Dissing the Fed

One of the most interesting things about the current presidential campaign is the sudden interest in the Federal Reserve Bank. When was the last time monetary policy got this much public attention? During Carter's 21% inflation? When Nixon severed the last link between the dollar and gold? We might have to go all the way back to when Roosevelt confiscated gold in 1933.

Of course, all of the chatter is coming from one candidate --Ron Paul.

His most intriguing notion is that the Federal Reserve Bank needs some competition. At first, this sounds like a rather impractical idea. However, I can safely say that the technology needed to make this a reality is already in widespread use today.

Money serves two purposes in society. First, it's a "medium of exchange", which means that it facilitates buying and selling. Second, it's a "store of value", which means that it should retain its purchasing power into the future.

The dollar is a widely accepted medium of exchange in the U.S. because the government mandates it as such. However, the dollar has not been a particularly good store of value over the last 100 years or so. There are a lot of ways to compare the value of a dollar between the creation of the Federal Reserve in 1913 and today. All of them show that the dollar is now only worth between 1 penny and 6 cents. It's not a good track record.

Fortunately for us, the dollar has lost its value gradually enough as to not cause major social unrest. Other societies haven't been so fortunate. In Germany, government monetary shenanigans after WWI caused a hyperinflation that wiped out the middle class and set the stage for Hitler.

In the U.S., you both save and buy things in dollars. However, it's actually quite possible to save in one currency and buy in another. In fact, it's done all of the time. I've been in over 25 countries. In all of them, I can use the debit card from my American bank to withdraw money from an ATM or buy things in the local currency. The ATM network takes care of figuring how many dollars to deduct from my bank account given the amount of local money I'm spending.

It's also possible to have a system where you can save in multiple currencies. Swiss banks allow you to have accounts denominated in any number of currencies, including U.S. dollars, Euros, and Swiss Francs.

So, there isn’t any technical reason that you couldn't save in whatever currency you want and buy things that are priced in another currency. The only thing that prevents you from doing this today are government laws that exist to protect the monopoly of the Federal Reserve Bank.

The same technology that already exists to support multiple coexisting national currencies could also support multiple coexisting privately issued currencies. As is the case with anything else, competition in currencies could help create a more robust and sound monetary system. Currencies that lose value over time would lose customers to better currencies and wouldn't be widely accepted as either a store of value or medium of exchange.

What about cash? There are times when you want your purchases to be anonymous. No problem. There are many examples of cards that have the characteristics of cash on the market today. Pre-paid cell phone cards and Starbucks cards are just two examples. There isn't any reason why the industry couldn't evolve a set of interoperability standards for generic cash cards, just like they have for debit cards.

Who would issue these private currencies? Financial institutions would be a good bet. My guess is that some large technology companies might be eager to do this as well.

So, despite the horror displayed by myopic mainstream pundits, Ron Paul's idea about competing currencies really isn't so crazy after all.