The competition is tough these days, except for our legal tender.
Competition makes markets work better. Economic theory and historical experience show the best outcome occurs in markets where competition is the highest.
Consumers benefit when car companies, cellular providers or computer manufacturers add new features and improve reliability to beat out their rivals. Competition increases choices and improves living standards.
Unfortunately, when it comes to a product consumers use everyday there is no choice. United States law allows consumers to use only one form of money.
The paper money we use today obtained its legal status during the Civil War. In 1862, Congress passed the Legal Tender Act, which first authorized the use of paper notes to pay the government's bills.
Today the U.S. Federal Reserve is the only institution authorized to produce money and has no obligation to redeem the paper for anything else. The courts recognize only Federal Reserve notes for fulfillment of economic obligations.
With monopoly power over money, the Fed controls many aspects of our economy. Arguably, the Fed is abusing this power given the sharp rise in gasoline and food prices over the past year.
High unemployment is pressuring businesses to hold prices steady, so overall inflation remains below long-term averages. However, food prices are nearly 5 percent higher over the past year, while consumer energy costs are up almost 20 percent.
The Fed’s loose monetary policies are blamed for food and energy inflation in the U.S. and abroad. In response, many call for a return to a metals-based currency.
During the 2010 legislative session, Idaho considered House Bill 633, which would have required the state to accept silver for the payment of fees and taxes. Last month the Utah House of Representatives passed a bill giving gold and silver legal tender status.
These actions would likely have little effect on most markets but would provide at least some competition to the dollar. But why gold and silver?
Switching to commodity money simply switches the risks to those commodities. Yes, the Fed’s power is limited, but productive resources are diverted to digging up these hard to carry minerals that have little use beyond their supposed intrinsic value.
Furthermore, limiting the government’s control over money with a metals standard will not necessarily control inflation. If the supply of gold or silver rises, because of some new find or productive mining technique, prices also will rise.
A key requirement of free-market capitalism is competition. It is tough for the system to work when the market for one of its most important products is not free. The government should get out of the money business.
In a free-banking system, private firms issue money and compete by limiting supply and backing their bills with something consumers trust. The system need not be limited to banks. Any institution that can gain consumer trust could issue and profit from money creation. Consumers may favor “GE dollars” or "Google notes."
Consumers like choices. Give them a choice of legal tender.
PETER R. CRABB Professor of finance and economics at Northwest Nazarene University in Nampa.