This is a fundamentally untestable hypothesis: there are many currencies that have suffered hyperinflation, yes, but many others which have gone on for decades without any real harm. You can claim that at some point in the future the currency will fail, and no matter how much time goes by you still won't be proven wrong.
As it happens, commodity-backed currencies aren't immune to problems either. The informal use of tobacco as currency in the colonial South led to a vast overproduction of tobacco and what we would today recognize as severe inflation (Friedman, Free to Choose). You need commodities that are inherently difficult to increase the supply of. In the 19th century, the American government had a seemingly perfect solution: a fixed ratio of dollars to silver, as well as a separate fixed ratio of dollars to gold. Long story made short, a silver rush disrupted this system and necessitated a move to the pure gold standard. The gold standard directly caused a lot of deflation though, which was a severe practical problem and a contributing factor to the Great Depression.
"Throughout the history of central banking in the united states we've had all of the worst financial crises and extreme loss of value (the dollar has lost 98%) of it's value since the federal reserve took over."
As it happens, this doesn't cause any real problems. It's ideal of course for neither inflation nor deflation to occur, but the consequences of deflation are so much more dire that, as a practical concern, we err on the side of inflation.
The economic consequences of mild inflation are as follows: there is an incentive to invest or spend money rather than bury it in your back yard, and there is a small degree of information loss in the price system as prices rise due to inflation. The economic consequences of deflation (an incentive to bury money in your back yard) have catastrophic consequences. The main advantage of fiat currencies is that it's possible to grow the currency at close to the same rate as the economy itself, so the degree of inflation or deflation can be controlled and minimized, with a bias towards inflation since that is the less harmful of the two. Any natural commodity has its own fluctuations in value, both natural and artificial, i.e. the Fisk/Gould plot to corner the gold market during the Grant administration.
Finally, some notes about gold in particular. There are a number of reasons gold is an infeasible currency base in the modern day. One is that, were the entire world monetary supply backed by gold, the price of gold would be so high as to all but eliminate the use of gold for any useful purposes. Of course, the whole world wouldn't switch over at once, but any single country that did would run into a lot of problems. A large country would increase the cost of gold to unreasonable levels--a small country would be at the mercy of any other country with significant gold reserves which could, by selling off gold, tactically devalue that country's currency.
"Lastly, if a currency is good it doesn't have to be forced upon you; if people actually believed in fiat currencies they would allow competing systems and abolish legal tender laws."
Legal tender laws predate even the gold standard, and are probably a practical necessity for debt to be enforceable. At the very least, the government has to mandate a specific currency for people to pay their taxes in, and it's probably just as important for the government to mandate a specific currency for legal judgments to be paid in. There is no actual law against you setting up shop and accepting gold as payment, but if someone runs their truck into your shop and you sue them, no court is going to bend over backwards to make the truck driver pay you anything except US dollars. What you're describing is essentially a barter system, where you only accept payment in gold, your neighbor only accepts payment in silver, your friend only accepts payment in chickens, and I only accept payment in portraits of Benjamin Franklin.
So, let's say we have a gold standard. Well, as I intimated above, a gold standard is just as much a fiat currency as a "Ben Franklin portrait" standard: the government up and tells you that something is money, therefore it's worth more than it should be for any practical purpose. Given the choice, a currency that can be managed to prevent serious financial problems is preferable to a currency that can't.
I'd be more than happy to answer any other questions, or clear up any misconceptions about this issue.
1. Bimetallism (mixed gold/silver) caused significant issues due to the fact that they were setting the price of gold/silver. Setting prices never works.
2. The consequences of deflation IMHO are overblown -- eventually people will need purchase goods and stop saving/hoarding. Now of course these days with massive amount of debt everyone has deflation would be horrible. Massive inflation on the other hand, Zimbabwe today, or Weimer Germany (getting paid 3 times each day) are real threats and will rob the life savings of anyone who doesn't have the money invested or converted to real assets. Driving asset/speculation booms.
3 I agree legal tender laws have existed for a long time, but if you advocate competing currencies then legal tender laws will quickly chase the good money out of the system.
4. Anything back by a physical commodity that people want is not a fiat currency:
>>the government up and tells you that something is money, >>therefore it's worth more than it should be for any >>practical purpose.
The government doesn't have to tell you that something is money the market can decide on what it wants to use as a medium of exchange.
5. The US went off the gold standard in the 1970s and gold was still used for things besides money so I don't really see how that argument holds water.
Lastly
>> Given the choice, a currency that can be managed to prevent serious financial problems is preferable to a currency that can't.
Do you mean like how it's currently managed now? how it was managed in the great depression? Manipulation of the primary information mechanism in the world may be able to change people's behavior but only by misleading them, and only for a temporary amount of time.
"The consequences of deflation IMHO are overblown -- eventually people will need purchase goods and stop saving/hoarding."
Eventually, yes, but as a noted economist once said, in the long run we're all dead. The point is that there's a real and significant economic cost to deflation, one that is much greater than the economic cost of inflation to an equivalent degree.
"Massive inflation on the other hand, Zimbabwe today, or Weimer Germany (getting paid 3 times each day) are real threats and will rob the life savings of anyone who doesn't have the money invested or converted to real assets."
I don't see any risk of that happening to the currency in a major country that isn't completely corrupt or totally broke. One thing the Fed is able to do is prevent hyperinflation. Mild inflation, which is what we've had instead, is probably the best long-term target for currency to take.
"I agree legal tender laws have existed for a long time, but if you advocate competing currencies then legal tender laws will quickly chase the good money out of the system."
"Competing currencies", as you put it, is simply a barter system. There's no way that civil law or tax law could even work without legal tender laws, and in any case, going back to barter would be a bad solution to a non-problem.
"The US went off the gold standard in the 1970s and gold was still used for things besides money so I don't really see how that argument holds water."
The US has been cheating on the gold standard since the FDR administration anyway--and there's been enough economic growth since then to create a really big wealth-to-gold ratio compared to what it was back then. If you take the level of M2 in the United States and divide it by the US gold reserves, which is what a US return to the gold standard would require, the resulting price of gold would be orders of magnitude above what it is now and what is affordable for any feasible purpose.
"Do you mean like how it's currently managed now? how it was managed in the great depression?"
As you yourself just noted, during the Great Depression we were on the gold standard. That was actually one of the causes of the Depression.
All money is simply a barter system; money is a commodity that is traded that, there is nothing stopping and in fact many stores do have prices in dollars and euros, etc. So there is no problem with competing currencies, the problem you mention with taxes is easily fixed by specifying in what currencies your taxes will be payable in. Eventually we settle on 1 or 2 currencies, but if there was ever a problem there would not be legal reasons for creating a new one.
"I see runaway inflation as a serious threat to the united states, and I think it is very possible."
Do you have any historical evidence that it's happened in our system or in other systems like ours? The main flaw I see in your argument is your conflation of mild inflation with runaway inflation.
The kicker is, runaway inflation would happen just as readily even under a gold standard if major new gold sources are discovered, or if another major power sells their gold reserves. We have even less control over that risk than we have over the Fed.
"All money is simply a barter system..."
Yes, except you have to have a common medium of exchange that's widely accepted, and a situation without legal tender laws would eliminate that.
The thing is, once you define what currency you accept taxes in and what currency legal judgments are determined in...you have legal tender laws by definition.
1. Your first point is incorrect, when a massive amount of gold is found there will be inflation -- but it won't be runaway, prices will quickly come to reflect expected future increases in the monetary supply whereas when the government prints it there is no limit. That is why people advocate tying it to something tangible. To limit their ability to inflate.
2. You can define that you accept taxes in the following currencies; and then when defining contracts you can specify what you will be paid in. The legal judgements would support that.
This is a fundamentally untestable hypothesis: there are many currencies that have suffered hyperinflation, yes, but many others which have gone on for decades without any real harm. You can claim that at some point in the future the currency will fail, and no matter how much time goes by you still won't be proven wrong.
As it happens, commodity-backed currencies aren't immune to problems either. The informal use of tobacco as currency in the colonial South led to a vast overproduction of tobacco and what we would today recognize as severe inflation (Friedman, Free to Choose). You need commodities that are inherently difficult to increase the supply of. In the 19th century, the American government had a seemingly perfect solution: a fixed ratio of dollars to silver, as well as a separate fixed ratio of dollars to gold. Long story made short, a silver rush disrupted this system and necessitated a move to the pure gold standard. The gold standard directly caused a lot of deflation though, which was a severe practical problem and a contributing factor to the Great Depression.
"Throughout the history of central banking in the united states we've had all of the worst financial crises and extreme loss of value (the dollar has lost 98%) of it's value since the federal reserve took over."
As it happens, this doesn't cause any real problems. It's ideal of course for neither inflation nor deflation to occur, but the consequences of deflation are so much more dire that, as a practical concern, we err on the side of inflation.
The economic consequences of mild inflation are as follows: there is an incentive to invest or spend money rather than bury it in your back yard, and there is a small degree of information loss in the price system as prices rise due to inflation. The economic consequences of deflation (an incentive to bury money in your back yard) have catastrophic consequences. The main advantage of fiat currencies is that it's possible to grow the currency at close to the same rate as the economy itself, so the degree of inflation or deflation can be controlled and minimized, with a bias towards inflation since that is the less harmful of the two. Any natural commodity has its own fluctuations in value, both natural and artificial, i.e. the Fisk/Gould plot to corner the gold market during the Grant administration.
Finally, some notes about gold in particular. There are a number of reasons gold is an infeasible currency base in the modern day. One is that, were the entire world monetary supply backed by gold, the price of gold would be so high as to all but eliminate the use of gold for any useful purposes. Of course, the whole world wouldn't switch over at once, but any single country that did would run into a lot of problems. A large country would increase the cost of gold to unreasonable levels--a small country would be at the mercy of any other country with significant gold reserves which could, by selling off gold, tactically devalue that country's currency.
"Lastly, if a currency is good it doesn't have to be forced upon you; if people actually believed in fiat currencies they would allow competing systems and abolish legal tender laws."
Legal tender laws predate even the gold standard, and are probably a practical necessity for debt to be enforceable. At the very least, the government has to mandate a specific currency for people to pay their taxes in, and it's probably just as important for the government to mandate a specific currency for legal judgments to be paid in. There is no actual law against you setting up shop and accepting gold as payment, but if someone runs their truck into your shop and you sue them, no court is going to bend over backwards to make the truck driver pay you anything except US dollars. What you're describing is essentially a barter system, where you only accept payment in gold, your neighbor only accepts payment in silver, your friend only accepts payment in chickens, and I only accept payment in portraits of Benjamin Franklin.
So, let's say we have a gold standard. Well, as I intimated above, a gold standard is just as much a fiat currency as a "Ben Franklin portrait" standard: the government up and tells you that something is money, therefore it's worth more than it should be for any practical purpose. Given the choice, a currency that can be managed to prevent serious financial problems is preferable to a currency that can't.
I'd be more than happy to answer any other questions, or clear up any misconceptions about this issue.