Denationalisation of Money: The Argument Refined

IX. COMPETITION BETWEEN BANKS ISSUING DIFFERENT CURRENCIES

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. It is, however, clearly not practicable to allow tokens with the same name and readily exchangeable against each other to be issued competitively, since nobody would be in a position to control their quantity and therefore be responsible for their value. The question we have to consider is whether competition between the issuers of clearly distinguishable kinds of currency consisting of different units would not give us a better kind of money than we have ever had, far outweighing the inconvenience of encountering (but for most people not even having to handle) more than one kind.

In this condition the value of the currency issued by one bank would not necessarily be affected by the supplies of other currencies by different institutions (private or governmental). And it should be in the power of each issuer of a distinct currency to regulate its quantity so as to make it most acceptable to the public—and competition would force him to do so. Indeed, he would know that the penalty for failing to fulfil the expectations raised would be the prompt loss of the business. Successful entry into it would evidently be a very profitable venture, and success would depend on establishing the credibility and trust that the bank was able and determined to carry out its declared intentions. It would seem that in this situation sheer desire for gain would produce a better money than government has ever produced.1

Effects of competition

It seems to me to be fairly certain that

(a) a money generally expected to preserve its purchasing power approximately constant would be in continuous demand so long as the people were free to use it;

(b) with such a continuing demand depending on success in keeping the value of the currency constant one could trust the issuing banks to make every effort to achieve this better than would any monopolist who runs no risk by depreciating his money;

(c) the issuing institution could achieve this result by regulating the quantity of its issue; and

(d) such a regulation of the quantity of each currency would constitute the best of all practicable methods of regulating the quantity of media of exchange for all possible purposes.

Clearly a number of competing issuers of different currencies would have to compete in the quality of the currencies they offered for loan or sale. Once the competing issuers had credibly demonstrated that they provided currencies more suitable to the needs of the public than government has ever provided, there would be no obstacle to their becoming generally accepted in preference to the governmental currencies—at least in countries in which government had removed all obstacles to their use. The appearance and increasing use of the new currencies would, of course, decrease the demand for the existing national ones and, unless their volume was rapidly reduced, would lead to their depreciation. This is the process by which the unreliable currencies would gradually all be eliminated. The condition required in order that this displacement of the government money should terminate before it had entirely disappeared would be that government reformed and saw to it that the issue of its currency was regulated on the same principles as those of the competing private institutions. It is not very likely that it would succeed, because to prevent an accelerating depreciation of its currency it would have to respond to the new currencies by a rapid contraction of its own issue.

‘A thousand hounds’: the vigilant press

The competition between the issuing banks would be made very acute by the close scrutiny of their conduct by the press and at the currency exchange. For a decision so important for business as which currency to use in contracts and accounts, all possible information would be supplied daily in the financial press, and have to be provided by the issuing banks themselves for the information of the public. Indeed, a thousand hounds would be after the unfortunate banker who failed in the prompt responses required to ensure the safeguarding of the value of the currency he issues. The papers would probably print a table daily, not only of the current rates of exchange between the currencies but also of the current value, and the deviation of each of the currencies likely to be used by their readers from the announced standard of value in terms of commodities. These tables might look something like Table I (with the initials of the issuing institution given after the name of the currency it issues).

TABLE I

ILLUSTRATION OF POSSIBLE CURRENCY PRICE DEVIATIONS

	Deviation from
Currency	Announced Standard	Our Test Standard
	%	%
Ducats (SGB)	-0.04	-0.04
Florins (FNB)	+ 0.02	+0.03
Mengers (WK)	+ 0.10	+ 0.10
Piasters (DBS)	-0.06	-0.12
Reals (CNB)	-1.02	-1.01
Shekels (ORT)	-0.45	-0.45
Talents (ATBG)	+0.26	+ 0.02

Nothing would be more feared by the bankers than to see the quotation of their currency in heavy type to indicate that the real value had fallen below the standard of tolerance set by the paper publishing the table.

Three questions

This sketch of the competition between several private issuing institutions presupposes answers to a number of questions we shall have to examine in more detail in succeeding sections.

—The first is whether a competing institution issuing its distinctive currency will always be able to regulate its value by controlling its quantity so as to make it more attractive to people than other currencies, and how far other issuers of currencies can by their policy interfere with these efforts.

—The second is which value (or other attribute of a currency) the public will prefer if different banks announce that it is their intention (and demonstrate their ability) to keep announced values of their currency constant.

—A third and no less important question is whether the kind of money most people will individually prefer to use will also best serve the aims of all. Though one might at first think that this must necessarily be so, it is not inevitably true. It is conceivable that the success of people’s efforts will depend not only on the money they themselves use but also on the effects of the money others use, and the benefits they derive for themselves from using a particular kind of money may conceivably be more than offset by the disturbances caused by its general use. I do not believe this to be the case in the present instance, but the question certainly requires explicit consideration.

Before we can discuss further the interaction between currencies it will be expedient to devote a section to precisely what we mean by money or currency and its different kinds, and the various ways in which they may differ from one another.

 

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2 Apart from notes and cheque deposits in its distinctive currency, an issuing bank would clearly also have to provide fractional coins; and the availability of convenient fractional coins in that currency might well be an important factor in making it popular. It would also probably be the habitual use of one sort of fractional coins (especially in slot machines, fares, tips, etc.) which would secure the predominance of one currency in the retail trade of one locality. The effective competition between different currencies would probably be largely confined to inter-business use, with retail trade following the decisions about the currency in which wages and salaries were to be paid.

        Certain special problems would arise where present sales practices are based on the general use of uniform coins of a few relatively small standard units, as, e.g., in vending machines, transportation or telephones. Probably even in localities in which several different currencies were in general use, one set of small coins would come to dominate. If, as seems probable, most of these competing currencies were kept at practically the same value, the technical problem of the use of coins might be solved in any one of various ways. One might be that one institution, e.g. an association of retailers, specialised in the issue of uniform coins at slightly fluctuating market prices. Tradesmen and transport and communication undertakings of a locality might join to sell, at market prices and probably through the banks, a common set of tokens for all automats in the locality. We can certainly expect commercial inventiveness rapidly to solve such minor difficulties. Another possible development would be the replacement of the present coins by plastic or similar tokens with electronic markings which every cash register and slot machine would be able to sort out, and the ‘signature’ of which would be legally protected against forgery as any other document of value.

• 1Apart from notes and cheque deposits in its distinctive currency, an issuing bank would clearly also have to provide fractional coins; and the availability of convenient fractional coins in that currency might well be an important factor in making it popular. It would also probably be the habitual use of one sort of fractional coins (especially in slot machines, fares, tips, etc.) which would secure the predominance of one currency in the retail trade of one locality. The effective competition between different currencies would probably be largely confined to inter-business use, with retail trade following the decisions about the currency in which wages and salaries were to be paid.
• 2In this condition the value of the currency issued by one bank would not necessarily be affected by the supplies of other currencies by different institutions (private or governmental). And it should be in the power of each issuer of a distinct currency to regulate its quantity so as to make it most acceptable to the public—and competition would force him to do so. Indeed, he would know that the penalty for failing to fulfil the expectations raised would be the prompt loss of the business. Successful entry into it would evidently be a very profitable venture, and success would depend on establishing the credibility and trust that the bank was able and determined to carry out its declared intentions. It would seem that in this situation sheer desire for gain would produce a better money than government has ever produced.