Since I know there are several dopers here that aren’t only supporters of the libertarian approach to politics but also know a good deal about its theoretical background, I’d like to ask what the libertarian view about central banking, especially note issue, is.
My WAG would be a libertarian would allow any privately run monetary institution to issue its own currency, whether backed by any specified commodity, other currency or nothing at all. The stability of the currency would be guaranteed by the bank’s reputation and its own incentive to keep the rate stable (because if not, people would cease to use their money for transactions, which would ruin the bank’s business). Right?
You’ve conflated two slightly different, albeit overlapping, issues with respect to central banking and note issue. The idea that the two are synonymous is itself an artifact of government regulation. England paved the way by granting a monopoly on note issue to the Bank of England; in the United States, note issue was reserved to nationally chartered banks during the Civil War and then to the government-managed Federal Reserve in 1913.
You’re correct that, under libertarian principles, note issue would be a private function which might be performed by any bank (central or otherwise) or business, and would be regulated only by general laws against fraud and by market confidence in the note issuer. The Libertarian Party platform says:
Other central bank functions (maintenance of commercial bank reserves, supervision of commercial banks, and protection against runs) could also be performed privately, and were in the United States before 1913. However, any government which rises above anarchy will have some involvement with currency issues, because it must specify what it will accept as payment of taxes and must render payment for goods and services (even if only for soldiers and police).
To slightly expand on what’s been said, note that in a free market good money will drive out bad, whereas in a controlled market bad money will drive out good. That’s known as Gresham’s Law.
Here’s an example:
In third-world and otherwise struggling nations, people don’t want the local currency. It’s inflationary and woefully mismanaged by whatever central bank their country is saddled with. They want ‘hard currency’, money from a country like the US that has a functional economy and a well-run central bank, because it will retain value and generally be useful in buying the essentials of life.
When a country replaces a high-grade bullion coin with a lower-grade one and mandates that both kinds are worth the same amount, the lower-grade one will drive the higher-grade one out of circulation as people melt the high-grade coins down into saleable metal. The same thing happens when bullion is replaced by base-metal coins and paper money, something that has occurred in the US within living memory. There are still pennies from the 1960s in circulation, but not silver half-dollars.