The solution to the expansion of the money supply by the government (an effect of which is a rise in the general level of prices) — inflation — is to end government’s monopoly on money by establishing free-banking. In the interim, one possible option might be a gold standard, since unlike paper dollars, gold cannot be counterfeited, by private or public agencies.
Under a capitalist system, there would be no legal tender laws to force citizens to use a particular form of currency; rather each citizen would have the freedom to choose what asset they would wish to use as a medium of exchange (money) — most likely this choice would be gold.
Quoting Richard Salsman, in Breaking the Banks: Central Banking Problems and Free Banking Solutions:
Central banking has failed to improve upon what Nobel economist Friedrich Hayek called “the spontaneous social order” of free banking, a failure that can be seen as a special case of the general failure of central economic planning. More precisely, it is the difference between private planning based on economic profit and bureaucratic planning based on political expediency. The money and banking system is too important to our freedom and our economic prosperity to be left to political manipulation. The system should be placed on an objective foundation of free-market principles and removed from the subjective quicksand of political manipulation. It should be governed by the rule of law and contract, not by the arbitrary rule of men. We know this has been the most useful approach in every other branch of industry. It is time to discover it in money and banking. Free banking offers an exciting, innovative, and prudent alternative to the central banking system that has destroyed sound money and sound banking.
- Breaking the Banks: Central Banking Problems and Free Banking Solutions by Richard Salsman (pdf)