The Hayekian Currency

A few nights ago Stephanie Flanders presented an interesting documentary which looked at the work of the Austrian economist Frederich Hayek.

The majority of the programme looked at his belief that in order to have a fully functioning economy one needed to remove the intervention of the state and central bank and allow the free market to sort itself out. He believed that no statesman or policymaker could manage the complexities of the market in order to provide a fully functioning free market economy.

As Stephanie Flanders points out in both the programme and the accompanying blog-post, the only thing which Hayek felt you could rely on governments for was their ability to debauch the currency. This is a point which has rung no truer than today when no single sovereign currency has been left untouched or devalued by the central bank.

Hayek believed that no one entity should hold the monopoly of producing the currency. In 1976, in Denationalization of Money, he wrote that given the central banks’ records of inflation, the need for them to issue monopoly money was no longer necessary. Instead, private institutions should be allowed to issue their own currencies, denominated as they wished.

Many Keynesians would no doubt argue that these profit-seeking institutions would print plenty of money in order to increase the spread of their currency. But Hayek realised that this would not happen; it is a self-defeating action.

If, say, Barclays over-issued their Barclays pound (thereby devaluing it), people would not want to spend, accept or even save in it. They would choose a currency from a more conservative bank which was more focussed on maintaining the value of the currency than worrying about political outcomes such as public spending.

As Frank Shostak argues, purchasing power is determined by the market and therefore whether there is "too much" or "too little" money the stock of the commodity chosen as money "will always be sufficient to secure the services that money provides." Competition between currencies is therefore beneficial to maintaining the value of a currency and the wealth of an individual.

Practicalities
Prior to the last decade or so it was fairly easy to dismiss the idea of competing currencies as the practicalities of a mixed currency system was a major hindrance. For example, if you were shopping in Sainsbury’s and they only accepted Barclay pounds but you only had Lloyds loonies, then how would you manage?

The other major issue, one which they currently have problems with in Zimbabwe, is the issue of change. When you allow any currency to be spent, how can shops be expected to keep enough to change to match every customer’s spending habits?

As we all know the Zimbabwean dollar was hugely devalued through hyperinflation (thanks to central banker Gideon Gono) so in 2009 the country moved to the US dollar. USD denominated coins, however, have become like gold dust as people struggle to make every-day purchases come to a whole $1 or a notes’ worth of value. There is hardly any change – coins are expensive to ship. Regardless of this however, the introduction of a competing currency has worked at reducing inflation. For now (after all the US Federal Reserve are now embarking on their own printing rampage).

Technology
In the last decade or so we have seen huge advances in payment systems. As Douglas Carswell MP told us back in March, the technological advances in mobile phone payments have reached, and transformed, day-to-day, peer-to-peer transactions across the African continent. According to a recent survey, of three quarters of countries which use mobile banking most frequently are in Africa.

There is little reason why a system cannot be designed to work in a similar way and effect transactions in different currencies from person to person or business to business. We already have payment systems which allow for different currencies – PayPal for example. There is little need for physical money, money is merely the medium of exchange. Mobile to mobile, iPad to iPad, there are several new technologies which would allow us to become a cashless society.

Once it becomes easy for individuals and companies to choose their particular currency, the currency issuer will work hard to retain the value of it.

The success of Bitcoin is one of many examples of how a currency operating outside of the hands of government and central banks can function successfully.

Competing with foreign currencies
Another issue with many have with competing currencies is the thought of us being able to freely spend euros, yen or the Fijian dollar seems preposterous. We’re not just proposing national currencies be allowed to be used but those of companies if they so wish. Tesco or Walmart may wish to have their own, as well as Google and Facebook. So far many of these organisations already have "a money" as it were – Tesco’s club card points, or you can earn vouchers. But these are as restrictive as national currencies – you can only spend in the place of issue. There is no exchange allowed.

In March of this year, Douglas Carswell MP, supported by Steve Baker MP, introduced a Bill which proposed a range of different currencies be used in the UK as legal tender. As Steve Baker writes, this would be a move towards honest money. Not only would currencies face competition abroad, but also at home, hopefully preventing governments from halving their value every 14 years.

The price of money
Money is a medium of exchange, however the currency is what must hold the value. Governments, with lifespans of about 4-5 years with the aim of becoming re-elected are not in this for the long-term. Businesses work to retain customers for long-periods of time, they have to work to provide a valuable service or they lose custom. Government after government do not have this issue. They make the excuse of devaluing money in exchange for public goods. Very nice in the short-term but not so fun when they lose funding thanks to increasing costs (inflation).

By removing the monopoly money from the central bank, the need for monetary policy is also removed. The quantity of money is set by market demand, in the same way supply of computers. Banks would charge interest rates which were economically competitive within the market.

Ease the return to gold
For those of us who propose the return of gold and silver to the monetary system, allowing competing currencies appears to be the most democratic and least disruptive way of allowing this to happen.

The argument against gold or silver money is often in regard to their fluctuations in price, suggesting inflicted deflation or inflation on the currency. Joe Cobb, once a senior economic advisor in the White House, believed that whilst gold currencies would still become dominant, competing currencies would help solve this problem, “With free banking, other types of money would come in at the margin if there were too little or too much gold-backed money,” Cobb says. Had the gold price risen, causing deflation the competition currencies would supplement it. Or, if the gold price falls, causing inflation, the Walmart dollar (or whatever) would displace it.

As we have frequently argued on these pages, the way metallic systems have historically come about is through the market agents’ choice. People used the money which they felt had the most value. That currency was backed by gold and silver. At the moment, gold standard or no gold standard, no one has chosen the money they spend or save. Hayek would argue that this means the very core of our system is not a market chosen one, but one enforced by an interested elite.

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