Monday, November 17, 2008

The Scale of Economies part II

Let me ask you a question. Go back to the nightmare scenario where you are starving to death, cold, alone, and in the dark. Someone approaches you and offers you food, shelter, clothing, and electricity, in return for your time, your labor, or some physical commodity you do possess. Would you be willing to discuss terms of exchange, rather than suffer and die?

If the answer is yes, then you are already on the path towards understanding how a stateless economy could work. If the answer is no, and not based on fear, or ignorance, or pride, but really truly objectively no, and you would rather suffer and die than engage in commerce then I have bad news for you. No system, with or without a state can help you. Your self destructive behavior will bring you only ruin, and you will accomplish nothing with your life.

For the rest of you, you have already grasped the basic tenant of commerce. I have something you need, I need something you have, and we trade. It's uncomplicated and rational. I explained in my post on Fiat Currency about the coincidence of wants and the need for intermediate forms of exchange, so you already understand why currencies exist. The question now is how currencies exist, and how they could exist free from the state.

While the government maintains its violent monopoly on the printing of currency, several independent organizations have attempted to introduce their own private means of exchange. Ithica Hours, Toronto Dollars, and Calgary Dollars are all examples of private local currency. These currencies are used by community businesses to buy and sell goods amongst themselves. Any company who agrees to accept these currencies as legal tender may, even if they are from outside of the community, but since most of the businesses currently accepting them are locally owned and operated, most of the currency is reinvested in the local economy.

Other forms of alternative currencies include electronic currencies such as PayPal, which buys liquid currency from one user in exchange for electronic credit, and sells that currency to another for a fee, and Mon€o, which allows users to convert French currency into electronic currency and then spend that at retailers, who can then convert it back to French currency. These types of electronic currency are essentially backed by the locally traded Fiat Currency, but exist as separate means of exchange. There exist also a number of companies which offer digital gold currency. This type of currency is similar to representative gold notes which are redeemable to the bearer on demand for an equivalent amount of gold in grams, troy onces, or on occasion dinars.

I give these examples in order to illustrate a simple point. Alternative currencies are a reality. They have existed in competition to national currencies, they exist now, and they would thrive in the absence of legal tender laws and government monopolies. Legal tender laws historically exist to force people to accept money that they would not if free from coercion.

On their own, sellers would never accept valueless currency over valuable currency. Instead, valueless, or “bad,” currency would disappear from circulation and only valuable, or “good,” currency would be used. It is only when governments enforce legal tender laws that buyers accept bad currency. Under legal tender laws, bad currency drives out good, because sellers use the bad currency to purchase goods while hoarding the good currency, and buyers have no choice but to accept it. Meanwhile, the good currency may have greater intrinsic value than face value, and so can be traded against its intrinsic value instead, or traded internationally at greater than face value where legal tender laws may not have jurisdiction. This is called Gresham's Law.

It is specifically because of Gresham's Law that governments attempt to prevent the printing and pressing of private currencies. They know that their currency could not possibly compete with real commodity backed currencies, so they force buyers to accept their bad currency by law, knowing that in so doing they will push good currencies out of circulation.

But even in the face of government raids, legal tender laws, and a coercive violent monopoly, alternative currencies are spreading. The internet is being used to further the creation and use of electronic currencies. Communities are using their own local currencies concurrent with, or even instead of, fiat currencies. More and more people are trading energy, precious metals, and commodities for goods and services. And this is all because people know that the fiat currency is garbage, and they wish to trade value for value. Even when the state tries to prevent it, the market seeks fair trade. Value for value.

So, knowing that alternative currencies exist, and knowing what we desire in an alternative currency, how could the market provide them? How could they address people's fears of fungibility, liquidity, and stability? How could banks simplify exchange between competing currencies? How could buyers and sellers make sure that they avoided the coincidence of wants problem by always trading in common currency? Well, there are answers to these questions, but before I lay them out for you, consider the situation we have now.

People all over the world use different currencies. How do international banks make sure that international debts are payed in the proper currency? How do border towns conduct business with migrant customers? How are sellers able to accept a variety of major credit cards for the same good or service? How does your local pizzeria accept your check regardless of what bank it is written against? How do online sellers do business with people all over the world? Perhaps competing currencies work better than the man with the gun would like us to believe.

Perhaps it would work after all.

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