Denationalisation of Money: The Argument Refined

The abolition of the government monopoly of money was conceived to prevent the bouts of acute inflation and deflation which have plagued the world for the past 60 years. It proves on examination to be also the much needed cure for a more deep-seated disease: the recurrent waves of depression and unemployment that have been represented as an inherent and deadly defect of capitalism.

Gold standard not the solution

One might hope to prevent the violent fluctuations in the value of money in recent years by returning to the gold standard or some regime of fixed exchanges. I still believe that, so long as the management of money is in the hands of government, the gold standard with all its imperfections is the only tolerably safe system. But we certainly can do better than that, though not through government. Quite apart from the undeniable truth that the gold standard also has serious defects, the opponents of such a move can properly point out that a central direction of the quantity of money is in the present circumstances necessary to counteract the inherent instability of the existing credit system. But once it is recognised that this inherent instability of credit is itself the effect of the structure of deposit banking determined by the monopolistic control of the supply of the hand-to-hand money in which the deposits must be redeemed, these objections fall to the ground. If we want free enterprise and a market economy to survive (as even the supporters of a so-called ‘mixed economy’ presumably also wish), we have no choice but to replace the governmental currency monopoly and national currency systems by free competition between private banks of issue. We have never had the control of money in the hands of agencies whose sole and exclusive concern was to give the public what currency it liked best among several kinds offered, and which at the same time staked their existence on fulfilling the expectations they had created.

*

It may be that, with free competition between different kinds of money, gold coins might at first prove to be the most popular. But this very fact, the increasing demand for gold, would probably lead to such a rise (and perhaps also violent fluctuations) of the price of gold that, though it might still be widely used for hoarding, it would soon cease to be convenient as the unit for business transactions and accounting. There should certainly be the same freedom for its use, but I should not expect this to lead to its victory over other forms of privately issued money, the demand for which rested on its quantity being successfully regulated so as to keep its purchasing power constant.

The very same fact which at present makes gold more trusted than government-controlled paper money, namely that its total quantity cannot be manipulated at will in the service of political aims, would in the long run make it appear inferior to token money used by competing institutions whose business rested on successfully so regulating the quantity of their issues as to keep the value of the units approximately constant.

**

Good money can come only from self interest, not from benevolence

We have always had bad money because private enterprise was not permitted to give us a better one. In a world governed by the pressure of organised interests, the important truth to keep in mind is that we cannot count on intelligence or understanding but only on sheer self-interest to give us the institutions we need. Blessed indeed will be the day when it will no longer be from the benevolence of the government that we expect good money but from the regard of the banks for their own interest.

It is in this manner that we obtain from one another the far greater part of those good offices we stand in need of’1 —but unfortunately not yet a money that we can rely upon.

It was not ‘capitalism’ but government intervention which has been responsible for the recurrent crises of the past.2 Government has prevented enterprise from equipping itself with the instruments that it required to protect itself against its efforts being misdirected by an unreliable money and that it would be both profitable for the supplier and beneficial to all others to develop. The recognition of this truth makes it clear that the reform proposed is not a minor technicality of finance but a crucial issue which may decide the fate of free civilisation. What is proposed here seems to me the only discernible way of completing the market order and freeing it from its main defect and the cause of the chief reproaches directed against it.

Is competitive paper currency practicable?

We cannot, of course, hope for such a reform before the public understands what is at stake and what it has to gain. But those who think the whole proposal wholly impracticable and Utopian should remember that 200 years ago in The Wealth of Nations Adam Smith wrote that

‘to expect, indeed, that the freedom of trade should ever be entirely restored in Great Britain, is as absurd as to expect that an Oceana or Utopia should ever be established in it’.3

It took nearly 90 years from the publication of his work in 1776 until Great Britain became the first country to establish complete free trade in 1860. But the idea caught on rapidly; and if it had not been for the political reaction caused by the French Revolution and the Napoleonic Wars no doubt it would have taken effect much sooner. It was not until 1819 that an effective movement to educate the general public on these matters started and it was in the end due to the devoted efforts of a few men who dedicated themselves to spread the message by an organised Free Trade Movement that what Smith had called ‘the insolent outrage of furious and disappointed monopolists’ was overcome.4,5

*

I fear that since ‘Keynesian’ propaganda has filtered through to the masses, has made inflation respectable and provided agitators with arguments which the professional politicians are unable to refute, the only way to avoid being driven by continuing inflation into a controlled and directed economy, and therefore ultimately in order to save civilisation, will be to deprive governments of their power over the supply of money.6

**

‘Free Money Movement’

What we now need is a Free Money Movement comparable to the Free Trade Movement of the 19th century, demonstrating not merely the harm caused by acute inflation, which could justifiably be argued to be avoidable even with present institutions, but the deeper effects of producing periods of stagnation that are indeed inherent in the present monetary arrangements.

The alarm about current inflation is, as I can observe as I write, only too quickly dispelled whenever the rate of inflation slows down only a little. I have not much doubt that, by the time these lines appear in print, there will be ample cause for a renewal of this alarm (unless, which would be even worse, the resumed inflation is concealed by price controls). Probably even the new inflationary boom already initiated will again have collapsed. But it will need deeper insight into the superficially invisible effects of inflation to produce the result required to achieve the abolition of the harmful powers of government on the control of money. There is thus an immense educational task ahead before we can hope to free ourselves from the gravest threat to social peace and continued prosperity inherent in existing monetary institutions.

*

It will be necessary that the problem and the urgent need of reform come to be widely understood. The issue is not one which, as may at first appear to the layman, concerns a minor technicality of the financial system which he has never quite understood. It refers to the one way in which we may still hope to stop the continuous progress of all government towards totalitarianism which already appears to many acute observers as inevitable. I wish I could advise that we proceed slowly. But the time may be short. What is now urgently required is not the construction of a new system but the prompt removal of all the legal obstacles which have for two thousand years blocked the way for an evolution which is bound to throw up beneficial results which we cannot now foresee.

**

_____________

7 Adam Smith [54], p. 26.

8 A theme repeatedly argued by the late Ludwig von Mises [45-47].

9 [54], p. 471. The whole paragraph beginning with the sentence quoted and concluding with the phrase cited further on is well worth reading in the present connection.

10 As a reviewer of the First Edition of this essay (John Porteous, New Statesman, 14 January, 1977) sensibly observed: ‘It would have seemed unthinkable 400 years ago that governments would ever relinquish control over religious belief.’

11 It has been said that my suggestion to ‘construct’ wholly new monetary institutions is in conflict with my general philosophical attitude. But nothing is further from my thoughts than any wish to design new institutions. What I propose is simply to remove the existing obstacles which for ages have prevented the evolution of desirable institutions in money. Our monetary and banking system is the product of harmful restrictions imposed by governments to increase their powers. They are certainly not institutions of which it can said they have been tried and found good, since the people were not allowed to try any alternative.

     To justify the demand for freedom of development in this field it was necessary to explain what consequences would probably result from granting such freedom. But what it is possible to foresee is necessarily limited. It is one of the great merits of freedom that it encourages new inventions, and they are in their very nature unpredictable. I expect evolution to be much more inventive than I can possibly be. Though it is always the new ideas of comparatively few which shape social evolution, the difference between a free and a regulated system is precisely that in the former it is people who have the better ideas who will determine developments because they will be imitated, while in the latter only the ideas and desires of those in power are allowed to shape evolution. Freedom always creates some new risks. All I can say is that if I were responsible for the fate of a country dear to me I would gladly take that risk in the field I have been considering here

12 Recent experience also suggests that in future governments may find themselves exposed to international pressure to pursue monetary policies which, while harmful to their own citizens, are supposed to help some other country, and will be able to escape such pressure only by divesting themselves both of the power and the responsibility of controlling the supply of money. We have already reached a stage in which countries which have succeeded in reducing the annual rate of inflation to 5 per cent are exhorted by others who lustily continue to inflate at 15 per cent per annum to assist them by ‘reflation’.

• 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.
• 2Willem Vissering [61].
• 3This definition was established by Carl Menger [43], whose work also ought to have finally disposed of the medieval conception that money, or the value of money, was a creation of the state. Vissering [61], p. 9, reports that in early times the Chinese expressed their notions of money by a term meaning literally ‘current merchandise’. The now more widely used expression that money is the most liquid asset comes, of course (as Carlile [8] pointed out as early as 1901), to the same thing. To serve as a widely accepted medium of exchange is the only function which an object must perform to qualify as money, though a generally accepted medium of exchange will generally acquire also the further functions of unit of account, store of value, standard of deferred payment, etc. The definition of money as ‘means of payment’ is, however, purely circular, since this concept presupposed debts incurred in terms of money. Cf. L. v. Mises [45], pp. 34 ff.
• 4Ibid., p. 47.
• 5Lord Farrer [17], p. 43.
• 6Cf. J. R. Hicks [33].
• 7In 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.
• 8There certainly can be and has been money, even very satisfactory money, without government doing anything about it, though it has rarely been allowed to exist for long. But a lesson is to be learned from the report of a Dutch author about China a hundred years ago who observed of the paper money then current in that part of the world that ‘because it is not legal tender and because it is no concern of the State it is generally accepted as money’. We owe it to governments that within given national territories today in general only one kind of money is universally accepted. But whether this is desirable, or whether people could not, if they understood the advantage, get a much better kind of money without all the to-do about legal tender, is an open question. Moreover, a ‘legal means of payment’ (gesetzliches Zahlungsmittel) need not be specifically designated by a law. It is sufficient if the law enables the judge to decide in what sort of money a particular debt can be discharged.
• 9Money is usually defined as the generally acceptable medium of exchange, but there is no reason why within a given community there should be only one kind of money that is generally (or at least widely) accepted. In the Austrian border town in which I have been living for the past few years, shopkeepers and most other business people will usually accept D-Marks as readily as Austrian schillings, and only the law prevents German banks in Salzburg from doing their business in D-Marks in the same manner as they do 10 miles away on the German side of the border. The same is true of hundreds of other tourist centres in Austria frequented mainly by Germans. In most of them dollars will also be accepted nearly as readily as D-Marks. I believe the situation is not very different on both sides of long stretches of the border between the United States and Canada or Mexico, and probably along many other frontiers.
• 10To this he adds a few lines later that ‘any Law of Legal Tender is in its own nature “suspect” ’.
• 11The commonsense of the matter was put very clearly 80 years ago by a distinguished defender of a liberal economic policy, the lawyer, statistician and high civil servant Lord Farrer. In a paper written in 1895 he contended that if nations
• 12It also means that, although we usually assume there is a sharp line of distinction between what is money and what is not—and the law generally tries to make such a distinction—so far as the causal effects of monetary events are concerned, there is no such clear difference. What we find is rather a continuum in which objects of various degrees of liquidity, or with values which can fluctuate independently of each other, shade into each other in the degree to which they function as money.