Denationalisation of Money: The Argument Refined

A hope one may cherish is that, as competition usually does, it will lead to the discovery of yet unknown possibilities in currency. This makes any attempt at prediction of the long-run effects of the proposed reform exceedingly hazardous, but we will attempt to summarise briefly what would appear to be the probable long-run developments if it were adopted.

I believe that, once the system had fully established itself and competition had eliminated a number of unsuccessful ventures, there would remain in the free world several extensively used and very similar currencies. In various large regions one or two of them would be dominant, but these regions would have no sharp or constant boundaries, and the use of the currencies dominant in them would overlap in broad and fluctuating border districts. Most of these currencies, based on similar collections of commodities, would in the short run fluctuate very little in terms of one another, probably much less than the currencies of the most stable countries today, yet somewhat more than currencies based on a true gold standard. If the composition of the commodity basket on which they are based were adapted to the conditions of the region in which they are mainly used, they might slowly drift apart. But most of them would thus concur, not only in the sense of running side by side, but also in the sense of agreeing with one another in the movement of their values.

After the experimental process of finding the most favoured collection of commodities to the price of which the currency was to be tied, further changes would probably be rare and minor. Competition between the issuing banks would concentrate on the avoidance of even minor fluctuations of their value in terms of these commodities, the degree of information provided about their activities, and various additional services (such as assistance in accounting) offered to their customers. The currencies issued by any surviving government banks would often themselves be driven more and more to accept and even to seek payment in currencies other than those issued by a favoured national institution.

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The possibility of a multiplicity of similar currencies

There exists, however, a possibility or even probability I did not consider in the First Edition. After certain currencies based on a particular batch of commodities have become widely accepted, many other banks might, under different names, issue currencies the value of which was based on the same collection of commodities as the one successful first, either in the same or smaller or larger units. In other words, competition might lead to the extensive use of the same commodity base by a large number of issue banks that would still compete for the favour of the public through the constancy of the value of their issues or other services they offer. The public might then learn to accept a considerable number of such moneys with different names (but all described as, say, of ‘Zurich Standard’) at constant rates of exchange; and shops might post lists of all the currencies which they were prepared to accept as representing that standard. So long as the press properly exercised its supervisory function and warned the public in time of any dereliction of duty on the part of some issuers, such a system might satisfactorily serve for a long time.

Considerations of convenience would probably also lead to the adoption of a standard unit, i.e. based not only on the same collection of commodities but also of the same magnitude. In this case most banks could issue, under distinct names, notes for these standard units which would be readily accepted locally as far as the reputation of the individual bank extended.

The preservation of a standard of long-term debts even while currencies may lose their value

With the availability of at least some stable currencies the absurd practice of making ‘legal tender’ a mere token which may become valueless but still remain effective for the discharge of debts contracted in what had been an object of a certain value is bound to disappear. It was solely the power of government to force upon people what they had not meant in their contracts which produced this absurdity. With the abolition of the government monopoly of issuing money the courts will soon understand, and, I trust, statute law recognise, that justice requires debts to be paid in terms of the units of value which the parties to the contracts intended and not in what government says is a substitute for them. (The exception is where the contract explicitly provides for a stated number of tokens rather than for a value expressed in terms of an amount of tokens.)

After the development of a widely preferred common standard of value the courts would in most cases have no difficulty in determining the approximate magnitude of the abstract value intended by the parties to a contract for the value of such and such an amount of a widely accepted unit of currency. If one currency in terms of the value of which a contract had been concluded seriously depreciated beyond a reasonable range of fluctuation, a court would not allow the parties to gain or lose from the malpractice of the third party that issued the currency. They would without difficulty be able to determine the amount of some other currency or currencies with which the debtor was entitled and obliged to discharge his obligation.

As a result, even the complete collapse of one currency would not have the disastrous far-reaching consequences which a similar event has today. Though the holders of cash, either in the form of notes or of demand deposits in a particular currency, might lose their whole value, this would be a relatively minor disturbance compared with the general shrinkage or wiping out of all claims to third persons expressed in that currency. The whole structure of long-term contracts would remain unaffected, and people would preserve their investments in bonds, mortgages and similar forms of claims even though they might lose all their cash if they were unfortunate to use the currency of a bank that failed. A portfolio of bonds and other long-term claims might still be a very safe investment even if it happened that some issuers of currency became insolvent and their notes and deposits valueless. Completely liquid assets would still involve a risk—but who wants, except perhaps temporarily, to keep all his assets in a very liquid form? There could never occur that complete disappearance of any common standard of debts or such a wiping out of all monetary obligations as has been the final effect of all major inflations. Long before this could happen, everybody would have deserted the depreciated unit and no old obligation could be discharged in terms of it.

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New legal framework for banking

While governments should not interfere in this development by any conscious attempts at control (i.e. any acts of intervention in the strict sense of the term), it may be found that new rules of law are needed to provide an appropriate legal framework within which the new banking practices could successfully develop. It would, however, seem rather doubtful whether it would assist developments if such rules were at once made generally applicable by international treaties and experimentation with alternative arrangements thereby prevented.

How long it would take for some countries no longer to desire to have a currency of their own for purely nationalistic or prestige reasons, and for governments to stop misleading the public by complaining about an undue restriction of their sovereign power, is difficult to say.1 The whole system is of course wholly irreconcilable with any striving for totalitarian powers of any sort.

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2 Indeed it would be the day of final triumph of the new system when governments began to prefer to receive taxes in currencies other than those they issue!

• 1A real difficulty could arise if a sudden large increase in the demand for such a stable currency, perhaps due to some acute economic crisis, had to be met by selling large amounts of it against other currencies. The bank would of course have to prevent such a rise in the value and could do so only by increasing its supply. But selling against other currencies would give it assets likely to depreciate in terms of its own currency. It probably could not increase its short-term lending very rapidly, even if it offered to lend at a very low rate of interest—even though in such a situation it would be safer to lend even at a small negative rate of interest than to sell against other currencies. And it would probably be possible to grant long-term loans at very low rates of interest against negotiable securities (in terms of its own currency) which it should be easy to sell if the sudden increase of demand for its currency should be as rapidly reversed.
• 2The issuing bank could, at first, at no prohibitive cost keep in cash a 100 per cent reserve of the currencies in terms of which it had undertaken to redeem its issue and still treat the premiums received as freely available for general business. But once these other currencies had, as the result of further inflation, substantially depreciated relative to the ducat, the bank would have to be prepared, in order to maintain the value of the ducat, to buy back substantial amounts of ducats at the prevailing higher rate of exchange. This means that it would have to be able rapidly to liquidate investments of very large amounts indeed. These investments would therefore have to be chosen very carefully if a temporary rush of demand for its currency were not to lead to later embarrassment when the institution that had initiated the development had to share the market with imitators. Incidentally, the difficulty of finding investments of an assured stable value to match similar obligations would not be anything like as difficult for such a bank as we are considering as present-day bankers seem to find it: all the loans made in its own currency would of course represent such stable assets. The curious fact that such an issuing bank would have claims and obligations in terms of a unit the value of which it determined itself, though it could not do so arbitrarily or capriciously without destroying the basis of its business, may at first appear disturbing but should not create real difficulties. What may at first appear somewhat puzzling accounting problems largely disappear when it is remembered that such a bank would of course keep its accounts in terms of its own currency. The outstanding notes and deposits of such a bank are not claims on it in terms of some other unit of value; it determines itself the value of the unit in terms of which it has debts and claims and keeps its books. This will cease to seem shocking when we remember that this is precisely what practically all central banks have been doing for nearly half a century—their notes were of course redeemable in precisely nothing. But notes which may appreciate relatively to most other capital assets may indeed present to accountants problems with which they never before had to deal. Initially the issuing bank would of course be under a legal obligation to redeem its currency in terms of the other currencies against which it was at first issued. But after it has existed for some time their value may have shrunk to very little or they may have altogether disappeared.