According to "Austrian" economics, government, compared to the market, is inevitably an inferior supplier of any good or service. Competition will produce more goods more efficiently and more closely in line with consumers' wants than will any other organization of production.
Some economists, such as Murray Rothbard, apply this principle even to the supply of justice, protection, and defense. But all economists, whatever their school ("Austrian" or Keynesian or Chicago), have made an exception for the supply of money, assuming it to be a monopoly. Yet if the free market is best, don't these tenets of free-market economics apply:
—that private enterprise will supply money more efficiently (and more honestly) than any government, and,
—that competition among different currencies would result in a much better quality money (or monies) than now exists?
Hitherto, the main libertarian position on the question of money has been that gold is better money than paper. In an anarcho-capitalist society gold would naturally—indeed, automatically and inevitably—become the money of a free society, while under a limited government gold would be the money of the realm. Whichever way you look at it, money would be gold via a natural or State monopoly.
Historically, the last 200 years of paper money is an aberration. Gold, and sometimes silver, became money because, in the words of Ludwig von Mises, it was the most marketable (that is, liquid) good. Government—as soon as government came on the scene—monopolized the issue of money, whether gold or paper, because the monopoly of money provided the most easily obtained and "painless" source of revenue.
When the printing press was invented, money was already a government monopoly of long standing. The explosion of technology since the Industrial Revolution has merely served to refine and extend that monopoly. Instead of being limited to "clipping" coins—watering down the gold or silver content of official money—improved technology has enabled governments to first print paper, then change numbers in a computer memory.
Prior to the invention of the banknote, there was no practical alternative to gold as money. Given the technological revolution, how can we be sure that in a completely free market, where different suppliers of money would compete for public favor, gold would win? If the government monopoly of money were abolished—after thousands of years of control—who can say what would happen, and what kind of money would emerge in the end?
Achieving that abolition could be the most important step toward a free society. The monopoly of money stands at the base of all government power. Remove that monopoly, let the market issue currency, and not only must the government live entirely within its means, as it can no longer print or devalue the money, but it has the additional problem of deciding which currency to use for tax determination. Anyone who has been involved with companies that trade internationally knows that a multicurrency situation allows a lot of creative, tax-minimizing accounting. When every individual in the market can utilize the creative tools hitherto reserved for multinationals, whither the government's tax receipts?
The more immediate question, of course, is, What would such a competitive-currency world look like? Would it—could it—work? Fortunately, two economists have addressed these questions over the past two years: Nobel laureate F.A. Hayek and Jerome F. Smith.
To my mind, Hayek's Denationalisation of Money (London: Institute of Economic Affairs) is significant primarily for the questions he raises (I find his answers unsatisfying) and for the fact that Hayek, at 77, chose to open a Pandora's box for economic theory. Hayek's initial proposal is that "the countries of the common market…mutually bind themselves by formal treaty not to place any obstacles in the way of free dealing throughout their territories in one another's currencies (including gold coins) or of a similar free exercise of the banking business by any institution legally established in any of their territories."
Imagine if the ordinary citizen of Britain or Italy could use German marks or Swiss francs in his daily purchases, could have checking and savings accounts with his local bank in Swiss francs, and could write such checks for purchases at the supermarket. How long would it be before either:
• the pound sterling and Italian lira were driven off the market, or
• the governments of Britain and Italy were forced to compete with the German mark and Swiss franc for customers by restricting the supply of their currencies to the market?
Hayek extends that concept one step further by asking what might happen if private institutions were able to compete with governments in issuing their own currencies. What if a Swiss bank issued a "ducat," redeemable in a fixed amount of dollars, marks, or francs, and then kept the value of its "ducat" higher than its redemption price? Individuals holding ducats would benefit from a lower rate of depreciation—or appreciation—in terms of other currencies.
Such competition already exists to a limited degree. Americans open Swiss bank accounts to put their savings into gold, silver, and Swiss francs. Governments, banks, and multinational corporations go to the Euromoney markets to lend and borrow in different currencies. Competition among currencies already takes place.
Jerome Smith's The Reinstitution of Money (Vancouver, B.C.: ERC Publishing) is a substantially more radical document than Hayek's. Where Hayek asks questions, Smith works out conclusions. While Hayek, with his stature in the economics profession, opens the debate, Smith anticipates and answers many of the questions that will be raised during that debate. Only some years, even decades, hence—since Smith is a private-enterprise economist, not hailing from the halls of academia—will Smith's Reinstitution of Money be recognized as the pathbreaking work it is.
Smith asks the question, What is money? Interestingly, no economist has really answered that question—until Smith. Present-day economists say that money is "M1″ or "M3," and some even say that money is indefinable. Prior to Smith, the best definition of money was von Mises's: the most marketable (liquid) good. In one sense, Smith refines that definition by asking, What is the most liquid good today?
Smith has a particular proposal for a new money. Whether it would become "the money of a free market" only the market can decide. The most liquid market in today's world is the market for capital values. In a free economy this would mean the stock market; in today's world it means commodities, particularly precious metals.
Smith proposes a mutual fund with strict and unbreakable rules concerning its investment alternatives. The fund would issue bearer shares in small units. A bearer share—like a dollar—means that possession is 99 percent of the law. Management fees would be low, since management would have little option under the rules of the fund. In a sane economy, the shares of the fund would accumulate value because of dividends the fund would receive from its investments. Thus, the bearer shares, which would become hand-to-hand currency, would naturally and automatically appreciate in value.
My abbreviated summary cannot do justice to either work. Hayek asks questions that, in retrospect, should have been asked before. His answers are, to my mind, unsatisfactory, but his questions are of absolute importance. Smith offers a solution that could well be the choice of a free market for money. I can think of five other competing currencies that might arise in a free market—and not I but the market, given the chance, will decide which one (or ones) it wants.
A whole new world of economic theory has just been opened up. And since the money supply is the basis of government power, its abolition would do more to bring a free society than any other possibility.
This article originally appeared in print under the headline "Money: Money and Freedom".