Originally published in Extropy #15 (7:2), 2nd-3rd Quarter 1995.
Along with the explosion in press coverage of the internet has come increasing attention to the possibility of digital money or electronic cash. Wired recently featured a major article on the topic by Steven Levy, and the current special cyberspace issue of TIME surprised us with a story on the subject by Neal (Snow Crash) Stephenson. In thinking about the further evolution of money, its digitalization forms only part of the picture. Extropian thinkers seem to excel in synthesizing ideas from multiple disciplines to form a sophisticated view of the possible future. As usual, we can take the lead by moving beyond the present state of these discussions. An aspect of future money that you'll seldom find elsewhere is the denationalisation of money, or the separation of money and government.
Electronic cash and the competing currencies that would result from the denationalisation of money should be considered together. Both can reduce the power of government to tax and regulate, thereby freeing markets and increasing liberty and productivity. Serious modern thinking about competing currencies was pioneered by Friedrich Hayek, 1974 Nobel Laureate in Economics. His groundbreaking Denationalisation of Money he developed out of a critical scrutiny of proposals for monetary union in Europe. This attempt at creating a single European currency continues to flounder, though backed by ill-informed futurists who think in terms of world government and supranational governmental units. Few thinkers, especially policy-makers, have discussed Hayek's alternative of competing currencies, perhaps because it threatens the interests of centralized government institutions and state control. Most relevant writing focuses on historical experiences with free banking (the absence of a central bank). In place of most futurists' ideals of world government, technocracy, and monetary supranationalism, we can examine the alternatives of polycentric/privately-produced law and competing digital private currencies.
What is the point of removing the government monopoly on money? Is it simply an ideological dream of radical free market enthusiasts? It may be a dream, but it's a dream with substance. The desirability of competing currencies comes from practical considerations. We can expect competing currencies to provide remedies to four economic ills: inflation, instability, undisciplined state expenditure, and economic nationalism.
Inflation results from an increase in the quantity of money in excess of any increase in demand for cash balances. It is not caused by increases in wages or other factors of production (so-called "cost-push" inflation). Increases in wages in excess of productivity gains will result only in unemployment. Inflation can only result if governments expand the money supply in an attempt to prevent the rise in unemployment. Hayek and the "Austrian School" economists have long argued that much of the harm of inflation arises from the distortions in relative prices, and not just from the rise in the "average price level". The influx of new money, to the extent that it artificially lowers the interest rate, stimu lates investment, especially in producer goods. Once the inflation is brought to an end, or once the interest rate is no longer too low, the uneconomic nature of the investments becomes apparent. The temporary boom ends up as a recession.
Economic instability the series of recessions or depressions and recoveries results directly from government manipulation of the money supply. Governments have found monetary policy addictive. The politically-caused cycle is especially clear in countries like Britain, where the executive branch has undivided control. Economic indicators usually strengthen just before an election, as the government throws money at the economy (borrowing and spending), then take a dive soon after as the economy pays the price of the unsustainable stimulus. It would be unrealistic to expect politicians to refrain from this kind of manipulation. So long as they have the power, they will exercise it to their advantage and the economy's long-term disadvantage.
The same self-interested incentives, in the radically different framework of competing private currencies, would have a thoroughly different effect: Private issuers, to preserve public confidence in their currency, will limit the quantity of the money they issue in order to maintain its value. I will not go into the details needed to justify this view of the incentives (though Hayek does); the presumption of stability of a private system should be clear from the realization that it will be in people's self-interest to switch from an unstable currency to a stable one. Marxists, Keynesians, and other statists, have long claimed that the Great Depression and other instabilities are inherent in the market economy. As Hayek notes, the truth is the "past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process".  (See Milton Friedman's and Murray Rothbard's extensive analyses of the Great Depression for further information.)
The state expands its power largely through taking more of the wealth of productive individuals. Taxation provides a means for funding new agencies, programs, and powers. Raising taxes generates little enthusiasm, so governments often turn to another means of finance: Borrowing and expanding the money supply. Only a legally-enforced monopoly on currency has allowed governments to cover deficits by issuing money. Taxation and deficits are related: If tax rate categories are not adjusted for inflation, inflation pushes people into higher tax brackets: their nominal but not real income rises, giving the government a way of increasing tax revenues seemingly without raising tax rates. Unexpected inflation also reduces the real value of the government's debt.
Most readers of this publication regard national boundaries as antiquated and irrational. Despite the efforts of governments, the advance of technology and the evolution of business practice contribute to the irrelevance of nations as economic units. Yet states continue to wield enormous nationalistic powers by means of their currency monopoly. Government is able to restrict the international movement of persons, money, and capital. This makes it extremely difficult for dissidents to escape oppressive governments. It's hard to leave a country if you can only take pocket change with you. Abolishing exchange controls helps, but controls can always be reimposed so long as the state retains its monetary monopoly.
Doing away with the government monopoly in money would do away with economic and political problems tied to national concerns. One of supposed problems concerns the balance-of-payments: the balance between imports and inflows and exports and outflows measured within the boundaries of a nation. As Hayek says, "With the disappearance of distinct territorial currencies there would of course also disappear the so-called `balance-of-payments problems' believed to cause intense difficulties to present-day monetary policy it would be discovered that `balance-of-payments problems' are a quite unnecessary effect of the existence of distinct national currencies, which is the cause of the wholly undesirable closer coherence of national prices than of international prices." [103-4]
The option of competing currencies can help us see that monetary policy is unnecessary; under the new competitive arrangement it would be impossible. Much of the instability governments cause with fiscal and monetary policy would be prevented. Interest rates would cease to be an instrument of policy, instead being determined by the demand for and supply of loans. Recently we've witnessed the absurd spectacle of the Federal Reserve Board (led by former member of Ayn Rand's inner circle, Alan Greenspan) continually raising interest rates to pour water on the economic fires before it reaches supposedly inflationary rates.
Instead of politically-influenced control by government, competitive pressures would determine the stability and value of competing private currencies. Hayek analyses the incentives faced by the private issuers of irredeemable currencies, showing that they would have an interest in maintaining a stable value. Currency users would abandon an unstable, inflating, or deflating currency, for better alternatives. Hayek looks at the ways in which an issuing bank could control the value of its currency in order to keep its value constant in relation to the aggregate price of a bundle of widely used commodities. You will find much more in Denationalisation of Money, including analyses of the relation between issuing and non-issuing banks, and how new currencies may be introduced.
Denationalisation of Money reveals the shape of a rational future for the monetary system. Competing currencies will trump the present system by controlling inflation, maximizing the stability of dynamic market economies, restraining the size of government, and by recognizing the absurdity of the nation-state. Pairing this reform with the introduction of anonymous digital money would provide a potent one-two punch to the existing order digital cash making it harder for governments to control and tax transactions.
I deeply regret Hayek's recent death. A polymath and iconoclast, in his ninth decade of life Hayek continued to make major contributions to economics, history, psychology, and legal and constitutional theory. He was the key figure opposing Maynard Keynes in the `40s and `50s, finally gaining some real influence in the `70s and `80s. Not having been placed into biostasis, Hayek will never return to see the days of electronic cash and competing private currencies that his thinking may help bring about. If we are to remain the vanguard of the future, let's see what we can do to hasten these crucial developments. Perhaps we will yet see a private currency bearing Hayek's name.
My thanks for helpful comments to last-minute readers, especially Ralph Whelan and Lawrence White.
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