Decentralize the state as a strategy for promoting sound money

The United States has been plagued by an inflationary monetary policy for more than a century.

Price inflation has recently emerged as the most visible public effect of the Federal Reserve's policies. Other, less obvious repercussions have proved just as damaging. Inflation is particularly sneaky since rising prices might hide a wealth transfer. Furthermore, the Fed's artificially low interest rate and quantitative easing programs have discouraged saving and fostered boom-bust cycles.

As these monetary problems have worsened, the demand for remedies has grown more pressing. The goal of this essay is to show how paper money and centralization complement each other, as well as to investigate how political decentralization might support sound money.One of the most apparent ways that fiat money facilitates centralization is by removing the constraints on the government's ability to inflate the currency that exist under the commodity money standard. In a system of unbacked fiat money, the regime's capacity to boost government expenditures by inflating the money supply is less constrained.

Nonetheless, the central government runs the danger of seeing its own currency depreciate against tougher currencies. A state, on the other hand, as a territorial monopolist of compulsion, can force the acceptance of its currency through legal tender regulations and by taxing or even outlawing alternatives inside its domain. As a state increases its authority over territory, it may force more individuals to adopt its money—for example, by forcing tax payments to be made in the government's official currency.To illustrate this, we will review some of the ways the United States government has reinforced its currency.To limit the circulation of state banknotes, the federal government instituted a fee in 1865. Franklin D. Roosevelt, on the other hand, went much farther, forbidding Americans from having more than a tiny quantity of monetary gold. While the restriction on gold has now been abolished, capital gains taxes continue to restrict its usage. Military might has helped the US maintain the dollar's place as the world's reserve currency through international monetary accords and supranational organizations such as the International Monetary Fund, which allow for coordinated inflation. These are some of the ways in which centralization has made fiat money possible in the United States.

Decentralization, on the other hand, would damage the present monetary system. Decentralization, pursued to its logical conclusion, will eventually necessitate the abolition of the existing system and the reintroduction of sound money. According to Hans-Hermann Hoppe:

Yet if one then imagines a proliferation of ever smaller national territories, ultimately to the point where each household forms its own country, [Milton] Friedman’s proposal is revealed for what it is—an outright absurdity. For if every household were to issue its own paper currency, the world would be right back at barter. No one would accept anyone else’s paper, economic calculation would be impossible, and trade would come to a virtual standstill. It is only due to centuries of political centralization and the fact that only a relatively small number of countries and national currencies remain, and hence that the disintegrative consequences and calculational difficulties are far less severe, that this could have been overlooked. From this theoretical insight it follows that secession, provided it proceeds far enough, will actually promote monetary integration. In a world of hundreds of thousands of independent political units, each country would have to abandon the current fiat money system which has been responsible for the greatest worldwide inflation in all of human history and once again adopt an international commodity money system such as the gold standard.1

Without political centralization, the current system of freely changing paper currencies with the US dollar as the reserve currency would not have been conceivable. To put it another way, the system of many paper currencies obstructs trade. At the same time, as decentralization progresses, maintaining a reasonably high quality of life under an autarky policy becomes increasingly challenging. As decentralization progresses and pressure for free trade grows, adopting an international currency that is not controlled by any government becomes increasingly vital.

To be sure, there are more direct ways to restore sound money. Ludwig von Mises has explained how this could be accomplished. However, we should not expect policymakers to embrace Mises’s proposal any time soon. In the short term, the nullification or repeal of all taxes on alternatives to fiat money—such as gold and bitcoin—is a reasonable goal for a decentralist strategy.

Decentralization is not a panacea that will cure our monetary ills overnight. But it would represent an important first step toward the restoration of sound money.

  • 1. Hans-Hermann Hoppe, Democracy—the God That Failed: The Economics and Politics of Monarchy, Democracy, and Natural Order (New Brunswick, NJ: Transaction Publishers, 2001), pp. 116–17.

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