How much choice do you want?
Most of us would be appalled by the lack of consumer choice in the old Soviet Union. We like walking into a big grocery store and seeing many options to choose from. But is more choice always good?
Suppose there were many systems of weights and measures in our daily life. You drive down the street and choose between gas stations that sell gas by the gallon and those that use quarts or pints. A few even use liters. That would be quite confusing. Because of “network effects”, we generally prefer a single unit of measurement.
Similarly, the unit of account is a way of measuring value. One could imagine some gas stations pricing their product in terms of Citibank dollars, while others used JP Morgan dollars or Wells Fargo dollars. But if the exchange rate between these various currencies fluctuated from day to day, then there would be multiple units of account, which would be pretty confusing.
On the other hand, that sort of competition in currency would present no problem at all if the economy had a single unit of account, and all the competing private currencies were backed by a common medium of account (something like gold or Federal Reserve Notes.) In that case, gas stations might accept any of the reputable competing currencies, just as they accept multiple credit cards.
When discussing monetary reform possibilities with libertarians, I am often frustrated by people conflating multiple media of exchange (the free banking debate) and multiple units of account (the monetary standard debate.) There’s no problem at all with competing media of exchange. In contrast, competing units of account seems so unlikely as to be hardly worth considering. (Countries with hyperinflation are a different story; they often have competing units of account. But that’s not a good sign!)
To be clear, I believe that people should be free to offer competing media of account. Let 1000 Bitcoins bloom. Because of network effects, however, I see it as overwhelmingly likely that a single medium of account will win out in the competition to become the unit of account in the US. Life is short, and I don’t plan on wasting lots of time thinking about hypothetical economies with multiple units of account.
If I’m right, then we need to think about what sort of media of account is best. Over its history, the US has had one official unit of account (the US dollar) and two types of media of account (initially it was commodities like gold and silver, and more recently fiat base money.) Going back to gold as the medium of account is an option, albeit not a wise option in my view. Silver might be slightly less bad. (BTW, the US going back to gold would not restore the classical gold standard.)
Is laissez-faire an option? Not immediately. There is trillions in US dollar base money out in circulation—some sort of decision must be made. You could legalize counterfeiting. That’s a decision. You could freeze the monetary base and allow private banknotes—that’s a decision. You could go back to the gold standard at 1/2000 oz. per dollar—that’s a decision. But it’s sheer fantasy to think that from this position in history we could simply move to laissez faire, abolish the Fed, and let the market decide on a new medium of account. People who speak of “ripping off the band-aid” have no idea how much blood would flow. You may not care about the value of the US dollar, but people who have their life saving in that currency have a lot at stake. And that’s equally true even if it the initial decision to move from gold to fiat money was a mistake.
Smaller countries such as Canada have more options. If the Bank of Canada decided to fold up shop it might agree to exchange all Canadian base money for foreign currency. In that case, Canadians would probably adopt the US dollar. But that doesn’t eliminate the need for thoughtful monetary policy; it simply outsources the decision of how to manage the medium of account to the US.
As a practical matter, the future status of America’s medium of account is a decision that will be made by the US government. There is no plausible alternative. My preference is for a system of NGDP targeting, where market forces determine the money supply and interest rates. But even in that case the NGDP target would be set by the government. If we go back to gold, that’s a decision that would be made by the government.
Commenters have provided lots of counterarguments, but none of them amount to anything much beyond: Assume a libertarian paradise where a freely chosen monetary regime magically appears.
If only things were that simple.
PS. Surprisingly, America once had a Morgan dollar. Here’s what it looked like: