The Monetary Policy Trilemma in light of a Choice of Monies

One of the key theoretical and policy obstacles to overcome when trying to enable a genuine choice of monies amongst agents (through enabling them to trade, be paid in and pay their taxes in multiple monies, for example, without politico-legally privileging one money over another through contemporary laws – notwithstanding historical privileges) is that the ‘Monetary Policy Trilemma’ would make it very problematic. Here, I argue that enabling a choice of multiple monies (when viewed from the theoretical framework of a paper I previously wrote for The Cobden Centre entitled “A Unifying Theory: Money, Goods and Services are Instruments of Expectations-Management”) would actually either solve the Monetary Policy Trilemma or make it irrelevant.


In short, the Monetary Policy Trilemma (or ‘Impossible Trinity’) states (with an empirical basis) that one cannot have, at the same time:


  1. Free Capital flows (absence of capital controls)
  2. Fixed Exchange Rates
  3. An independent monetary policy


Working, initially, from the assumption of free capital flows, we can wonder whether its possible to have fixed exchange rates as well as an independent monetary policy. The fixed exchange rates would ordinarily be difficult without sacrificing independent monetary policy in the sense that pegging a currency’s exchange rate to another would mean that the central bank is bound to conduct monetary policy (through altering interest rates and buying and/or selling up currencies respectively, appropriately and accordingly, for example, and most simplistically) with a view to maintaining the fixed exchange rate.


In a free banking system, money-issuers (whether they be public, public-private or wholly private) would be able to conduct their own respective monetary policies for their clientele (who would, otherwise, have been bound to one monetary policy that is imposed upon them despite their diverse, varying preferences) whilst also maintaining fixed exchange rates in so far as it aligns with the preferences of their clientele (the agents using their money). Nevertheless, there is a concern that government and/or public-private partnership money-issuers macro- and microeconomic policy objectives may not align with those of the wholly private money-issuers.


However, their monetary policy would still be sovereign and independent in so far as they have the capability of altering it in line with the appropriate agents’ (their clientele’s) preferences and their objectives. It must be conceded, however, that they would have a diminished proportional influence over the overall economic system. However, in absolute terms, since truly free banking would likely enable favour economic conditions for increased growth, it could be argued that they would have greater influence in absolute rather than relative terms in so far as agents continue choosing their monies. Indeed, from a sequential game-theoretic perspective, it could be argued that, if public monies continued to exist and there was a gradual liberalisation towards free banking (wherein more public and public-private monies are introduced before giving free reign to wholly private monies) that the incumbent(s) (public/government money or monies) would still reap the benefits of having the first-mover advantage over new entrants into the new, truly competitive marketplace and, therefore, would continue to play a role in agents’ economic lives.


Furthermore, it is likely that the public, public-private and wholly private money-issuers would cooperate to some extent in order to meet common macroeconomic objectives and, if this includes promoting the welfare of the peoples they are intended to serve (which is what central banks worldwide largely project as their missions), then the sovereign monetary policy could meet this in a more efficient, welfare-maximising way even if it does have proportionally diminished influence. Finally, so long as agents continue to choose government monies for whatever reason, the monetary policy of these money-issuers would still be sovereign and independent in so far as they are working to align with and manage the expectations-management preferences (of which risk-management preferences are a significant, important subset) of their agents. Even where some money-issuers may find incentive to harm other money-issuers for short-term gains, since the overall marketplace would be adversely affected in the long-term and thereby diminish overall economic performance, other money-issuers would work together to limit that impact and, thereby, disincentivise, deter or punish such unscrupulous, immoral behaviour.


The contentions here may seem intuitively plausible to some but it is difficult to have this considered more seriously without the use of some rigorous mathematical modelling to prove them. As such, an avenue for future research (which I intend to pursue) would be to conduct a computational simulation of a complex (socio)economic system wherein agents use monies as instruments of expectations-management (which was a theoretical contention of mine in the aforementioned paper published earlier by The Cobden Centre) to predict whether, assuming free capital flows, fixed exchange rates and independent monetary policies are also possible.


For the latter, although private sector and public-private partnership monies may pose some problems, one might examine whether there is a scope for co-operation between public, public-private and wholly private money-issuing entities or even just between wholly public and public-private entities to meet the various macro- and microeconomic objectives of monetary policy so that monetary policy can still be ‘independent’ in the sense of not being bound to anything other than prevailing market forces. Nevertheless, from a normative perspective, one may even conjecture that the monetary policy trilemma may become wholly irrelevant in a free banking context since there would be no need for sovereign monetary policy when agents are able to freely optimise their preferences with respect to a genuine choice of monies.


Vishal Wilde recently graduated with a BSc (Hons) in Philosophy, Politics & Economics (Economics major) at the University of Warwick. He wishes to spend his life fighting for and defending freedom. He is a Freelance Journalist, he writes Poetry, Science-Fiction and Fantasy and conducts independent academic research in Economics, Political Science and Philosophy. He is also a Research Consultant for Fantain Sports, Pvt Ltd. (a tech startup based in India).

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