answered question
10
Votes
Votes
8
Answers
Answers
M$5.00
Would privatizing currency be a possible solution to our current economic woes?
So: crazy idea. :) And apparently, not completely original.
The current financial system has failed us, think we all agree there. The policy of a centralized Federal Reserve system seems to me to be part of the problem (this is arguable, of course). But they exist outside the checks and balances of the Constitution. They are a monopoly, and they are not subject to market forces which would normally correct for the ineffective behavior that got us into this mess in the first place. Instead, when Fed policies fail, we double down and keep artificially propping our banks up with bailouts.
Now, my crazy idea is this: Why not allow currencies to be created by almost anyone? (keep reading :) )
Why not privatize money itself, engage the imagination of entrepreneurs to solve this financial problem rather than bankers and politicians? We need a different mindset and new ideas to dig out of this hole. Internet entrepreneurs have the kind of mindset we need. I say, unleash them. Open this up.
Think of this like you would internet startups -- but instead, these would be startups for various forms of money. Money 2.0, if you will. The concept of the dollar remains the same; but there is now meta-information attached: what backs it.
You could have 'dollar brands' backed by gold, of course, but also by weapons and armor caches in World of Warcraft, or hours of labor, or baseball card collections, mutual funds or stock portfolios or even *gasp* Mahalo Dollars! :) Anything you can imagine that has value can potentially back a dollar brand.
The public would decide which currency brand it favored. Market forces would dictate the winners and losers. If the backing of a currency went under, then the currency would be worthless.
The specific method of backing the currency would be its competitive advantage. And -- here is the good part -- everything related to a currency brand would have to be (by law) transparent, a matter of online public record. No more operating outside of scrutiny or checks and balances.
http://upload.wikimedia.org/wikipedia/commons/thumb/d/d5/Delaware_Bridge_Company_Dollar.jpg/300px-Delaware_Bridge_Company_Dollar.jpg
One objection to private currency in the past (1837 - 1866) (when America actually had this exact system, apparently) is that the cost of exchange was too high. In an online world, that cost is probably now next to nothing.
Now, I am not an economist or financial expert by any means. I have next to no idea about what I am proposing here. But it seems to make sense to me. The Titanic was built by experts, and Noah's Ark was built by an amateur, so I figure it's worth a Mahalo Answers question.
What do you think? Very interested in any and all opinions on any part of this. Most considered and well-argued gets the tip!
The current financial system has failed us, think we all agree there. The policy of a centralized Federal Reserve system seems to me to be part of the problem (this is arguable, of course). But they exist outside the checks and balances of the Constitution. They are a monopoly, and they are not subject to market forces which would normally correct for the ineffective behavior that got us into this mess in the first place. Instead, when Fed policies fail, we double down and keep artificially propping our banks up with bailouts.
Now, my crazy idea is this: Why not allow currencies to be created by almost anyone? (keep reading :) )
Why not privatize money itself, engage the imagination of entrepreneurs to solve this financial problem rather than bankers and politicians? We need a different mindset and new ideas to dig out of this hole. Internet entrepreneurs have the kind of mindset we need. I say, unleash them. Open this up.
Think of this like you would internet startups -- but instead, these would be startups for various forms of money. Money 2.0, if you will. The concept of the dollar remains the same; but there is now meta-information attached: what backs it.
You could have 'dollar brands' backed by gold, of course, but also by weapons and armor caches in World of Warcraft, or hours of labor, or baseball card collections, mutual funds or stock portfolios or even *gasp* Mahalo Dollars! :) Anything you can imagine that has value can potentially back a dollar brand.
The public would decide which currency brand it favored. Market forces would dictate the winners and losers. If the backing of a currency went under, then the currency would be worthless.
The specific method of backing the currency would be its competitive advantage. And -- here is the good part -- everything related to a currency brand would have to be (by law) transparent, a matter of online public record. No more operating outside of scrutiny or checks and balances.
One objection to private currency in the past (1837 - 1866) (when America actually had this exact system, apparently) is that the cost of exchange was too high. In an online world, that cost is probably now next to nothing.
Now, I am not an economist or financial expert by any means. I have next to no idea about what I am proposing here. But it seems to make sense to me. The Titanic was built by experts, and Noah's Ark was built by an amateur, so I figure it's worth a Mahalo Answers question.
What do you think? Very interested in any and all opinions on any part of this. Most considered and well-argued gets the tip!
voted interesting: daigakuinsei, dbspringer, bhasky, rickg, mattman4, tracebooks, hushnow, srgothard, morriss003, jasoncalacanis
answers (8)
I'm sure this is not the answer you are looking for, but our current monetary system is privatized. The Federal Reserve is not a Government entity. They are their own bank. The money we use now is actually the Federal Reserves IOUs. What's backing it... well it was once gold. Now nothing. If you're wondering why the dollar is falling, and we suffer from inflation, it's because our money has no backing. In fact I recently read an article about how Abraham Lincoln was able to pay the same amount for a loaf of bread as George Washington. Now a days we're taught that inflation is "natural" and there is nothing we can do to stop it. Interesting huh?
You're idea would work, as long as money (whatever form it is) continues to have backing and people continue to accept it. But as we've seen with our banking system, keeping money backed, is a very hard thing to do. To be more specific, most people don't actually see there money anyway. In fact, there is an estimated $2000 cash for every person in the US- yet for a lot of us, our bank accounts exceed that number. How is that possible?
When you put your money into a bank account the bank only needs to keep so much of it in reserve. Right now it's 3.5%- but because I'm not very good at math let's say it's 10%. So if I put in $1000 the bank only has to keep $100 in actual cash. They can loan out the other $900. But when you get a loan, do you get cash or does the bank simply right a number in your account? If they right a number in your account, they can turn around and loan out even more money because in essence they have $1900 in their bank. Does that make sense? And even if they do give you cash, chances are you'll go to another bank and put it in an account or you'll give it to someone else that will go back to a bank and put it in an account. Then that bank can turn around and use that money to make more loans.
Whether we'd like to believe it or not, the same thing would hold true for "personal" bankers. As long as everyone doesn't cash their money at once, personal bankers, private bankers, or even Government bankers would have no incentive to fully back their money. On a wider scale, I think they'd certainly wouldn't keep a 3.5% reserve, but even a 20% reserve wouldn't work. Can you imagine if rumor spread that all money backed by guns weren't actually 100% backed. If anything it would be worse with everyone trying to cash out their backed-by-guns money. Any little slip up like that- even if it was just in one area could cause the whole economy to collapse. Plus we'd be relying on people's integrity to keep their money backed 100%. That is a whole lot of faith to put in society.
You're idea would work, as long as money (whatever form it is) continues to have backing and people continue to accept it. But as we've seen with our banking system, keeping money backed, is a very hard thing to do. To be more specific, most people don't actually see there money anyway. In fact, there is an estimated $2000 cash for every person in the US- yet for a lot of us, our bank accounts exceed that number. How is that possible?
When you put your money into a bank account the bank only needs to keep so much of it in reserve. Right now it's 3.5%- but because I'm not very good at math let's say it's 10%. So if I put in $1000 the bank only has to keep $100 in actual cash. They can loan out the other $900. But when you get a loan, do you get cash or does the bank simply right a number in your account? If they right a number in your account, they can turn around and loan out even more money because in essence they have $1900 in their bank. Does that make sense? And even if they do give you cash, chances are you'll go to another bank and put it in an account or you'll give it to someone else that will go back to a bank and put it in an account. Then that bank can turn around and use that money to make more loans.
Whether we'd like to believe it or not, the same thing would hold true for "personal" bankers. As long as everyone doesn't cash their money at once, personal bankers, private bankers, or even Government bankers would have no incentive to fully back their money. On a wider scale, I think they'd certainly wouldn't keep a 3.5% reserve, but even a 20% reserve wouldn't work. Can you imagine if rumor spread that all money backed by guns weren't actually 100% backed. If anything it would be worse with everyone trying to cash out their backed-by-guns money. Any little slip up like that- even if it was just in one area could cause the whole economy to collapse. Plus we'd be relying on people's integrity to keep their money backed 100%. That is a whole lot of faith to put in society.
source(s):
http://sonic.net/sentinel/naij2.html
Macroeconomics, 7th Edition
by Colander, David
How to profit from the Next Great Depression, by John L. King
Debt as Money
http://www.youtube.com/watch?v=vVkFb26u9g8
http://sonic.net/sentinel/naij2.html
Macroeconomics, 7th Edition
by Colander, David
How to profit from the Next Great Depression, by John L. King
Debt as Money
http://www.youtube.com/watch?v=vVkFb26u9g8
| Asker's rating: |
Many answers here were excellent -- even the ones that basically told me my idea wouldn't work, they made me think. Tough choice, but this one made me think the most.
Disclaimer -I am not an economist either...
But some thoughts come to mind...
- Another form of virtual currency exists today - airline miles - and the owner of that currency pretty much decides how you can spend it - there are blackout dates, small quotas for miles tickets, nearly impossible to convert one currency to another - the issuer of the currency is the supreme lord - not exactly ideal for the picture you paint above
- what happens if the issuer of the currency goes bankrupt - we need some assurances here that the currency we work with will have standing tied to a solid standard and can be converted at will to that standard ( like Mahalo dollars to real ones)
- Do we have to wait till the 15th of the month if we have to cash out ;-)
- the administrative overhead will be huge for any entity that needs to manage its own currency - not a very productive idea
- what prevents the aritificial irregularities from developing within each of these currencies as indeed happens today in various countries that do have their own currencies
- how will each of these currencies be (equivalent of) FDIC insured - if not how do you create stability against volatile runs caused by short term problems
I am sure there are lots of good that will come too, that others will articulate ..just wanted to share my 2 cents
But some thoughts come to mind...
- Another form of virtual currency exists today - airline miles - and the owner of that currency pretty much decides how you can spend it - there are blackout dates, small quotas for miles tickets, nearly impossible to convert one currency to another - the issuer of the currency is the supreme lord - not exactly ideal for the picture you paint above
- what happens if the issuer of the currency goes bankrupt - we need some assurances here that the currency we work with will have standing tied to a solid standard and can be converted at will to that standard ( like Mahalo dollars to real ones)
- Do we have to wait till the 15th of the month if we have to cash out ;-)
- the administrative overhead will be huge for any entity that needs to manage its own currency - not a very productive idea
- what prevents the aritificial irregularities from developing within each of these currencies as indeed happens today in various countries that do have their own currencies
- how will each of these currencies be (equivalent of) FDIC insured - if not how do you create stability against volatile runs caused by short term problems
I am sure there are lots of good that will come too, that others will articulate ..just wanted to share my 2 cents
voted helpful: morriss003
- what happens if the issuer of the currency goes bankrupt
Your 'currency' is now mere worthless paper. That's the risk you take with this system. But guess what? We may be in that movie anyway with our supposedly safer centralized currency. At least this way, the 'currency portfolio' is diversified. There is no single point of failure that drags everyone down. Sure, Dollar Brand A may be gone, but B, C, and D are just fine.
Your 'currency' is now mere worthless paper. That's the risk you take with this system. But guess what? We may be in that movie anyway with our supposedly safer centralized currency. At least this way, the 'currency portfolio' is diversified. There is no single point of failure that drags everyone down. Sure, Dollar Brand A may be gone, but B, C, and D are just fine.
now that would be fun...imagine managing a stock portfolio built in various currencies, each of which could become worthless at any moment...that would call for a new brand of financial whizkids who will in turn build new insurance instruments on top of that, and more wall street geniuses on top of that..till no one the heck knew what was going on...and voila!!!..just kidding
..I still think it really is a great imaginative idea and I am sure you will get lots of good responses to back this up.
..I still think it really is a great imaginative idea and I am sure you will get lots of good responses to back this up.
Yeah I'm not saying it's THE answer :) ... I just think we ought to be thinking more in this direction more than we are. A debate about this would be quite healthy, even if none us agreed.
markjeffre- to some extent it's consumer confidence that backs our current dollar. If dollar brand "A" goes belly up, consumers holding dollar brand "B" might not have the confidence to carry that money either. Maybe it has some close relationship, maybe it doesn't at all... but either way, if one dollar system goes belly up, people's confidence will waver in other areas as well.
My first question would be: how do these private dollars differ from shares of stock? Or just pure barter?
Can we add the transparency you're talking about to the existing stock market before we start introducing a bunch of new currencies that require even more information to be sifted by consumers and investors already hammered by an insane number of choices for everything?
This is not really an answer, unfortunately. Just a bunch more questions.
Can we add the transparency you're talking about to the existing stock market before we start introducing a bunch of new currencies that require even more information to be sifted by consumers and investors already hammered by an insane number of choices for everything?
This is not really an answer, unfortunately. Just a bunch more questions.
voted helpful: morriss003, mrgunn
My first question would be: how do these private dollars differ from shares of stock?
A: They really don't. But neither does our dollar now. They are effectively (very) restricted shares in the Federal Reserve Corporation.
Can we add the transparency you're talking about ... before we start introducing a bunch of new currencies ...?
A: Yes. But it would require a lengthy audit of the Fed, which would a) take a decade, realistically and b) won't ever happen, even more realistically. I'm saying, It's damage, let's route around it and go for the full reboot.
A: They really don't. But neither does our dollar now. They are effectively (very) restricted shares in the Federal Reserve Corporation.
Can we add the transparency you're talking about ... before we start introducing a bunch of new currencies ...?
A: Yes. But it would require a lengthy audit of the Fed, which would a) take a decade, realistically and b) won't ever happen, even more realistically. I'm saying, It's damage, let's route around it and go for the full reboot.
One additional comment: perhaps another differentiator a currency issuer could attach to their 'dollars' would be services: more personalized meta-information: how many dollars have you spent over your life? wouldn't you like to get reports and metrics on your dollars? How much they've grown in value versus what you've spent and what your 'value ratio' was? (did you get a good deal?).
Services could be built around and integrated with currency as a differentiator.
Services could be built around and integrated with currency as a differentiator.
Quicken / Intuit quickbooks is gonna go out of business :-(
Well, just to point something out, Noah was guided by God who is probably better at building ships than those who built the Titanic.
Note: I'm not an economist, either.
Anyway, to the real point: Back when America had that system, the problem wasn't only the cost of exchange, it was that many banks couldn't cover all the money they were printing and giving out. There would need to be massive government oversight to make sure no money makers engage in illegal/unethical practices. You can say everything has to be transparent, but that doesn't mean it'll happen. Big money brings out big crooks.
Really, what this boils down to is just another form of investing. You would "invest" in different currencies. The big difference is that investing would be compulsive. You would always have to worry about the state of your investment in your chosen currency. Today, the only people who really have to worry about currency rates are travelers, forex traders, international business men, etc. The average US citizen can rest easy knowing that the US dollars they have will be worth something when they wake up, even though it may be devalued internationally. Some people don't play the stock market because they don't want the risk and they don't want to worry. This would force people to take the risk, and lots of people would be burned.
Also, this would make things very unstable. This market would be much more volatile than the stock market, and much more complicated. I could see this inciting mass panics to change currencies when a currency starts to tank.
Buying anything would be really complicated if the value of your money constantly changed. Would you have to time your purchases to coincide with upswings in currency value? And paying bills and taxes would be majorly complicated.
Note: I'm not an economist, either.
Anyway, to the real point: Back when America had that system, the problem wasn't only the cost of exchange, it was that many banks couldn't cover all the money they were printing and giving out. There would need to be massive government oversight to make sure no money makers engage in illegal/unethical practices. You can say everything has to be transparent, but that doesn't mean it'll happen. Big money brings out big crooks.
Really, what this boils down to is just another form of investing. You would "invest" in different currencies. The big difference is that investing would be compulsive. You would always have to worry about the state of your investment in your chosen currency. Today, the only people who really have to worry about currency rates are travelers, forex traders, international business men, etc. The average US citizen can rest easy knowing that the US dollars they have will be worth something when they wake up, even though it may be devalued internationally. Some people don't play the stock market because they don't want the risk and they don't want to worry. This would force people to take the risk, and lots of people would be burned.
Also, this would make things very unstable. This market would be much more volatile than the stock market, and much more complicated. I could see this inciting mass panics to change currencies when a currency starts to tank.
Buying anything would be really complicated if the value of your money constantly changed. Would you have to time your purchases to coincide with upswings in currency value? And paying bills and taxes would be majorly complicated.
voted helpful: morriss003
Having little or no knowledge of how the actual currency market works, this initially scared the Hell out of me. But, after really considering it, it's really just a way of returning to the barter system from days or old. You'd just need some sort of exchange to constantly determine the value of any given currency.
Sort of exciting to think about!
Sort of exciting to think about!
voted helpful: morriss003
Scary is correct. This would be scary, no doubt about it. However, let us review our current situation:
http://big.assets.huffingtonpost.com/graph_1.png
It is now time to thing out of the proverbial box :) Half measures and more of the same ain't going to cut it.
What would PROBABLY happen (my guess anyway) is that we would start out with thousands of 'currency startups'. There would be a currency market bubble, then a crash, then no more than three strong players would emerge and be stable for several decades. These three would dominate 85% of the market; the remaining 15% would be niche and innovators, and would be enough of a threat to the big guys that everyone would stay on their toes.
It is now time to thing out of the proverbial box :) Half measures and more of the same ain't going to cut it.
What would PROBABLY happen (my guess anyway) is that we would start out with thousands of 'currency startups'. There would be a currency market bubble, then a crash, then no more than three strong players would emerge and be stable for several decades. These three would dominate 85% of the market; the remaining 15% would be niche and innovators, and would be enough of a threat to the big guys that everyone would stay on their toes.
This would not work well for everyone. The market is not the cure all, often it is the problem. Do you recall the last time there was an attempt to reform the health care system? The conservatives jibed "Do you want your health care run like the Post Office?" (They object to the Post Office for some reason). But the liberals replied "Do you want your mail delivered by the insurance companies?" They had the right of it; "Montana, sorry no mail, you're too spread out to be profitable." "Inner cities, you're blackballed, it costs to much to insure our mail carriers" etc. What I am saying is there are two different goals involved. The government tries to serve everyone. Sometimes it's inefficient; but, that's the goal and it tries. Corporations exist to make money, if anyone gets served that's just a coincidence. Providing a stable currency is a vital public service that can't be left to chance. It's all very well getting paid in Mahalo dollars if it's just extra beer money. Not so if that's what you are saving to retire on. Private companies are efficient, but they come and go. Their goal is to make a profit. This is not what you want controlling the currency.
voted helpful: morriss003
My feeling is that there is very little done by the government that could not be done by private enterprise. Even national defense employs private industry to develop new technology. While the criminal justice system and the standing military may be functions that are best assigned to the government, anything else we can privatize is better.
You know how painful it is to go to the DMV or to file taxes? The less we have the government perform these functions and the more these industries are subject to market forces, the more efficient they will be. And unlike the government, when a part of a company is failing, it does not get more money, but less.
You know how painful it is to go to the DMV or to file taxes? The less we have the government perform these functions and the more these industries are subject to market forces, the more efficient they will be. And unlike the government, when a part of a company is failing, it does not get more money, but less.
voted helpful: morriss003
Companies concentrate on efficiency but not fairness. Charities concentrate on fairness, but are often not efficient. Our government is supposed to balance efficiency and fairness. I would rather use the government to fight wars and secure the peace, even though sometimes it fails at both. I would rather go to the DMV for my drivers license or to register my car than to go to Wal-Mart. I don't particularly trust the government to collect taxes, but I certainly not going to trust AIG.
I'm not sure I agree that charities concentrate on fairness, but that's beside the point. The government's purpose is to maintain power. It will do that by voting for things that get its representatives reelected. There is no reason for the government to "balance efficiency and fairness" and I've never seen that in any founding documents.
Think about how you file your taxes. There is all sorts of competition in the free market for making it simpler, cheaper, faster (Turbo Tax, H&R Block, etc.). If free enterprise collected taxes to pay to the government, it wouldn't definitely look more streamlined.
As for not trusting AIG, some of the failings in these banks are due to the laws passed (I believe under Pres. Clinton) requiring banks to make loans to more poor people (who couldn't afford it). The big stink right now about banks is that last year people signed contracts with retention bonuses for working at AIG. AIG attempted to fulfill their obligations and Chris Dodd even made an exception to allow contractually-obligated (retention) bonuses to be paid, but the government has now stepped in and said that those contracts shouldn't count and don't want the people paid. Some people made $1/year + bonuses, but the government can change contracts half-way through. Is this the government you want in charge of your life? A government who when it's convenient may decide that tax free growth in Roth IRA's is no longer fair and tax something they promised would not be?
There is a reason the founders wanted checks and balances. They had no romanticized view of government as being the defenders of efficiency and fairness but wanted to prevent people from career politics with terms limits and checks and balances to prevent the government from growing (as is does). At this rate, in 20 years, every job with be for the government.
Think about how you file your taxes. There is all sorts of competition in the free market for making it simpler, cheaper, faster (Turbo Tax, H&R Block, etc.). If free enterprise collected taxes to pay to the government, it wouldn't definitely look more streamlined.
As for not trusting AIG, some of the failings in these banks are due to the laws passed (I believe under Pres. Clinton) requiring banks to make loans to more poor people (who couldn't afford it). The big stink right now about banks is that last year people signed contracts with retention bonuses for working at AIG. AIG attempted to fulfill their obligations and Chris Dodd even made an exception to allow contractually-obligated (retention) bonuses to be paid, but the government has now stepped in and said that those contracts shouldn't count and don't want the people paid. Some people made $1/year + bonuses, but the government can change contracts half-way through. Is this the government you want in charge of your life? A government who when it's convenient may decide that tax free growth in Roth IRA's is no longer fair and tax something they promised would not be?
There is a reason the founders wanted checks and balances. They had no romanticized view of government as being the defenders of efficiency and fairness but wanted to prevent people from career politics with terms limits and checks and balances to prevent the government from growing (as is does). At this rate, in 20 years, every job with be for the government.
How about just returning to the set of rules and regulations that existed before we got into this mess? Before derivatives and CDO's? Before banks could do all kind of other stuff beside banking? Before interest only mortgages were allowed? Before credit cards could be offered to teenagers? Before a kited check resulted in a high priced loan and not in an overcharge? Before you could borrow against your 401K? Before cutting taxes became more important than paying the bills? Before wars were not included in the national budget?
Related questions
140 characters left
ask any question
