Denationalisation of Money: The Argument Refined

For the vast majority of people the appearance of several concurrent currencies would merely offer them alternatives ; it would not make necessary any change in their habitual use of money. Experience would gradually teach them how to improve their position by switching to other kinds of money. Retail merchants would soon be offered by the banks the appropriate calculating equipment which would relieve them of any initial difficulties in management or accounting. Since the issuer of the money they used would be interested in supplying assistance, they would probably discover they were better served than before. In manufacture, trade and the service industries, learning to take full advantage of the new opportunities might take a little longer, but there would be no important necessary changes in the conduct of business or unavoidably difficult adaptations.

Preventing rapid depreciation of formerly exclusive currency

The two activities that would be most profoundly affected, and in which an almost complete change of habitual practices and routines would be required, are public finance and the whole range of private finance, including banking, insurance, building societies, saving and mortgage banks as well. For government, apart from the changes in financial policy mentioned in Section XXI, the chief task would be to guard against a rapid displacement and consequent accelerating depreciation of the currency issued by the existing central bank. This could probably be achieved only by instantly giving it complete freedom and independence, putting it thus on the same footing with all other issue banks, foreign or newly created at home, coupled with a simultaneous return to a policy of balanced budgets, limited only by the possibility of borrowing on an open loan market which they could not manipulate. The urgency of these steps derives from the fact that, once the displacement of the hitherto exclusive currency by new currencies had commenced, it would be rapidly speeded up by an accelerating depreciation that would be practically impossible to stop by any of the ordinary methods of contracting the circulation. Neither the government nor the former central banks would possess the reserves of other currencies or of gold to redeem all the old money the public would want to get rid of as soon as it could change from a rapidly depreciating currency to one it had reason to believe would remain stable. It could be brought to trust such a currency only if the bank issuing it demonstrated a capacity to regulate it in precisely the same manner as the new issue banks competing with it.

Introduce new currencies at once, not gradually

The other important requirement of government action, if the transition to the new order is to be successful, is that all the required liberties be conceded at once, and no tentative and timid attempt be made to introduce the new order gradually, or to reserve powers of control ‘in case anything goes wrong’. The possibility of free competition between a multiplicity of issuing institutions and the complete freedom of all movements of currency and capital across frontiers are equally essential to the success of the scheme. Any hesitant approach by a gradual relaxation of the existing monopoly of issue would be certain to make it fail. People would learn to trust the new money only if they were confident it was completely exempt from any government control. Only because they were under the sharp control of competition could the private banks be trusted to keep their money stable. Only because people could freely choose which currency to use for their different purposes would the process of selection lead to the good money prevailing. Only because there was active trading on the currency exchange would the issuing banks be warned to take the required action in time. Only because the frontiers were open to the movement of currency and capital would there be assurance of no collusion between local institutions to mismanage the local currency. And only because there were free commodity markets would stable average prices mean that the process of adapting supply to demand was functioning.

Commercial bank change in policy

If the government succeeded in handing over the business of supplying money to private institutions without the existing currency collapsing, the chief problem for the individual commercial banks would be to decide whether to try and establish their own currency, or to select the other currency or currencies in which they would in future conduct their business. The great majority clearly would have to be content to do their business in other currencies. They would thus (Sections XI and XII) have to practise a kind of ‘100 per cent banking’, and keep a full reserve against all their obligations payable on demand.

This necessity would probably prove the most far-reaching change in business practice required by competing currencies. Since these banks presumably would have to charge substantially for running chequing accounts, they would lose that business largely to the issuing banks and be reduced to the administration of less liquid kinds of capital assets.

So long as this change could be effected by a deliberate transition to the use of a currency of their choice, it might prove somewhat painful but not raise unmanageable problems. And to do away with banks which, in effect, created currency without bearing any responsibility for the results has been for more than a hundred years the desideratum of economists who perceived the inherent instability of the mechanism into which we had drifted but who usually saw no hope of ever getting out of it. An institution which has proved as harmful as fractional reserve banking without responsibility of the individual bank for the money (i.e. cheque deposits) it created cannot complain if the support by a government monopoly that has made its existence possible is withdrawn. There will certainly also have to develop generally a much sharper distinction between pure banking and the investment business, or between what used to be regarded as the English and the Continental types of banks (Depositenbanken and Spekulationsbanken as these types were once described in German). I expect that it will soon be discovered that the business of creating money does not go along well with the control of large investment portfolios or even control of large parts of industry.

A wholly different set of difficulties would of course arise if the government or its privileged bank did not succeed in preventing a collapse of its currency. This would be a possibility which the banks not able to issue their own currency would rightly fear, since a large part of their assets, namely all their loans, would dwindle away with most of their liabilities. But this would merely mean that the danger of a high inflation, of the kind that now always threatens and that others might avoid by shifting to other currencies, would for them become particularly threatening. But banks have usually claimed that they have more or less succeeded in bringing their assets through even a galloping inflation. Bankers who do not know how to do it might perhaps consult their colleagues in Chile and elsewhere where they have had plenty of experience with this problem. At any rate, to get rid of the present unstable structure is too important a task for it to be sacrificed to the interests of some special groups.