The United States is in the process of replacing its $100 bill. The Mint was supposed to bring a newly designed bill to the public in 2011, but several botched designs have delayed introduction.
The latest mishap saw $3 billion printed but unusable due to excessive use of ink. Previous problems include spotty printing and even a theft of the as-yet-unreleased bills on their way to the Federal Reserve.
The drive for a new bill is to deter counterfeiters. The U.S. $100 bill is still the money of choice in the black market, and in particular it is a lucrative object to counterfeit. Indeed, as the highest denomination bill printed by the United States, it is the most lucrative bill to counterfeit.
Luckily this latest mishap in money production will only “cost” the taxpayer about $2.34 million. This is because the new bills cost about 7.8 cents each to produce.
While the government seems to be striving for a noble cause by stamping out counterfeiters, it is actually the guiltiest party to the crime. Consider the finances of the $100 bill. The markup is about 128,000 percent. Thanks to legal tender laws, businesses and individuals are obliged to accept these bills in the payment of purchases and debts. Sounds like a good business, so where do I invest?
We the people are not allowed to partake in this avenue of business. In fact, money production is one of the few goods which is off limits to the entrepreneur. This is unfortunate.
The common reason given is that when the cost of something is low (or close to zero, as in the case of money) the free market will overproduce it. If we get overproduction in money its value will tend to zero, and as such it will be useless. Hence, the free market cannot efficiently produce money and the chosen alternative is to place production in the caring hands of the government.
Yet the reason the cost of money production is now close to zero is because it is in the hands of government. Consider that our money functions as such by fiat, or command of law. A $100 bill is a small piece of paper with some writing on it, nothing more and nothing less. If you take it to your bank and ask to redeem it for something of value, you will get another bill. If the bank takes it to the central bank and asks for something for it, they will either get another bill, or the equivalent value in government bonds.
Once upon a time money didn’t come for free. There was a real cost to produce it as it represented a form of real wealth, gold usually. Competitive forces saw private banks issue their own currencies, and offer innovative features to make their currencies attractive to customers (e.g., physical beauty or difficult to counterfeit designs). Because money was costly to produce there were real competitive checks on its production. There is a long history of competitive banks successfully offering monies all around the world, notably in Canada, the United States and Scotland.
Everyone is well aware of the endemic spending problem in government today. Budget deficits have become the norm, and political gridlock makes it unlikely that the necessary spending cuts will materialize to put these finances on a sustainable path. I too would not be quick to tighten my belt if I had access to easy money, and I cannot much blame the elected officials for being in the same place. What is needed is a change in their incentives to make them cognizant of the real cost of printing (and by extension, spending) money.
This change could happen easily, in one of two ways. Either remove government from the production of money, or allow individuals to seek alternatives. Private banks can issue money effectively, just as private companies produce cars, t-shirts and apples with no significant problems. Alternatively, or preferably, in conjunction with this first change, eliminating legal tender laws will give citizens choice in which money they chose. Then we’ll see how well the government can compete against private banks without getting a leg up from the law.