22. The Ray of Hope: Free Market for Money and Private Law Society

To reverse the trend and reduce the role of government in our lives … is a giant educational task.
– HANS F. SENNHOLZ

A free market for money means two things. On the one hand, those demanding money can freely choose what they want to use as money—for transaction and saving purposes. On the other hand, every market participant has the freedom to try to offer his fellow human beings a good which they want to demand voluntarily as money. But wouldn’t that lead straight to “money chaos”? Wouldn’t hundreds, maybe even thousands of types of money circulate and thus make financial calculation impossible in the national economy? And wouldn’t that undermine the efficiency of the economy? This concern is unfounded.

The money demander plays the decisive role. In a free market for money, anyone who asks for money will, out of self-interest, ask for a good that has the greatest possible marketability, a good that is recognized by its trading partners as the generally accepted medium of exchange: money. What do you offer the baker? It is best to offer something that the baker can use to buy shoes from a cobbler or shirts from a tailor. In a free market for money, people will demand a good as money that finds the widest acceptance, that is regarded by the largest number of people as a medium of exchange. The choice of the good that serves as money is based on the wishes of the trading partners.

But what if Mrs. A offers colorfully printed paper slips and says that these are “good money”? The answer is that no one would accept her paper slips as money. Why not? Quite simple: you wouldn’t know what these colorful notes are worth, or what you could get for them in exchange. That’s why no one would demand them as money. This is exactly what Ludwig von Mises has shown with his regression theorem: money must arise from a good that has already had a nonmonetary market value before it can be used as money. This is not the case for colorful and arbitrarily printed paper slips. They would not be able to compete against other goods such as gold and silver.

In a free market for money, people will demand a good that possesses the physical qualities that “good money” must have. Such a good must, for example, be scarce, storable, transportable, divisible, malleable, and transferable, and it must also be regarded as valuable.122 If we take into account the experience of currency history, it seems quite probable that money would still be chosen in the form of precious metals today—above all in the form of gold and silver. But crypto-units could also possibly assert themselves as money in the future. The choice people will ultimately make in a free market for money cannot be predicted with certainty from today’s perspective.

If people opt for precious metals as money, this would be anything but a step backward compared to the unbacked fiat money. No one would have to carry jangling coins around in their pockets. The use of gold and silver can be digitalized. All kinds of payments that are common today could be carried out easily and problem-free with gold and silver. If cash is desired, precious metal coins circulate, or banknotes can be used that can be exchanged 100 percent for physical gold at the storage facility that issued the banknotes. Cashless payment transactions are also possible in the usual way when using gold money: bank transfer, direct debit, crossed check, payments by credit and debit card, mobile payment, bills of exchange, etc.

In a free market for money, two types of banks will emerge which legally will have to operate separately from each other: deposit and credit banks. Deposit banks offer storage, security, and payment services. For example, they provide storage capacity for physical gold and silver, protect the stored precious metals against theft, and also process cashless payments in precious metal money (settlement services). They charge their customers a fee for this. Deposit banks compete with each other for the best storage and payment services on the best terms.

Credit banks grant loans to credit seekers. The credit banks procure the money that is lent by issuing shares or debt securities on the capital market. For example, they offer savers interest-bearing securities in exchange for gold money. The savers transfer their purchasing power to the credit bank for the duration of the credit agreement, and the credit bank lends the money to the borrower. Although credit banks increase the volume of credit in the economy by granting credit, they do not create new money and do not distort market interest rates (as is the case in today’s fiat money system).

In a free market for money, in which a good that cannot be multiplied at will (by granting credit) is chosen as money, the credit market can exercise its intended function undisturbed: the supply of and demand for savings creates a market interest rate that ensures that sufficient savings are available to make the investments. This puts an end to the chronic economic disruptions (boom and bust) caused by the issuance of fiat money. Because the banking business is not inflationary, the nonmarket (antisocial) redistributive effects of fiat money also cease.

FREE MARKET FOR MONEY—ANSWERS TO PRESSING QUESTIONS

Anyone who hears about free market money and free banking will probably pose the question: Can this work? Below are some important questions and short answers.

What happens if a deposit bank goes bankrupt? Like any company, a deposit bank can go bankrupt. However, the customer who has deposited his gold with the deposit bank does not suffer any loss: the depository bank is “only” the depository for his gold. In the event of bankruptcy, the creditors of the deposit bank have no access to the stored gold. It still belongs to the bank’s customers.

Are there crises in a free market money system? Yes, there will probably also be crises in an economy where there is a free market for money. But no longer monetary crises such as the fiat money system necessarily produces.

Is there credit in a free market money system? Yes. Credit banks offer savers interest-bearing bonds. The money obtained in this way is then passed on as loans to credit seekers. However, the creation of credit by the credit banks leaves the money supply unchanged.

What happens if the money supply is so tight that goods prices fall over time? That wouldn’t be a problem. The purchasing power of the money that consumers possess increases over time. It is therefore possible to reduce money holdings and demand additional goods. When commodity prices fall, companies are faced with no other challenge than rising commodity prices: their profit corresponds to the margin between turnover and costs. If prices rise, companies must ensure that their costs do not rise more than their sales; if prices fall, they must ensure that their costs decrease more than their sales.

Is there any demand for goods at all when the prices of goods fall? Yes. To explain this, let us assume that a car costs €50,000  today, and only €40,000 in a year. Those who absolutely need a car now and immediately (because, for example, their old one is broken) will buy it today. As a general rule, whether you buy now or wait to purchase depends on the time preference. Of course, the (marginal) benefit of buying a car for €50,000 (U1) is lower than of buying it for €40,000 (U2). In order to decide whether to buy today or in a year’s time, however, the actor will compare the (marginal) utility of the purchase today with the (marginal) utility of the purchase in a year’s time, discounted at his personal time preference rate (r, or originary interest rate). If U1 > U2 / (1 + r) applies, then he buys today; and if U1 < U2 / (1 + r) applies, he will wait to make his purchase. We should therefore not believe that the economy would come to a standstill if commodity prices were to fall, because nobody would buy anymore! This will not happen—if only because there are nonsuspensive needs and also because the time preference (rate) is always and everywhere positive, because time preference and originary interest can never fall to zero (let alone become negative).

What does it mean for the credit market if prices fall? There is a credit market even when commodity prices are falling. Only it would be much smaller than in today’s fiat money system: debt financing becomes more expensive for the borrower—compared to credit financing in the fiat money system. At the same time, the external financing of companies by issuing new shares (in the case of stock corporations) or company member shares (in the case of partnerships) gains in importance. For old-age provision, savings would no longer be primarily in the form of debt securities, but above all in the form of money (which gains in purchasing power over time) and in the form of company shares.

Wouldn’t a free banking system lead to a monopoly? In a free market for money and banks, moneyholders are free to choose the deposit bank that appears to them to be the best in comparison. New providers are always ready to attract dissatisfied customers of the deposit banks with newer and better offers. Under competitive conditions, no compulsory monopoly develops.

It is likely that in a free market for money, in addition to deposit and credit banks, other service providers will establish themselves, such as currency market and equity traders, derivatives and credit trading specialists, private equity firms, mergers and acquisitions (M&A) providers, providers of insurance services, etc., and that the market for money will also become more open. In a free market for money all kinds of modern financial and risk-hedging transactions are possible. However, the credit and financial market would be much smaller than it is in today’s fiat money system. Far fewer people would work in the banking and financial sector, and labor and scarce resources would be used to a greater extent than is the case today in the production of goods.

In a free market for money, there is no central bank and no state supervisory or regulatory authorities. All that is necessary for the functioning of a free market for money is a functioning legal order which ensures that the contracting parties fulfill their obligations and that infringements of contractual agreements are effectively sanctioned: for example, that the stored commodity money is not embezzled, that banknotes can be exchanged for the money base at any time at face value. In order to guarantee this, there is no need for state monopolies of law. Jurisprudence and law enforcement can also be organized in the free market (we will return to the issue later).123

A free market money system—with free choice of money and bank freedom—is not a national but an international concept. If trade takes place internationally, across national borders, the market participants select the good to use as money with the same calculation as is used at the national level. Every user of money has an economic incentive to demand as money that good which he thinks is the most attractive means of exchange from his trading partner’s point of view. The idea of a free market for money is thus global in the truest sense of the word: just as free trade knows no national borders, so a free market for money extends globally.

As the previous chapters have shown, a free market for money is incompatible with the state as we know it today, namely as a territorial compulsory monopolist with ultimate power of decision over all conflicts in its territory. There is no question that a free market for money requires far-reaching changes in people’s thinking. This insight was formulated by Ludwig von Mises in 1923:

The belief that a sound monetary system can once again be attained without making substantial changes in economic policy is a serious error. What is needed first and foremost is to renounce all inflationist fallacies. This renunciation cannot last, however, if it is not firmly grounded on a full and complete divorce of ideology from all imperialist, militarist, protectionist, statist, and socialist ideas.124

The state is a logical impossibility, a monstrous inconsistency: it is a property-destroying property protector and a law-breaking law protector.125 But what follows from this analytical insight? Is the state in today’s configuration an unavoidable evil that must be accepted inevitably and grudgingly because it is essential, because without it there can be neither justice nor security? It is tempting to answer this question in the affirmative: after all, reality shows that there are always people who disregard the property rights of their fellow human beings, who cheat, steal, rob, and murder. Honest people must protect themselves against such evildoers, and therefore law and security and their enforcement are needed. This is the only way it is possible for people to coexist peacefully and productively in the community. The conclusion is therefore that the state is indispensable.

But let’s be careful not to react too hastily. If we see monkeys riding a bicycle, then we cannot conclude that only monkeys can ride a bicycle. If we think that, we are subject to a logical fallacy, a non sequitur. If the goods law and security are in demand because they are considered necessary and indispensable, it does not mean that only the state can provide these goods. On the contrary, law and security can also be organized and produced in the free market—and better and more economically, by the way. Like any other good, law and security can be provided through free supply and free demand in the desired quantity and quality. No compulsory monopoly is required for the provision of the goods law and security.

The alternative to the state, in its present form, is the private law society. It is characterized by the fact that the same rules apply to all people always and everywhere: that everyone has self-ownership and that everyone has ownership of external goods acquired lawfully, i.e., non-aggressively. And since the same law applies to everyone, there is no public law apart from private law. The idea of a private law society is by no means synonymous with anarchy. Far from it! Rather, the private law society is characterized by a very clear distinction between “mine” and “yours,” and violations of property are punishable and sanctioned.

It would be too far-reaching to explain in this book in detail what a private law system would look like in practice and how it would work; please refer to the bibliography for further reading.126 At this point, however, a few brief remarks on law and security should suffice. Such mental images are helpful to better understand the idea of the free market for money.

In a private legal system, the good security is offered in the free market. On the supply side, there are insurance companies that offer security services (insurances against theft, for personal protection, etc.) in competition with other companies. In insurance contracts, the security service is specified precisely and the mutual rights and obligations are contractually laid down (such as exclusion of negligence on the part of the insured or compensation in the event of damage). The insurance contracts specify independent conciliation bodies—which also compete with each other for customers who pay voluntarily—to be called upon in the event of a dispute between the policyholder and the insurer.

Under competitive conditions, it is to be expected that prices for insurance coverage, and dispute resolution will fall (while they will rise chronically in today’s state-monopolized security and legal apparatus). And it is not only that the insurance services in the free market for security are more geared to the customer’s demand wishes (in terms of scope and pricing); peaceableness and conflict avoidance are also promoted in this way. Those who demonstrably behave well and are friendly toward their fellow human beings, represent a smaller risk and are rewarded with comparatively low insurance premiums.

Since an insurance company is contractually obliged to indemnify the policyholder in the event of a loss (e.g., in the event of a burglary), it will take a great deal of effort to prevent the occurrence of a loss. And if the damage has nevertheless occurred, the insurance company will do everything in its power to track down the perpetrator and make him liable; otherwise, it will have to pay the compensation, which in turn will reduce its profit. The free market for security discourages crime, because potential perpetrators face highly efficient private insurance providers and police agencies. Such insurance and legal contracts can be established not only nationally, but of course also internationally, for private households as well as companies.

In a private law society, a free market for money is a natural phenomenon in the truest sense of the word: a free market for money is the logical consequence of people’s right to self-determination when choosing money. The voluntary agreement of the people involved in the global division of labor would (presumably very quickly) result in a single world currency. A freely chosen world currency differs categorically from a single fiat world currency, which is the passion of the democratic socialists. A world currency chosen in the free market for money would literally be economically and ethically good money, which best serves humankind, which best promotes a peaceful and cooperative coexistence of people in this world.

• 122See J. Laurence Laughlin, The Principles of Money (New York: Charles Scribner’s Sons, 1903), ipp. 40–43.
• 123See David Dürr, “Entstaatlichung der Rechtsordnung: Ein Modell ohne staatliches Rechtsetzungs- und Gewaltmonopol,” in Individuum und Verband, Festgabe zum Schweizerischen Juristentag, ed. Roger Zäch, Christine Breining-Kaufmann, Peter Breitschmid, Wolfgang Ernst, Paul Oberhammer, Wolfgang Portmann, and Andreas Their (Zurich: Schulthess Juristische Medien, 2006), pp. 397–414.
• 124Ludwig von Mises, The Cause of the Economic Crisis and Other Essays before and after the Great Depression (Auburn, AL: Ludwig von Mises Institute, 2006), p. 44.
• 125See chapter 7.
• 126See for example Murray N. Rothbard, For a New Liberty, 2d ed. (Auburn, AL: Ludwig von Mises Institute, 2006), pp. 11, 12, and 13, 249 ff.; Hoppe, Democracy, pp. 239 ff.; Hoppe, Der Wettbewerb der Gauner: Über das Unwesen der Demokratie und den Ausweg in die Privatrechtsgesellschaft (Berlin: Holzinger Verlag, 2012), pp. 73 ff.; also Walter Block, The Privatization of Roads and Highways: Human and Economic Factors (Auburn, AL: Ludwig von Mises Institute, 2009).