How A Private Money Market Would Work?

The past few generations have become used to money being issued by the government. Hence, there is an implicit assumption that maybe this has always been the case. However, this is not the case. Many people will be surprised to know that creating money was not always the job of the government. Private money was a reality before the government took it over.

Seeing the lax government policies, many critics believe that there should once again be a private money market. Anybody should be allowed to issue money and then the market should be allowed to decide amongst various monies like they decide amongst other products.

In this article, we will understand the concept of privately issued money.

How Private Money Markets Work?

At the present moment, the government has the monopoly over the issuance of money. Hence, if you live in the United States, only the federal government can issue money. Any other attempt at issuing money is called counterfeiting and is punishable by law.

However, this need not necessarily be the case. In the past gold and silver was considered money. Goldsmiths had created brands which allowed consumers to trust the purity and value of the gold that they were receiving. The dollar was originally a specific weight of silver! There is no reason why private parties cannot issue private money. Once again, the credibility of their money will be evaluated by the market. There are several major benefits of having a private money issuing system.

• Voluntary: Firstly, the economic freedom of each and every individual will be taken into account. This means that individuals will have the freedom to decide whether or not they want to use a certain kind of money. Right now, they do not have that option. Right now the state makes it illegal to use anything apart from the dollar as money. Since a private money market would be voluntary, people will be careful about the money they accept as payment. Any debasement of the money will earn the manufacturer a bad name and harm their business.
• Why Should The Government Be Trusted? It is strange that people somehow believe that the government will not be able to maintain the decorum of a private money market. The common belief is that there will be chaos and large scale counterfeiting. However, it is even more absurd that the solution to this problem is giving the entire money supply in the hands of the government. If the government cannot be trusted to maintain law and order in the market. Then how can the government be trusted with the far greater responsibility of issuing money which is the lifeblood of the entire economy.
• Dollar Vote Every Day: Also, voting for the government is an ineffective way to vote for one’s monetary policy. Firstly, the people have fewer options. Also, people can only vote once in four years or so. Hence, if their elected representative is not working as per their expectation, they can’t do anything apart from waiting for four years to vote them out of office. On the contrary, in a private money market people would vote every day. If they believe that a particular manufacturer of money is debasing currency, they will stop accepting it. They do not have to wait four years to see the results. This is the reason why private money markets were effective in the past and why they are likely to be effective in the future.
• Stable Purchasing Power: People are likely to keep a close eye on the number of coins that the manufacturer is producing. The market pressure will ensure that the number of coins in circulation is never inflated beyond a certain level. This would be unlike fiat currency which is routinely inflated at a high rate. As a result, private money will be able to fulfill its function as a store of value better than fiat money.

Problems with a Private Money Market

Private money markets are likely to have their fair shares of problems as well. Some of them have been listed below.

• One Shot Move: For instance, private money markets rely heavily on reputation. If debasement occurs, the reputation of the producer takes a hit and further business is impacted. The belief is that the fear of this bad publicity should act as a deterrent. However, it is also likely that crooks and frauds may simply do a big fraud one time and take off with the money. Hence the question of reputation acting as a deterrent does not arise in this case.
• Transaction Costs: Also, since all money would not be commonly accepted everywhere, there would be huge transaction costs involved. Each time a payment has to be made money may have to be converted to a medium which is acceptable to both parties. Also, when private money markets did exist, books and periodicals had to be published to make the users aware about the current value of the private money.

To sum it up, it is unlikely that modern governments will allow the fiat money system to be replaced by private money. However, it is possible to have such a system. In fact such a system has existed for most of recorded human history.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.