Thursday, September 12, 2013

#49 Jon Matonis on Riegel

Source - November 12, 2012

We contemplated merely placing Matonis' article on this blog without comment, a #0, until we read it over and found a few places for additional comment were required. Matonis' words will be in blue, mine in black.

Edwin Clarence Riegel (1879-1953), generally known as E.C. Riegel, was an independent scholar, author and consumer advocate who campaigned against restrictions on free markets that harmed consumers and promoted an alternative monetary theory and an early private enterprise currency alternative.

Riegel’s primary published works on monetary theory include Private Enterprise Money: A Non-Political Money System (1944), The New Approach to Freedom (1949), and Flight from Inflation: The Monetary Alternative( 1978). As the publisher responsible for reviving many of his writings, Spencer MacCallum also prepared a detailed summary of Riegel’s thoughts on money.

The entire individualist anti-statist position from Pierre-Joseph Proudhon, Josiah Warren, Benjamin Tucker, and William B. Greene to the modern money theorists, Hugo Bilgram and E.C. Riegel, is inextricably linked to the insistence of competing money systems and the evolution of marketplace control over money, credit, and interest rates. Riegel anticipated Austrian economist Friedrich Hayek’s thinking that the separation of money and State also entailed the separation of the standard unit of value and the State. The non-Hayekian ‘libertarians’ persist in a dogged devotion to the gold standard, which Riegel believed was essentially a formula for a different brand of State-controlled money, run in collusion between ambitious State finance ministers and the major holders of gold, thereby tying currency to a gold price fixed by political agreement and made immune to the market adjustment process of a free market in gold trading.

This is essentially our view as will be demonstrated in the forthcoming abstract covering the monetary history of the United States which shall be presented here on this blog when completed. [12 April, 2014: We decided that retelling the story of the dollar and the various attempts at bi-metalism during the 19th century could be better told elsewhere although certain remarks throughout this blog will indicate lessons learned from past experience.]

With echoes of the late 19th-century standards battle between New York gold interests and the agrarian Free Silver Movement, Riegel’s valun system describes a voluntary banking association of private abstract standards based on goods and services (or labor) that they are being exchanged for, similar to a mutual credit system.

This is not strictly speaking true and therefore tends to be misleading. Specifically, Riegel recommended basing a new independent monetary value on an already existing one, a dollar at a particular point in time, and calling that a valun (Value Unit). Riegel described how goods and services might price themselves according to supply and demand based on such a standard, but he nevertheless recommended basing a new value standard on an existing one.

This was essentially what the founders of the American republic did when they defined a dollar in 1792 as 371.25 grains of silver, approximately the same as the Spanish milled dollar or “piece of eight” which was widely circulated, recognized and used as a stable medium of trade at the time. What the founders failed to do however was to state that a dollar would have to be the amount of silver affordable in any year subsequent to 1792 required to buy 371.25 grains of silver in 1792. This was Riegel's principal contribution, recognizing that commercial value required an independent yardstick that was planted in time and would not be affected by mere changes in commodities prices based on supply and demand. Riegel referred to this starting position as the Figure 1.

Essentially, a greater number of choices in monetary standards will increase the dignity of the common man and the overall prosperity of the people. In extrapolating this mutual participatory banking system, I doubt Riegel would have advocated that the valun currency unit assume the new monopoly privilege barring other free enterprise entrants. Therefore, other private currency units would evolve naturally and they would be competing directly against the valun.

We will certainly see more of this as bitcoin has shown itself capable of providing a market. More other kinds of money will certainly follow.

This is where it gets interesting.

Although Hayek departed from some of his Austrian peers in turning towards a totally free market monetary system that may end up not being based on a 100% gold-backed monetary unit, his insistence on free banking and market-determined standards was unwavering. In the worldwide evolution of standards left free to develop unhindered, I maintain that a metals based monetary unit will tend to dominate in the race for nonpolitical digital currency adoption.

This is where we step right up to it and proclaim that instead of our Figure 1 being a dollar, or any other “public” currency, our Figure 1 is in fact the price of a troy ounce of gold at a particular point in time from which time we can calculate how much gold or silver it takes to buy so many Value Units, as compared with 1,000 VU per ounce of gold on November 2, 2011, an easy date to remember. Our solution will achieve a true bimetalism because though the initial stack of monetary units was measured in gold, there is also an initial value for the number of Value Units per troy ounce of silver. We aren't using spot prices either but actual bullion prices as we fully intend to become a large player in the precious metals markets. We will not want to hold anyone else's money, but we will hold gold and silver in order to make the exchanges back into their money from ours.

We can observe this today in the many digital currency companies jockeying for adoption and circulation. The digital gold currency issuers, as opposed to the digital fiat currency issuers, appear to have a distinct advantage in trust when the elements of jurisdiction and political risk are removed. Otherwise, why would e-gold have achieved such market dominance before being challenged legally by the U.S. authorities? The evidence to date is that online, cross-border digital currency users will gyrate toward objectively-measured value, such as gold, rather than abstract subjective value.

Again, the proposal outlined on this blog is so far the only one that recognizes the intrinsic qualities (no matter how misguided they are in fact) of the precious metals for offering an objective means of exchange (barter) between their money (which we do not want) and ours.

What Riegel did not foresee as possible in the 1940s was technology’s ability to permit competing non-State currency providers to issue online and beyond political boundaries. This is a paramount change to the money issuing landscape, not least of which allows for immediate convertibility, partial or full. Riegel’s market process for nonpolitical money is correct; however, the conclusions that he reaches regarding the separation of standard unit of value and the State are not realistic.

Except that it is beyond dispute that the present monetary order, where the state is the primary money issuer, though through arrangements through a central bank, is an inherently illegitimate system, of a kind which has failed many times and shall fail again, and while the present system enjoys patronage it contributes to both poverty and war. While we are forced to admit the frankly monopolistic nature of the present monetary order and yes that it is unrealistic to challenge its legitimacy openly, this cannot prevent us from thinking and planning for a time when a new and better monetary order can be pursued. Though we accept that alternative money may exist and that is the function of a free market, ultimately the strongest monetary unit will survive and displace all others. Riegel himself foresaw a time when the economics worldwide would be local but the money unit they all used would be the same.

The challenge for the community currency crowd is to demonstrate in practice how a valun or a local time-labor note will prevail over a metals-based currency unit in the digital world.

Jon Matonis
The Monetary Future

Jon Matonis is an Austrian School economist focused on expanding the circulation of nonpolitical digital currencies. He argues that what is about to happen in the world of money is nothing less than the birth of a new Knowledge Age industry: the development, issuance, and management of private currencies. Edwin Clarence Riegel (1879-1953), generally known as E.C. Riegel, was an independent scholar, author and consumer advocate who campaigned against restrictions on free markets that harmed consumers and promoted an alternative monetary theory and an early private enterprise currency alternative.

Our purpose is to continue to plot the course of the precious metals, plus their trading ranges against the major world currencies and against our proposed Value Unit. So far, the world gold market is purposely being rigged to favour the Japanese yen as a “carry trade” currency for the precious metals. In practical terms this means that for sizable purchases it pays to buy in yen than anything else at the moment. What we can do is choose a new initial Figure 1 value for gold (or silver) for a particular currency should their prices indicate that the brokers are favouring one currency over the others. However once the initial price goes up, it never comes down. This provides the Value Unit with “hardness” over time. Parenthetically after initialization, no Value Unit should ever trade for less than its price at inception. Ever!

David Burton

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