Denationalisation of Money: The Argument Refined

For in every country of the world, I believe, the avarice and injustice of princes and sovereign states abusing the confidence of their subjects, have by degrees diminished the real quality of the metal, which had been originally contained in their coins,

ADAM SMITH

(The Wealth of Nations (1776), I. iv, Glasgow edn.,

Oxford, 1976, p. 43.)

In my despair about the hopelessness of finding a politically feasible solution to what is technically the simplest possible problem, namely to stop inflation, I threw out in a lecture delivered about a year ago1 a somewhat startling suggestion, the further pursuit of which has opened quite unexpected new horizons. I could not resist pursuing the idea further, since the task of preventing inflation has always seemed to me to be of the greatest importance, not only because of the harm and suffering major inflations cause, but also because I have long been convinced that even mild inflations ultimately produce the recurring depressions and unemployment which have been a justified grievance against the free enterprise system and must be prevented if a free society is to survive.

The further pursuit of the suggestion that government should be deprived of its monopoly of the issue of money opened the most fascinating theoretical vistas and showed the possibility of arrangements which have never been considered. As soon as one succeeds in freeing oneself of the universally but tacitly accepted creed that a country must be supplied by its government with its own distinctive and exclusive currency, all sorts of interesting questions arise which have never been examined. The result was a foray into a wholly unexplored field. In this short work I can present no more than some discoveries made in the course of a first survey of the terrain. I am of course very much aware that I have only scratched the surface of the complex of new questions and that I am still very far from having solved all the problems which the existence of multiple concurrent currencies would raise. Indeed, I shall have to ask a number of questions to which I do not know the answer; nor can I discuss all the theoretical problems which the explanation of the new situation raises. Much more work will yet have to be done on the subject; but there are already signs that the basic idea has stirred the imagination of others and that there are indeed some younger brains at work on the problem.2

The main result at this stage is that the chief blemish of the market order which has been the cause of well-justified reproaches, its susceptibility to recurrent periods of depression and unemployment, is a consequence of the age-old government monopoly of the issue of money. I have now no doubt whatever that private enterprise, if it had not been prevented by government, could and would long ago have provided the public with a choice of currencies, and those that prevailed in the competition would have been essentially stable in value and would have prevented both excessive stimulation of investment and the consequent periods of contraction.

The demand for the freedom of the issue of money will at first, with good reason, appear suspect to many, since in the past such demands have been raised again and again by a long series of cranks with strong inflationist inclinations. From most of the advocates of ‘Free Banking’ in the early 19th century (and even a substantial section of the advocates of the ‘banking principle’) to the agitators for a ‘Free Money’ (Freigeld)— Silvio Gesell [22] and the plans of Major C. H. Douglas [13], H. Rittershausen [51] and Henry Meulen [44]—in the 20th, they all agitated for free issue because they wanted more money. Often a suspicion that the government monopoly was inconsistent with the general principle of freedom of enterprise underlay their argument, but without exception they all believed that the monopoly had led to an undue restriction rather than to an excessive supply of money. They certainly did not recognise that government more often than any private enterprise had provided us with the Schwundgeld (shrinking money) that Silvio Gesell had recommended.

I will here merely add that, to keep to the main subject, I will not allow myself to be drawn into a discussion of the interesting methodological question of how it is possible to say something of significance about circumstances with which we have practically no experience, although this fact throws interesting light on the method of economic theory in general.

In conclusion I will merely say that this task has seemed to me important and urgent enough to interrupt for a few weeks the major undertaking to which all my efforts have been devoted for the last few years and the completion of which still demands its concluding third volume.3 The reader will, I hope, understand that in these circumstances, and against all my habits, after completing a first draft of the text of the present Paper, I left most of the exacting and time-consuming task of polishing the exposition and getting it ready for publication to the sympathetic endeavours of Mr Arthur Seldon, the Editorial Director of the Institute of Economic Affairs, whose beneficial care has already made much more readable some of my shorter essays published by that Institute, and who has been willing to assume this burden. His are in particular all the helpful headings of the sub-sections and the ‘Questions for Discussion’ at the end. And the much improved title of what I had intended to call Concurrent Currencies was suggested by the General Director of the Institute, Mr Ralph Harris. I am profoundly grateful to them for thus making possible the publication of this sketch. It would otherwise probably not have appeared for a long time, since I owe it to the readers of Law, Legislation and Liberty that I should not allow myself to be diverted from completing it by this rather special concern for longer than was necessary to get a somewhat rough outline of my argument on paper.

A special apology is due to those of my many friends to whom it will be obvious that, in the course of the last few years when I was occupied with wholly different problems, I have not read their publications closely related to the subject of this Paper which would probably have taught me much from which I could have profited in writing it.

_____________

4 See [31]. Numbers in square brackets will throughout refer to the Bibliography at the end of the Paper (pp. 138-144).

5 See [35], [59] and [60].

6 Law, Legislation and Liberty: Vol. I was Rules and Order, Routledge & Kegan Paul, 1973. Vol. 2, The Mirage of Social Justice, will appear about the same time as the present Paper. Vol. 3, The Political Order of a Free Society, nearing completion, will be published, I hope, in 1978.

• 1See [31]. Numbers in square brackets will throughout refer to the Bibliography at the end of the Paper (pp. 138-144).
• 2See [35], [59] and [60].
• 3Law, Legislation and Liberty: Vol. I was Rules and Order, Routledge & Kegan Paul, 1973. Vol. 2, The Mirage of Social Justice, will appear about the same time as the present Paper. Vol. 3, The Political Order of a Free Society, nearing completion, will be published, I hope, in 1978.
• 4In my despair about the hopelessness of finding a politically feasible solution to what is technically the simplest possible problem, namely to stop inflation, I threw out in a lecture delivered about a year ago a somewhat startling suggestion, the further pursuit of which has opened quite unexpected new horizons. I could not resist pursuing the idea further, since the task of preventing inflation has always seemed to me to be of the greatest importance, not only because of the harm and suffering major inflations cause, but also because I have long been convinced that even mild inflations ultimately produce the recurring depressions and unemployment which have been a justified grievance against the free enterprise system and must be prevented if a free society is to survive.
• 5The further pursuit of the suggestion that government should be deprived of its monopoly of the issue of money opened the most fascinating theoretical vistas and showed the possibility of arrangements which have never been considered. As soon as one succeeds in freeing oneself of the universally but tacitly accepted creed that a country must be supplied by its government with its own distinctive and exclusive currency, all sorts of interesting questions arise which have never been examined. The result was a foray into a wholly unexplored field. In this short work I can present no more than some discoveries made in the course of a first survey of the terrain. I am of course very much aware that I have only scratched the surface of the complex of new questions and that I am still very far from having solved all the problems which the existence of multiple concurrent currencies would raise. Indeed, I shall have to ask a number of questions to which I do not know the answer; nor can I discuss all the theoretical problems which the explanation of the new situation raises. Much more work will yet have to be done on the subject; but there are already signs that the basic idea has stirred the imagination of others and that there are indeed some younger brains at work on the problem.
• 6In conclusion I will merely say that this task has seemed to me important and urgent enough to interrupt for a few weeks the major undertaking to which all my efforts have been devoted for the last few years and the completion of which still demands its concluding third volume. The reader will, I hope, understand that in these circumstances, and against all my habits, after completing a first draft of the text of the present Paper, I left most of the exacting and time-consuming task of polishing the exposition and getting it ready for publication to the sympathetic endeavours of Mr Arthur Seldon, the Editorial Director of the Institute of Economic Affairs, whose beneficial care has already made much more readable some of my shorter essays published by that Institute, and who has been willing to assume this burden. His are in particular all the helpful headings of the sub-sections and the ‘Questions for Discussion’ at the end. And the much improved title of what I had intended to call Concurrent Currencies was suggested by the General Director of the Institute, Mr Ralph Harris. I am profoundly grateful to them for thus making possible the publication of this sketch. It would otherwise probably not have appeared for a long time, since I owe it to the readers of Law, Legislation and Liberty that I should not allow myself to be diverted from completing it by this rather special concern for longer than was necessary to get a somewhat rough outline of my argument on paper.