Private Coinage

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This
article is excerpted from chapter 7 of What
Has Government Done to Our Money?

The idea
of private coinage seems so strange today that it is worth examining
carefully. We are used to thinking of coinage as a “necessity
of sovereignty.” Yet, after all, we are not wedded to a “royal
prerogative,” and it is the American concept that sovereignty
rests, not in government, but in the people.

How would
private coinage work? In the same way, we have said, as any other
business. Each minter would produce whatever size or shape of
coin is most pleasing to his customers. The price would be set
by the free competition of the market.

The standard
objection is that it would be too much trouble to weigh or assay
bits of gold at every transaction. But what is there to prevent
private minters from stamping the coin and guaranteeing its weight
and fineness? Private minters can guarantee a coin at least as
well as a government mint. Abraded bits of metal would not be
accepted as coin. People would use the coins of those minters
with the best reputation for good quality of product. We have
seen that this is precisely how the “dollar” became prominent
– as a competitive silver coin.

Opponents
of private coinage charge that fraud would run rampant. Yet, these
same opponents would trust government to provide the coinage.
But if government is to be trusted at all, then surely, with private
coinage, government could at least be trusted to prevent or punish
fraud. It is usually assumed that the prevention or punishment
of fraud, theft, or other crimes is the real justification for
government. But if government cannot apprehend the criminal when
private coinage is relied upon, what hope is there for a reliable
coinage when the integrity of the private marketplace operators
is discarded in favor of a government monopoly of coinage? If
government cannot be trusted to ferret out the occasional villain
in the free market in coin, why can government be trusted when
it finds itself in a position of total control over money and
may debase coin, counterfeit coin, or otherwise with full legal
sanction perform as the sole villain in the marketplace? It is
surely folly to say that government must socialize all property
in order to prevent anyone from stealing property. Yet the reasoning
behind abolition of private coinage is the same.

Moreover,
all modern business is built on guarantees of standards. The drug
store sells an eight-ounce bottle of medicine; the meat packer
sells a pound of beef. The buyer expects these guarantees to be
accurate, and they are. And think of the thousands upon thousands
of specialized, vital industrial products that must meet very
narrow standards and specifications. The buyer of a 1/2 inch bolt
must get a 1/2 inch bolt and not a mere 3/8 inch.

“It
is surely folly to say that government must socialize all property
in order to prevent anyone from stealing property. Yet the reasoning
behind abolition of private coinage is the same.”

Yet, business
has not broken down. Few people suggest that the government must
nationalize the machine-tool industry as part of its job of defending
standards against fraud. The modern market economy contains an
infinite number of intricate exchanges, most depending on definite
standards of quantity and quality. But fraud is at a minimum,
and that minimum, at least in theory, may be prosecuted. So it
would be if there were private coinage. We can be sure that a
minter’s customers, and his competitors, would be keenly alert
to any possible fraud in the weight or fineness of his coins.[1]

Champions
of the government’s coinage monopoly have claimed that money is
different from all other commodities, because “Gresham’s Law”
proves that “bad money drives out good” from circulation. Hence,
the free market cannot be trusted to serve the public in supplying
good money.

But this
formulation rests on a misinterpretation of Gresham’s famous law.
The law really says that

money
overvalued artificially by government will drive out of circulation
artificially undervalued money.

Suppose,
for example, there are one-ounce gold coins in circulation. After
a few years of wear and tear, let us say that some coins weigh
only .9 ounces. Obviously, on the free market, the worn coins
would circulate at only 90 percent of the value of the full-bodied
coins, and the nominal face value of the former would have to
be repudiated.[2] If anything,
it will be the “bad” coins that will be driven from the market.

But
suppose the government decrees that everyone must treat the worn
coins as equal to new, fresh coins, and must accept them equally
in payment of debts. What has the government really done? It has
imposed price control by coercion on the “exchange rate”
between the two types of coin. By insisting on the par ratio when
the worn coins should exchange at 10 percent discount, it artificially
overvalues the worn coins and undervalues new
coins. Consequently, everyone will circulate the worn coins, and
hoard or export the new. “Bad money drives out good money,” then,
not on the free market, but as the direct result of governmental
intervention in the market.

Despite never-ending
harassment by governments, making conditions highly precarious,
private
coins have flourished many times in history
. True to the virtual
law that all innovations come from free individuals and not the
state, the first coins were minted by private individuals and
goldsmiths. In fact, when the government first began to monopolize
the coinage, the royal coins bore the guarantees of private bankers,
whom the public trusted far more, apparently, than they did the
government. Privately minted gold coins circulated in California
as late as 1848.[3]

Notes

[1]
See Herbert Spencer, Social Statics (New York: D. Appleton
1890), p. 438.

[2]
To meet the problem of wear-and-tear, private coiners might
either set a time limit on their stamped guarantees of weight,
or agree to recoin anew, either at the original or at the lower
weight. We may note that in the free economy there will not
be the compulsory standardization of coins that prevails when
government monopolies direct the coinage.

[3]
For historical examples of private coinage, see B.W. Barnard,
“The use of Private Tokens for Money in the United States,”
Quarterly Journal of Economics (1916–17): 617–26; Charles
A. Conant, The Principles of Money and Banking (New
York: Harper Bros., 1905), vol. I, 127–32; Lysander Spooner,
A Letter to Grover Cleveland (Boston: B.R. Tucker,
1886), p. 79; and J. Laurence Laughlin, A New Exposition
of Money, Credit and Prices (Chicago: University of Chicago
Press, 1931), vol. I, pp. 47–51.

On coinage,
also see Mises, Theory
of Money and Credit
, pp. 65–67; and Edwin Cannan, Money,
8th ed. (London: Staples Press, 1935), pp. 33ff.

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