Preference is not Prediction

I have now finished describing what I would like to see. Is it likely to occur? I think not. To go from one monetary system to another involves a difficult coordination problem. I would rather use a poor money that everyone else uses than an ideal money that nobody else uses. I will therefore continue to use the present system unless I can somehow arrange for everyone else to shift at the same time I do. An inflation rate of twelve percent a year corresponds, for an individual holding a hundred dollars in currency, to an implicit tax of a dollar a month. That is a small price to pay for the convenience of using the same money as everyone else, which is why even quite badly run fiat systems continue to be used.

My own opinion is that, even if there were no legal barriers to the use of private money, the existing fiat system would remain in use unless it became very much worse than it now is. For similar reasons, I think it likely that if a private system does come into use it will be based on gold even though gold is not a very suitable commodity for the purpose. It is desirable that banks issuing private money agree on a common commodity standard and it would be much easier to agree on gold, which has been widely used in the past, than on some complicated commodity bundle, despite the advantages of the latter.

Even if gold is not a very suitable commodity, it does not follow that a private system based on gold is worse than what we now have. Historical experience suggests that while a gold standard may produce either inflation or deflation, it is unlikely to produce as serious an inflation as even a relatively successful fiat system, such as our own, and that the inflations produced by unsuccessful fiat systems dwarf anything that might result from new discoveries of gold. The possibilities for contraction under a fractional reserve system based on gold are more serious; since governments profit by printing money not by burning it, this has only occasionally been a problem under a pure fiat system.

In considering current proposals for monetary reform, it is important to distinguish between a private banking system based on gold and a government-run fractional reserve system linked to gold, such as the U.S. had in various forms during much of the past century. It is the latter that is usually meant when people talk about returning to the gold standard. Under such a system the tie to gold puts some limits on the ability of the government to manipulate the money supply and the price level but at the cost of giving the government an incentive to block the free flow of goods and services in international trade as a way of avoiding those constraints.

In the short run, we may well be stuck with government money. But we should abandon the idea that such a system is either desirable or inevitable. Money can and should be produced on the market. Like education, it is too important to be left in the hands of government.