The push for monetary reform is on, and intellectuals seeking to reform the monetary system in accordance with free market principles are seriously debating two alternative solutions. One is a return to the gold standard in some fashion. The other is a free market in currency, i.e., private currency competition. Toward the latter end, Rep. Ron Paul has sponsored a bill repealing legal tender law.
Their primary concern is the establishment of perfect money, which they define as money which changes in value the least. A much stronger case can be made for private currency competition than for a national gold standard in achieving this goal. Broadly speaking, private currency competition can provide the means to both a better concept of money (i.e., the development of an ideal monetary standard), and a better practical implementation of a monetary system.
Regarding the first advantage, some believe that humanity has already found the ideal monetary standard in gold. However, there are important reasons why alternate standards should be tested on the market, not the least of which is the theoretical case for commodity baskets.
To say that money should be stable necessarily implies that there is something by which the value of money remains stable; stability does not exist in a vacuum. It is generally accepted that commodity price trends mark the stability of the currency in which they are denominated. A decline in currency value is expressed as a general rise in the price of commodities, which are fundamental to an economy. Commodities should therefore be candidates to serve as a monetary base. Among others, Benjamin Graham and Friedrich von Hayek advocated a basket of commodities, the latter within the context of a system of private currency.
Hayek believed that the measure of a private currency’s stability would be the aggregate price of a basket of commodities in that currency over time. A constant aggregate price is the definition of stability. Issuers would achieve this stability through loan extension and expiration operations (the major, long-term method) or currency trading (the minor, day-to-day method).