Currency competition: the British debate.

• Author: Brittan, Samuel

Earlier History

It would probably be best for me to concentrate on the recent British debate. Not only do I know it best, but I do not think that the earlier debates on free banking in previous centuries in various countries have any very direct relevance. This is because, until some time in the 20th century, it was generally assumed that money was based on an intrinsically valuable commodity, usually gold or silver, or some combination.

In earlier times freely floating paper currencies, not officially convertible into gold or silver anything else, were regarded as emergency or temporary expedients. An example was the U.S. dollar after the Civil War. During episodes of free banking the privately issued currencies had an explicit or implicit bullion value, and their success was measured by how low the discounts on them were, relative to their stated metal value.

Hayek's Proposals

The origin of the more recent British debate lies with some proposals made by the veteran Austro-British economist Friedrich Hayek. In a prewar work, Monetary Nationalism and International Stability (1937), he had come out in favor of a fixed international standard, which he thought would probably be gold. During the Second World War he published in the Economic Journal for June 1943 a proposal for "A Commodity Reserve Currency" that would be convertible into a basketful of commodities on a predetermined basis, following on the lines of similar proposals earlier put forward by Benjamin Graham and Frank D. Graham. Such ideas faded from public view in the post-World War II period, as the Bretton Woods system developed on the basis of national currencies linked by fixed but adjustable exchange rates.

The breakdown of that system after 1971, when President Nixon broke the last remaining link between the dollar and gold, was soon followed by the largest peacetime inflation of the 20th century (leaving aside postwar hyperinflations.) In the 1970s Hayek started to investigate free competition between both official national currencies and privately issued ones as well. It started in his own words as a bitter joke directed against what he then thought was the chronic inability of governments to provide sound money. But it soon led him into the fascinating problem of what would happen if money were provided competitively. (1)

Hayek's preliminary analysis appeared in a short paper in 1976 and a much fuller treatment followed in The Denationalisation of Money (1978), which was his last contribution to monetary economies. A number of authorities contributed to the subsequent discussion. Milton Friedman, for one, was thoroughly skeptical, although he avoided the subject whenever he could out of deference to Hayek's standing and age, and in order to avoid a bitter internal war among free-market inclined economists (Friedman 1984).

Enter the Euro

The issue arose again when the European Union began to develop plans for a single currency, later to be named the euro. Margaret Thatcher was bitterly opposed to the idea; but as an olive branch she suggested out of the blue at a meeting in Madrid in 1989 that the British would provide some alternative...