I shall assume for the rest of this discussion that it will be possible to establish a number of institutions in various parts of the world which are free to issue notes in competition and similarly to carry cheque accounts in their individual denominations. I shall call these institutions simply ‘banks’, or ‘issue banks’ when necessary to distinguish them from other banks that do not choose to issue notes.

It has for so long been treated as a self-evident proposition that the supply of money cannot be left to competition that probably few people could explain why. As we have seen, the explanation appears to be that it has always been assumed that there must be only one uniform kind of currency in a country, and that competition meant that its amount was to be determined by several agencies issuing it independently.

Money is usually defined as the generally acceptable medium of exchange,1 but there is no reason why within a given community there should be only one kind of money that is generally (or at least widely) accepted.

The chief attraction the issuer of a competitive currency has to offer to his customers is the assurance that its value will be kept stable (or otherwise be made to behave in a predictable manner). We shall leave for Section XII the question of precisely what kind of stability the public will probably prefer.

Since it is my thesis that the public would select from a number of competing private currencies a better money than governments provide, I must now examine the process and the criteria by which such a selection would take place.

Strictly speaking, in a scientific sense, there is no such thing as a perfectly stable value of money—or of anything else. Value is a relationship, a rate of equivalence, or, as W. S.

The usual assumptions of monetary theory, that there is only one kind of currency, the money, and that there is no sharp distinction between full money and mere money substitutes, thus disappear.

We have so far provisionally assumed that the kind of money individuals will prefer to use will also be most conducive to the smooth functioning of the market process as a whole. Although this is plausible and, as we shall see, approximately true in practice, it is not self-evident. We have still to examine the validity of this belief.

Neither a general increase nor a general decrease of prices appears to be possible in normal circumstances so long as several issuers of different currencies are allowed freely to compete without the interference of government. There will always be one or more issuers who find it to their advantage to regulate the supply of their currency so as to keep its value constant in step with the aggregate price of a bundle of widely used commodities.