Denationalisation of Money: The Argument Refined

Though under the proposed arrangement the normal provision of money would be entirely a function of private enterprise, the chief danger to its smooth working would still be interference by the state.1 If the international character of the issuing business should largely protect the issuing banks against direct political pressure (though it would certainly invite attacks by demagogues), the trust in any one institution would still largely depend on the trust in the government under which it was established. To obviate the suspicion of serving the political interests of the country in which they were established, it would clearly be important that banks with headquarters in different countries should compete with one another. The greatest confidence, at least so long as peace was regarded as assured, would probably be placed in institutions established in small wealthy countries for which international business was an important source of income and that would therefore be expected to be particularly careful of their reputation for financial soundness.

Pressures for return to national monetary monopolies

Many countries would probably try, by subsidies or similar measures, to preserve a locally established bank issuing a distinct national currency that would be available side by side with the international currencies, even if they were only moderately successful. There would then be some danger that the nationalist and socialist forces active in a silly agitation against multinational corporations would lead governments, by advantages conceded to the national institution, to bring about a gradual return to the present system of privileged national issuers of currency.

Recurring governmental control of currency and capital movements

The chief danger, however, would threaten from renewed attempts by governments to control the international movements of currency and capital. It is a power which at present is the most serious threat not only to a working international economy but also to personal freedom; and it will remain a threat so long as governments have the physical power to enforce such controls. It is to be hoped that people will gradually recognise this threat to their personal freedom and that they will make the complete prohibition of such measures an entrenched constitutional provision. The ultimate protection against the tyranny of government is that at least a large number of able people can emigrate when they can no longer stand it. I fear that few Englishmen, most of whom thought the statement which I now repeat unduly alarmist and exaggerated when I published it more than 30 years ago, will still feel so :

‘The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges. Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference. Yet the experience of most continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty. It is in fact the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape—not merely for the rich, but for everybody. Once the individual is no longer free to travel, no longer free to buy foreign books or journals, once all means of foreign contact can be restricted to those whom official opinion approves or for whom it is regarded as necessary, the effective control of opinion is much greater than that ever exercised by any of the absolutist governments of the seventeenth and eighteenth centuries.’2

Next to the barrier to the excessive growth of government expenditure, the second fundamental contribution to the protection of individual freedom which the abolition of the government monopoly of issuing money would secure would probably be the intertwining of international affairs, which would make it more and more impossible for government to control international movements, and thus safeguard the ability of dissidents to escape the oppression of a government with which they profoundly disagreed.

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3 I use here for once the term ‘state’ because it is the expression which in the context would be commonly used by most people who would wish to emphasise the probability of the beneficial nature of these public activities. Most people rapidly become aware of the idealistic and unrealistic nature of their argument if it is pointed out to them that the agent who acts is never an abstract state but always a very concrete government with all the defects necessarily inherent in this kind of political institution.

4 Hayek [28], p. 69, note.

• 1Cf. Hayek [30], pp. 318-320.
• 2On the question of its attractiveness the discussion by S. Fischer [18] of the notorious reluctance of enterprise to issue indexed bonds is somewhat relevant. It is true that a gradual increase of the value of the notes issued by a bank in terms of other concurrent currencies might produce a situation in which the aggregate value of its outstanding notes (plus its liabilities from other sources) would exceed its assets. The bank would of course not be legally liable to redeem its notes at this value, but it could preserve this business only if it did in fact promptly buy at the current rate any of its notes offered to it. So long as it succeeded in maintaining the real value of its notes, it would never be called upon to buy back more than a fraction of the outstanding circulation. Probably no one would doubt that an art dealer who owns the plates of the engravings of a famous artist could, so long as his works remained in fashion, maintain the market value of these engravings by judiciously selling and buying, even though he could never buy up all the existing prints. Similarly, a bank could certainly maintain the value of its notes even though it could never buy back all the outstanding ones.
• 3It might be expedient that the issuing institution should from the outset announce precisely the collection of commodities in terms of which it would aim to keep the value of the ‘ducat’ constant. But it would be neither necessary nor desirable that it tie itself legally to a particular standard. Experience of the response of the public to competing offers would gradually show which combination of commodities constituted the most desired standard at any time and place. Changes in the importance of the commodities, the volume in which they were traded, and the relative stability or sensitivity of their prices (especially the degree to which they were determined competitively or not) might suggest alterations to make the currency more popular. On the whole I would expect that, for reasons to be explained later (Section XIII), a collection of raw material prices, such as has been suggested as the basis of a commodity reserve standard, would seem most appropriate, both from the point of view of the issuing bank and from that of the effects of the stability of the economic process as a whole.
• 4Is the risk in the venture therefore too big to justify entry by men with the kind of conservative temper its successful conduct probably requires? It is not to be denied that, once announced and undertaken, the decision on how large the commitment was to grow would be taken out of the hands of the issuing institution. To achieve its announced aim of maintaining the purchasing power of its currency constant, the amount would have to be promptly adapted to any change of demand, whether increase or decrease. Indeed, so long as the bank succeeded in keeping the value of its currency constant, there would be little reason to fear a sudden large reduction of the demand for it (though successful competitors might well make considerable inroads on its circulation). The most embarrassing development might be a rapid growth of demand beyond the limits a private institution likes to handle. But we can be fairly sure that, in the event of such success, new competition would soon relieve a bank of this anxiety.