Envisioning Monetary Freedom.

• Author: Selgin, George

So constantly have the ideas of currency and government been associated--so universal has been the control exercised by lawgivers over monetary systems--and so completely have men come to regard this control as a matter of course, that scarcely any one seems to inquire what would result were it abolished. Perhaps in no case is the necessity of state-superintendence so generally assumed; and in no case will the denial of that necessity cause so much surprise. Yet must the denial be made.

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So wrote Herbert Spencer (1851: 396), the Victorial polymath, during a period now seen as the apotheosis of laissez-faire economic thought. Yet even then, Spencer's thesis--that legislative interference with money and currency "is not only needless, but injurious" (ibid., 402)--was an extremely radical one. Spencer was not content to merely argue for open competition among rival private suppliers of paper currency, as he did by unfavorably comparing the results of the Bank of England's monopoly privileges with those of Scotland's less privileged (and less regulated) banks. He also dared to challenge the most ancient of all forms of government control of money, by insisting that the minting of coins itself ought to be left to the private sector.

Since Spencer wrote, studies of the Scottish "free" banking system--a remarkably unregulated and efficient yet famously stable commercial banking and currency system that flourished during the first half of the 19th century (see White 1995)--and of several past, competitive coinage systems, have shown that, for all its radicalism, Spencer's critique of state interference rested on solid empirical foundations. Just as importantly, it remains as true today as it was in Spencer's day that the only way to determine whether such interference is desirable is by asking what would happen without it.

Monetary Freedom, Then

Answering that question is, however, never easy. Partly that's so because of "status quo bias"--a natural tendency to assume that what's customary is necessarily best. The problem is one of which Spencer himself was well aware. "So much so does a realized fact influence us than an imagined one," he wrote, "that had the baking and sale of bread been hitherto carried on by government-agents, probably the supply of bread by private enterprise would scarcely be conceived possible, much less advantageous" (Spencer 1851: 402).

Yet it was far easier to envision a monetary system independent of state interference in 1851 than it is now. Back then, the monetary systems of all advanced nations were based on units of gold or silver or (in so-called bimetallic systems) both; and although state interference sometimes favored one metal over the other, one did not have to suffer from status quo bias to take a precious-metal standard of some sort for granted, as Spencer himself did.

And although a handful of nations, England among them, had rudimentary central banks that enjoyed special privileges, especially when it came to issuing circulating paper notes, others (like Scotland) allowed numerous commercial banks to issue notes and otherwise compete on roughly equal, if not liberal, terms. Although they were as yet few and far between, bank clearinghouses--the agencies responsible for gathering notes and checks issued by or drawn on various banks, returning them to their sources, and arranging for the settlement of interbank dues--were themselves still private institutions. Finally, although coining was a state monopoly almost everywhere, an entirely private coinage system was thriving in California, whereas another had been snuffed out only a few decades before by authorities in England (see Selgin 2008).

In short, one did not have to look all that far, or to strain one's imagination, to realize how both coins and paper money might be manufactured and supplied entirely through private initiative, much as bank deposits are supplied today, except without the least hint of state interference.

Monetary Freedom, Now

Today, governments are far more heavily involved in the business of supplying and regulating money than most were in Herbert Spencer's day. Here and there, to be sure, banks enjoy certain freedoms denied them in the past. In the United States, for instance, banks can now have nationwide branches, whereas before the 1990s, many were limited to a single location only. But in many other respects, both here and elsewhere, banks are more heavily regulated than ever. Here in the United States, federally chartered ("national") banks are regulated by the Federal Reserve, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation (FDIC), while most state-chartered banks are regulated by the Fed and the FDIC as well as by state regulatory authorities. U.S. banks are also indirectly subject to international regulations, including those promulgated by the Basel Committee-the global prudential regulatory authority housed within the Bank of International Settlements.

While most fonns of bank regulation limit what banks can do, ostensibly to prevent them from behaving imprudently, others actually tend to encourage imprudent behavior. Deposit insurance, which was relatively unknown before the 1930s and which has since been adopted by most nations, falls into this category: by protecting depositors from losses, it encourages them to overlook the risks certain banks take and even to patronize risky banks that pay higher rates on their deposits (see Anginer and Demirgiig-Kunt 2018).

Although the explicit coverage offered by government deposit insurance schemes is usually limited--in the United States today, individual bank accounts are covered up to a (very generous) limit of $250,000--creditors at very large or otherwise important financial institutions enjoy the equivalent of unlimited coverage, thanks to the now-prevalent view among government officials that such institutions are "too big to fail." Provided he or she keeps it at one of these institutions, a creditor with a balance well in excess of $250,000 has good reason to assume that, should the institution get into trouble, die government will rescue both it and its depositors.

Perhaps most importantly, precious-metal monetary standards have given way to fiat-money systems, in which the standard money unit is represented by nothing more substantial than an irredeemable slip of paper issued by some national central bank. Commercial banks have also stopped issuing paper money of any sort, except in three places: Scotland, Ireland, and Hong Kong. And even in those exceptional cases, note issue is very strictly regulated. All other commercial banks are limited to receiving and managing digital credit balances known, somewhat inaccurately, as "deposits," denominated and redeemable in official fiat money units.

The much-enlarged role of government in modern monetary systems makes it especially difficult to "inquire what would result" were the government to cease playing any role. Some might be tempted to suppose that ending the government's involvement now would necessarily lead to the spontaneous revival of market-based monetary arrangements of the past, including a gold (or silver) standard. But the temptation ought to be resisted. To suppose that, were they given free reign today, market forces would restore the gold standard, or cause commercial banks to start issuing their own redeemable banknotes, just because these were features of less regulated monetary systems of the past, makes about as much sense as supposing that privatizing Amtrak would bring back steam locomotives. Instead, a modern "laissez-faire" monetary system of the future might well have even less in common with a circa 1851 laissez-faire system than with today's heavily regulated arrangements.

But just how great those differences will be, and what precise forms they take, will depend on precisely how we go about...