals for different base moneys become relevant.

Posted by Steve Horwitz | September 18, 2007 9:06 AM

Ithaca Hours are still alive and well. But there is no bank, and there is no conversion between Ithaca Hours and U.S. currency. It's an interesting phenomenom.

In my visits to Ithaca, I've noticed that it is a strange little town, with the politics running from the Greens on the far left to the Democrats on the far right. Moderates are labeled as far right wing. Ordinary right wingers are labeled as extremists. The bumper sticker that defines Ithaca as 10.2 square miles surrounded by reality hits the nail right on the head.

Many of the local eateries serve sandwiches in three styles: ordinary, vegetarian, and vegan.

Two colleges form the main industry in Ithaca: Ithaca College and Cornell University. As they say, you can always tell a professor at Cornell, but you can't tell him (her) much.

Many Ithacans view the federal governement as too right wing, even the Clintonistas. Hilary is lambasted because she supported the war in Iraq. Paul Glover, who founded Ithaca Hours, brags that he makes just the right amount of money so that he doesn't have to pay income taxes.

Posted by Rex | September 18, 2007 10:22 AM

Corporations use their own stock and warrants to buy companies, to buy services and to get loans. Recipients can easily convert publicly traded stock into greenbacks.

Posted by Béziers | September 18, 2007 6:51 PM

I recall Madison Hours from my days in Wisconsin. It's been a while, so I may be off on the details, but as I recall:

They were tradeable, on face, for $10/hour. Oddly enough that was the prevailing definition of "living wage" in local politics. Each was "worth" an hour's work from somebody. The trick was, finding somebody who charged more than $10/hour, who felt willing to trade his services for this paper, which was pretty much redeemable at the Mifflin St Coop and the Willie St Coop (two small, but nicely diverse, grocery stores) and nowhere else that I recall.

There was a small but devoted subcommunity which was very willing to sell their services in "Madison Hours" and, frankly, quite desperate to buy other people's services in "Madison Hours."

It was always fun to point out the dichotomy: You lambast a plumber, say, from refusing to take this quasi-money because he felt he could do better charging his hourly dollar rate, in universal tender. You insist he work for your hourly rate, and get flustered when the answer is "no. Hire some other sucker."

Perhaps this is the single biggest factor. Like "small l" libertarians being overshadowed by "Big L" LIBERTARIANS (use your own definitions: I use- small l = uses common sense; Big L = stands on ideology until it sinks, then grabs a snorkel) the private currency folks are just plain overwhelmed by the nutjobs who want currency to mean "what I think it should mean" not "what the market thinks it should mean."

With that rather large hurdle, little things like "only 2 stores in town will take this money" seem pretty tiny in comparison.

I don't even know if they still exist; I moved out in 2001 and they were dying out among the moderate fanatics even then. Funny about only being able to pay the people you wouldn't want to hire being a damper on your enthusiasm. But as long as you could buy groceries, there was an outlet for them. I knew a couple people at the coops, but I knew enough to not talk economics with them. Who knows, you may still be able to buy groceries with Madison Hours.

Posted by Dr_Mike | September 18, 2007 8:25 PM