Denationalisation of Money: The Argument Refined

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.

This is a question on which we have little empirical knowledge. It would be of little use to try asking the people (perhaps by an opinion poll). Never having been in such a position, most people have never thought or formed an opinion about what they would do. We can merely attempt to derive the probable character of individual decisions from our general knowledge of the purpose for which people want money, and the manner in which they act in similar situations. This is, after all, the procedure by which most of economic theory has been built up and has arrived at conclusions usually confirmed by later experience. We must not, of course, assume that people will at once act rationally in a new situation. But, if not by insight, they would soon learn by experience and imitation of the most successful what conduct best serves their interests.1 A major change like the one considered here might at first cause much uncertainty and confusion. Yet I do not think there is much reason to doubt that people would soon discover what rational consideration could have told them at once. Whether in practice the process would be fast or slow may differ from country to country.2

Four uses of money

There are four kinds of uses of money that would chiefly affect the choice among available kinds of currency: its use, first, for cash purchases of commodities and services, second, for holding reserves for future needs, third, in contracts for deferred payments, and, finally, as a unit of account, especially in keeping books. To treat these uses as different ‘functions’ of money is common but not really expedient. They are in effect simply consequences of the basic function of money as a medium of exchange, and will only in exceptional conditions, such as a rapid depreciation of the medium of exchange, come to be separated from it. They are also interdependent in such a way that, although at first different attributes of money may seem desirable for its different uses, money renders one service, namely that as a unit of account, which makes stability of value the most desirable of all. Although at first convenience in daily purchases might be thought decisive in the selection, I believe it would prove that suitability as a unit of account would rule the roost.

(i) Cash purchases

To the great mass of wage- and salary-earners the chief interest will probably be that they can make their daily purchases in the currency in which they are paid, and that they find prices everywhere indicated in the currency they use. Shopkeepers, on the other hand, so long as they know they can instantaneously exchange any currency at a known rate of exchange against any other, would be only too willing to accept any currency at an appropriate price. Electronic cash registers would probably be developed rapidly, not only to show instantaneously the equivalent of any price in any currency desired, but also to be connected through the computer with banks so that firms would immediately be credited with the equivalent in the currency in which they kept their accounts. (Gash balances in the currencies would be collected every evening.) On the other hand, shopkeepers would find it expedient, if two or three currencies were in common local use, to mark their wares in an easily distinguishable manner, for example in different colours for each currency, so as to ease price comparisons between shops and currencies.

(ii) Holding reserves for future payments

Beyond the desire to use his regular receipts for his ordinary expenditure, the wage- and salary-earner would probably be interested chiefly in stability. And although in his mortgage and instalment payments he might for a while profit from a depreciating currency, his wage or salary contract would incline his wishes towards an appreciating currency.

All holders of cash, that is, everybody, would prefer an appreciating currency and for this reason there might be a substantial demand for such money; but it would clearly not be to the advantage of borrowers to borrow in it, or for banks to have to maintain a value higher than that at which they issued a currency. It is conceivable that a limited amount of notes of such an appreciating currency might be issued and used for special purposes, but it would seem most unlikely that they would become generally used. The chief demand for holding would probably be for the currency in which people expected to have to pay debts.

(iii) Standard of deferred payments

When we come to the third use, as a standard of deferred payments, the primary interests of the parties to the contract would of course be precisely opposite: lenders preferring an appreciating and borrowers a depreciating currency. But each group would be of a very mixed composition, the creditors including all wage- and salary-earners as well as the owners of capital, and the debtors including the banks as well as enterprises and farmers. It therefore seems unlikely that market forces would produce a predominant bias in one direction. And, though they would all in the short run either lose or gain from changes in the value of the currency on their borrowing or lending business, they would probably all soon discover that these losses or gains were merely temporary and tended to disappear as soon as interest rates adapted themselves to expected price movements.

(iv) A reliable unit of account

It seems to me that the decisive factor that would create a general preference for a currency stable in value would be that only in such a currency is a realistic calculation possible, and therefore in the long run a successful choice between alternative currencies for use in production and trade. In particular, the chief task of accounting, to ensure that the stock of capital of the business is not eaten into and only true net gains shown as profits available for disposal by the shareholders, can be realised only if the value of the unit of account is approximately stable.

An attempt to explain further why successful economic calculation is possible only with a stable value of money raises the question of what precisely we mean by ‘the value of money’ and the various respects in which it may be kept stable. This we must leave to Section XIII. For the present we content ourselves with the empirical fact that effective capital maintenance and cost control is possible only if accounts are kept in a unit that in some sense remains tolerably stable. So we will provisionally leave the present subject with the conclusion that, in the long run at least, the effective choice between competitive offers of currencies will be the usual one of competition. The currency that will prevail will be the one preferred by the people who are helped to succeed and who in consequence will be imitated by others.

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3 Cf. C. Menger [43], p. 261: ‘There is no better way in which men can become more enlightened about their economic interests than by observation of the economic success of those who employ the correct means of achieving their ends.’

4 We must not entirely overlook the possibility that the practices and expectations of business men based on past experience, and particularly the experience of the last fifty years or so, are so much adjusted to the probability of a continuous upward trend of prices, that the realisation that average prices in future are likely to remain constant may at first have a discouraging effect. This may even make some business men prefer to deal and keep accounts in a slowly depreciating currency. I believe, however, that in the end those who have chosen a stable currency will prove more successful.

• 1Cf. C. Menger [43], p. 261: ‘There is no better way in which men can become more enlightened about their economic interests than by observation of the economic success of those who employ the correct means of achieving their ends.’
• 2We must not entirely overlook the possibility that the practices and expectations of business men based on past experience, and particularly the experience of the last fifty years or so, are so much adjusted to the probability of a continuous upward trend of prices, that the realisation that average prices in future are likely to remain constant may at first have a discouraging effect. This may even make some business men prefer to deal and keep accounts in a slowly depreciating currency. I believe, however, that in the end those who have chosen a stable currency will prove more successful.
• 3This is a question on which we have little empirical knowledge. It would be of little use to try asking the people (perhaps by an opinion poll). Never having been in such a position, most people have never thought or formed an opinion about what they would do. We can merely attempt to derive the probable character of individual decisions from our general knowledge of the purpose for which people want money, and the manner in which they act in similar situations. This is, after all, the procedure by which most of economic theory has been built up and has arrived at conclusions usually confirmed by later experience. We must not, of course, assume that people will at once act rationally in a new situation. But, if not by insight, they would soon learn by experience and imitation of the most successful what conduct best serves their interests. A major change like the one considered here might at first cause much uncertainty and confusion. Yet I do not think there is much reason to doubt that people would soon discover what rational consideration could have told them at once. Whether in practice the process would be fast or slow may differ from country to country.
• 4This is a question on which we have little empirical knowledge. It would be of little use to try asking the people (perhaps by an opinion poll). Never having been in such a position, most people have never thought or formed an opinion about what they would do. We can merely attempt to derive the probable character of individual decisions from our general knowledge of the purpose for which people want money, and the manner in which they act in similar situations. This is, after all, the procedure by which most of economic theory has been built up and has arrived at conclusions usually confirmed by later experience. We must not, of course, assume that people will at once act rationally in a new situation. But, if not by insight, they would soon learn by experience and imitation of the most successful what conduct best serves their interests. A major change like the one considered here might at first cause much uncertainty and confusion. Yet I do not think there is much reason to doubt that people would soon discover what rational consideration could have told them at once. Whether in practice the process would be fast or slow may differ from country to country.