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Legal Tender

The power of the Federal Reserve to monopolize money has been further solidified by the notion of “legal tender.”

Along the top of a dollar bill you can see the words “Federal Reserve Note.” This is a reminder that it is currency issued by a private institution and not the Federal Government. Regardless of whether it is physically printed by the US Treasury, a department of the US government, the note, or obligation is issued by the Federal Reserve, an entity separate and apart from government.

Furthermore, the obligation is denominated in dollars—not gold or some other commodity. So all you can redeem the note for is more dollars. It seems like a cat chasing its own tail.

But the key phrase you should notice on the front of the dollar says: “This note is legal tender for all debts public and private.” This is an indication that even though the note is issued by a non-government entity, as a citizen of the country, you are forced by law to accept it as money even though you may not want to.

As discussed previously, one of the critical functions of government in a civil society is to enforce our contracts with each other. And in order to carry on productive trades with each other, we will always require some degree of trust.

For example, I might deliver some food or clothing to you with the agreement that you will pay me later. This is called short term credit.

Similarly, we might agree to be partners in a certain business enterprise or we might agree to exchange labor for money or services. In each of these cases, it is important to be able to trust the other person to fulfill his promises made in the agreement.

In order to be confident of these relationships, we need an authority who will require otherwise non-complying parties to live up to their commitments. Otherwise, the burden is left up to individuals to enforce their own agreements. And this is bound to devolve to the “law of the jungle” where superior strength rules the day.

Legal tender laws specify, if a contract is made where payment is expected in exchange for goods or services, then the provider must accept Federal Reserve dollars in full satisfaction of the debt. But what if the Federal Reserve irresponsibly inflates the currency over a period of time until its value is no longer dependable? It doesn’t matter. You still have to accept it.

As a more specific example, imagine you agree to sell a house today for $200,000 dollars, payable two years from now. But in the intervening period of time, a financial crisis hits, there is mass devaluation of the currency and $200,000 is no longer enough to even buy a car, let alone a house. You might wish you could go back to your buyer and require him to make payment in gold or silver—something that still has enough value for you to buy another home. But legal tender laws forbid this. They say you must accept the $200,000 even if it is now worthless because that is the amount you originally agreed to. It doesn’t matter whether the money can be trusted or not. If you don’t accept it, the government will refuse to enforce your contract and the buyer won’t really have to pay you anything at all, let alone the now worthless $200,000.

Legal tender laws are another example of big government working hand-in-hand with big business to create regulations to prevent small business from competing with them. In this case, the government appoints an official business monopoly who gets to create and manage the money supply. And that business gets to decide how much ongoing interest you have to pay for the privilege of using their money.

If you try to use any other kind of money, government will not enforce your contracts. So it will be much more difficult for you to reliably engage in contracts with other people.

Nearly all of us enjoy the freedom to decide where we will shop to buy our groceries each week. We enjoy choosing what movie we want to go see and what restaurant we might visit afterwards. We like to decide where we will take a vacation. And if we can stay far enough ahead of our bills, we would even like to decide how long that vacation will be.

Wouldn’t it be great if we could also decide what kind of money we prefer to use? Wouldn’t it be better if we could compare the relative strengths and weaknesses of a variety of different money options? And then, as long as buyer and seller were both in agreement, the transaction could take place using any kind of money you might like the best?

This concept is called “complementary currencies.” It describes an economy where there are multiple viable currencies and consumers can freely choose from among them.

The advantages of such a system are clear. Various currencies could compete for the confidence of the people. The ones based on the most sound principles would eventually win out. And other, less reliable methods would gradually fade away.

Using the natural economic processes of diversity and evolution, we would develop money that is:

  • More dependable at retaining its value,
  • more effective as a medium of exchange, and
  • a better measure of value in the commodities and services we regularly purchase.

Over the years, we have seen proposals for a variety of complementary currencies. In fact, a few of these already exist today. But they suffer from the unfair advantage of our officially-sanctioned cartel currency, the Federal Reserve dollar.

In order to have truly viable complementary currencies which are not dependent upon the dollar to derive their value, we really should repeal our legal tender laws. We must not be afraid to allow producers and consumers to select the currency they want to use. And we should be able to depend on our government to do its job of enforcing our privately executed contracts. We should not be forced by law to use the currency of the Federal Reserve Bank.

This notion of a government-sponsored monopoly for the creation and management of money may have been a little easier justify 100 years ago. After all, it doesn’t seem that much different than another core industry: telecommunications. And government exercised a firm hand of regulatory control in that sector as well.

But technology allowed us to tear down the regulatory barriers to entry, and allow small business to compete in the telecom industry. Likewise, technology has progressed to the point where we can support multiple, privately issued and managed currencies.

To a minor degree, this is already done today. For example, you may still carry around some paper money in your wallet. But very likely, most of your purchases are now done using a credit card.

A credit card is not legal tender so anyone can refuse to accept it. But fewer and fewer businesses are not equipped to process a major credit card. In some ways, they are even more prevalent than cash.

What they cost in additional overhead, they often make up for in convenience and reliability. They are good for business so businesses accept them.

In the same way, a complementary currency that is solid and dependable could also come to be accepted anywhere you might need it. And even if it is not, technology has now advanced enough that an instant transfer could be executed in a computer somewhere just as it is needed.

A merchant might not even have to know, or care what currency you are using. You could buy in the currency you choose and he could sell in the currency he chooses. And the banks you each use could work out the details much as they do now when you make a purchase in a foreign country.

The short term debt your credit card company allows you to accrue each month is money, just as is the debt you create when you borrow to buy a home. It is credit money, created out debt and backed by you. It is money in the very same sense as Federal Reserve money. It is just a complementary, or additional form of money you can choose to use if you want to.

So credit cards do offer some small degree of choice. But they do not really offer the kind of diversity and competition we could get from a truly independent complementary currency. Their primary limitation is, they are still linked to the Federal Reserve dollar.

Credit card transactions are typically denominated in dollars so the money they create is subject to most of the same inherent problems such as reliability, interest, inflation, and so forth. So while short term credit is good for buying this month’s necessities, it is not the kind of money you would want to use to store value for a future retirement.

In recent years, we have seen the emergence of a new form of money called “crypto currencies.” Perhaps the best known example of these is called “bitcoin.”

Bitcoin was designed to be kind of like gold in this way: There is only a certain amount of it to go around—it is inherently difficult to come by. The way the algorithm is implemented, the size of the money supply is finite. Only a certain number of bit coins can ever be discovered, or mined.

This means, as long as people are interested in owning bitcoins, they will tend to go up in value because they will become harder and harder to come by. Bitcoins can be divided up into smaller and smaller parts—theoretically infinitely small. This is much more flexible than a dollar, for example, which can be effectively divided only into 1/100th parts, or cents. So the theory is, as the currency continues to appreciate in effective value, people can just use smaller and smaller bits of it for each transaction.

But bitcoin suffers from some problems not too different from the dollar itself. First among these is, it is clearly a fiat currency. In other words, it is unbacked.

A bitcoin is only valuable if people agree it has value. Otherwise, it is just numbers in a computer. You can’t eat it and you can’t use it as a material to make anything. It is only useful as long as someone will accept it as exchange in a transaction.

As a result, the value of a bitcoin is likely to change substantially over time as people’s perceptions of its value and/or demand changes. In other words, its value is highly speculative. And that value can be expected to fluctuate in relatively large swings, both up and down.

The built-in, inflationary structure of the Federal Reserve dollar means it is sure to gradually lose its value over time. In contrast, bitcoin is designed to gradually increase in value over time—at least as long as people continue to believe it is desirable. But that is the catch. Because its value is primarily built on speculation, that value is bound to be volatile.

This means the people who mine, or buy it early, will benefit from its appreciation. But these gains will come at the expense of those who get in later.

Bitcoin has been quite successful in spite of these problems. And it has made a few early adopters very wealthy. But at some point, people may begin to perceive it as an “insiders’ game” or even a Ponzi scheme. If so, it may well begin to fall out of favor as fewer and fewer people accept it in trade.

One of the outgrowths of bitcoin has been the evolution of a variety of other competing crypto currencies. As people have discovered the strengths and weaknesses of bitcoin, some have attempted to make their own similar currencies.

This makes a lot of sense when you understand how the system works. Be the first one to mine a large block of coins. Then convince other people to join in and you could really become quite wealthy.

As of this writing, there are hundreds of crypto currencies competing with bitcoin. But one thing they all share in common: they are fiat currencies. They have no inherent value other than the demand people create for them due to their own perceptions. If those perceptions change to disfavor, the value of a crypto-coin can easily fall to zero.

Perhaps one of the greatest benefits to come from bitcoin and its competitors is their demonstration that competing currencies really can be conceived, implemented and used. And they don’t have to be indexed in dollars. We don’t have to be stuck using only Federal Reserve notes and credit cards. We should be able to conceive entirely new systems, backed in better and more creative ways.

Bitcoin has helped show us that a world is possible where multiple currencies exist in a single economy. Maybe we are ready for a new kind of money that will:

  • have the advantages of our current electronic checkbook money, and
  • will enjoy the freedom and flexibility of bitcoin, but
  • will be able to hold a constant and stable value—even over long periods of time.

In addition, there are a number of other initiatives under way, in various stages of conception or practice. Each contains its own unique contribution to enhance our available choices for what kind of money we will use.

Here are just a few:

Next, we will discuss our own strategy for new money.
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