This paper originally appeared as Economic Notes No. 39, published by the Libertarian Alliance in 1992. The Paper is available in full here.
This paper is not primarily intended as a contribution to economic theory. It is instead intended to steer the debate on free banking away from statements of loyalty to the “line”: that orthodoxy of political views which is often incoherent and always an affront to individual reason. This is accomplished by concentrating upon the process of argument.
In “A Credibility Problem” (Part I), there is a critical evaluation of the depth of understanding by free banking’s supporters of their own position, and a hard evaluation of the likely effectiveness of these arguments. Then in “How To Do It” (Part II) micropolitics are applied to the free banking issue.
PART I: A CREDIBILITY PROBLEM
To expect the introduction of legal private currency – that is to say not state owned, not state regulated, and the use of which will not result in prosecutions on the grounds of issuing counterfeit notes, fraud nor ‘economic sabotage’ – is to dream.
Most people divorce their dreams from reality. In the Conservative Party’s youth wings, home to many who “dream with their eyes open”, a majority does not as yet support the privatisation of money. Given the tendency in these sections of the Tory Party to “vote the slate” and “walk the line”, heedless of the anguished bleatings for moderation from Conservative Central Office, the fact that the “comrades” are not four-square behind the extirpation of state dirigisme is perhaps an indication of how unpractical currency liberation appears to be. Perhaps it is also a problem of definition: how many people could explain the benefits of currency demonopolisation? Of these how many would the enlightened comrade entrust with his savings? I leave the reader to make up his or her mind, but for my part I know no one personally who can simultaneously convince me of the urgent need for privatization, assure me that its introduction is remotely likely, persuade me that it won’t involve considerable disruption when introduced, and sell to me the proposition that I am better off using this currency without qualms about ‘funny money’ or ‘junk bonds’. I haven’t even begun to consider the technical operation of such a currency, which is where I consider that Hayek has left a host of questions unanswered. In short there is a credibility problem.
This is a matter that I have tested before writing this paper, by asking acquaintances of mine who are not intimately familiar with the works of people who write for the Institute of Economic Affairs, the Adam Smith Institute or the Libertarian Alliance. The test was carried out by asking the respondent what he or she thinks of the privatisation of money. The response that comes to mind most readily but is not always articulated (we do live in a civil society) is: “It’s insane!”
After a period of time devoted to demonstrating the possibility that currency denationalisation is not necessarily insane, the immediate reply is: “It couldn’t work.”
This is an understandable objection because it reflects a distinction between what Ayn Rand called “an error of knowledge” and “moral failure”. Some technical arguments exist, and I propose to evaluate some of them in the course of this paper, but it would be a gross overstatement of the public’s awareness of market economics to assume that these arguments are widely disseminated, assimilated, or even that they are conclusive. At this stage, after some explanation that the topic has been researched by Nobel prizewinners and that some historical studies have offered grounds for accepting the principle that private money could exist, in possibly atypical circumstances, the victim of my experiment may recoil at the notion of one of his or her standards for gauging reality being shattered. The response may then become: “It’s unnatural!”
By now emotional objections will have come into play; privatisation of the Bank of England is at least credible but the abolition of legal tender restrictions is – in appearance at any rate – the end of civilisation as we know it.
Having reassured the listener of the seriousness of my case and having suggested that civilisation might not end because the monarch’s head is not on every bank note the problem turns to the consequences of such radical reform: “It isn’t safe!”
This response is often considered awkward because anyone with the faintest understanding of economics, and banking especially, will feel inclined to agree …
This problem is therefore of crucial importance: are private currencies less secure than ‘junk bonds’ as well as non-inflationary? Those who answer glibly “No” to the former and “Yes” to the latter are probably not the sort of people that I will take private scrip from.
Scepticism about privatising currency is not merely understandable, in keeping with the view that the ‘masses don’t know where their true interests lie’, but is rather a healthy indication that people are wary of panaceae, immiment miracles and ‘leave it all to the market: everyone’s a winner’. Those who propounded the decimal calendar, lunar colonies before 1985 and the revival of British Lawn Tennis due imminently – since 1936 – are today on a par with those who promise the abolition of inflation and monetary stability.
The credibility problem is compounded by the additional correlation of forces supporting or opposing change. The basic list of opponents to change is more powerful than for any privatisation to date. The list of supporters of currency privatisation is the flimsiest for any privatisation to date.The opponents come in four categories: interest groups in favour of less choice in currency exchanges than exists at present (i.e. Socialists, certain sections of bureaucracy); interest groups in favour of the status quo (i.e. the Bank of England, H.M. Treasury); some financial institutions that would benefit in a marketplace, issuing currency, but with more to lose (in terms of market share to new operators and in faster clearing of credit) than seems prudent to stake on change (i.e. some banks and building societies, particularly the larger ones); those potential users of private currencies who would prefer to keep ‘safe’ state currency because it’s the known quantity and because it is ‘guaranteed’ (i.e. the entire population of the United Kingdom).
THE ANTI-PROGRESSIVE FORCES
Those whose interests lie with greater state control are of little concern to this study: its purpose is not to convert Socialists, nor bureaucrats. This study is more interested in the reasons why money privatisation is not in prospect in the UK, what the weaknesses are in the argument for free currencies, and whether or how the enterprise might succeed.
To read on: download the paper.