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Source: This essay first appeared in the journal Literature of Liberty: A Review of Contemporary Liberal Thought ,
vol. 5, No. 3, Autumn 1982, published by the Cato Institute (1978-1979)
and the Institute for Humane Studies (1980-1982) under the editorial
direction of Leonard P. Liggio. It is republished with thanks to the
original copyright holders.
Pamela J. Brown taught at Auburn University.
Constitution or Competition? Alternative Views on Monetary Reform: A Bibliographical Essay by Pamela J. Brown
Table of Contents
I. Money: Medium of Exchange or Policy Instrument?
Money, for practically as long as it has existed, has been employed
to realize two fundamentally different sorts of goals: production or
plunder. In a market economy, private individuals routinely use
monetary institutions in a cooperative way to achieve voluntary
exchanges of goods and services. Political authorities, by contrast,
use monetary institutions in a non-cooperative way to achieve
involuntary transfers of wealth.
As a means for realizing cooperatively achieved ends, the use of
money signals a great social advance over its predecessor, direct
barter exchange. Carl Menger provided the classical invisible hand or
spontaneous order explanation of the process of natural social
evolution from barter to commodity money.1
The emergence of money was an unplanned or "spontaneous" event. No one
person invented money; it gradually evolved as individuals, seeking to
minimize the number of barter transactions necessary to obtain the
commodities they wanted, learned that certain goods were more marketable than others and began to accumulate trading inventories for the exclusive purposes of exchange.
Money's usefulness as a general medium of exchange is clear
in contrast to the inconvenience of direct exchange: money eliminates
the would-be trader's need to search among the sellers of the
commodities he wants to acquire in order to find those few sellers who,
in turn, want to acquire the particular commodity or service that he
has to offer. The use of money thereby serves, in the words of Karl
Brunner and Allan H. Meltzer, as a "substitute for investment in
information and labor allocated to search."2
Brian Loasby aptly comments: "Money, like the firm, is a means of
handling the consequences of the excessive cost or sheer impossibility
of abolishing ignorance."3
It may be added that money, again like the firm, permits a far greater
degree of specialization and division of labor because it reduces the
need to search through markets. Without the institution of money, the
modern economy could hardly have grown to its current level of
The use of money as a medium of exchange brings with it the
widespread practice of quoting prices in a common currency unit. As a
consequence, money becomes a tool of economic calculation —a "means of appraisal"
in addition to its medium-of-exchange role as a "means of adjustment."
It facilitates the formation of economic plans as well as their
The corrective feedback processes of a complex exchange system
crucially depend upon these social functions that money performs. The
informational and operational constraints that block both the
individual decision-maker and the whole economic order from better
coordination of plans would be far more severe had not the institution
of money spontaneously emerged. The emergence of money was itself an
adaptive response to those obstacles.
The single most important book which has to date been written on the subject of money is Ludwig von Mises' Theory of Money and Credit,
first published in 1912. If the reader wanted to read just one work for
general instruction, this would be the text to choose. It offers still
today the most comprehensive and sophisticated system of theory on
monetary phenomena. There are of course a number of other important
works discussing the nature, evolution, and functions of money.4
In its contrasting role as a means for realizing non-cooperative
ends, a government-issued circulating currency provides political
agencies with an instrument for redistributing wealth. Wealth transfers
are achieved through the manipulation of money and credit production,
specifically through the injection of new money.5 For its first spenders the new money represents fresh additional
command over goods and services; but, as the monetary injection does
nothing to increase the available supplies of goods and services, the
first spenders' command of these goods and services comes at the
expense of other participants in the monetary economy. Such
money-facilitated government interventions may either transfer wealth
from one group of private individuals to others within the private
sector of the economy, or transfer wealth to the government itself from
the private sector as a whole, depending on whether the initial
recipients of the new money represent public or private agencies.6
Economists refer to the first type of transfer as the use of "monetary
instruments" in pursuit of macroeconomic "policy targets," and to the
second as government revenue creation via an "inflation tax."
Discussion of the currently competing theories of macro-economic policy can be found in a number of textbooks.7 The books of Arthur Marget, The Theory of Prices (1942), and Axel Leijonhufvud, On Keynesian Economics and the Economics of Keynes
(1968), provide valuable doctrine-historical perspectives on
macro-economic theory. Of the many extensive analyses of the nature and
implications of the revenue-generating potential of a government fiat
currency monopoly, two works co-authored by H. Geoffrey Brennan and
James M. Buchanan deserve special attention: "Money Creation and
Taxation," which appears in The Power to Tax: Analytical Foundations of a Fiscal Constitution (1980); and Monopoly in Money and Inflation: The Case for a Constitution to Discipline Government (1981).8
One point is worth noting in passing. There seems to exist a
unidirectional ('one-way street') dependence between the feasibility of
utilizing a currency's universal acceptability for facilitating
economic exchange and the feasibility of exploiting this property for
political ends. In other words, it appears possible for money to serve
the needs of market participants without at the same time necessarily
having to serve the interests of political agencies; yet it seems
impossible for money to serve the non-cooperative currency controller
without it already having been adopted for use by the cooperative
social order. The relationship, in other words, is like that of host to
II. The Problem Plaguing Monetized Systems: Government Mismanagement of Currency Production
As S. Herbert Frankel has noted in his Money: Two Philosophies; The Conflict of Trust and Authority
(1977), the cooperative and non-cooperative uses of money do not simply
coexist peacefully. There exists a "trade-off" between the cultivation of a monetary order best suited to the purposes of microeconomic
adjustment (processes based on the ability of individuals to calculate
and exchange effectively), and the manipulation of the monetary system
to achieve macroeconomic adjustment. Government impairs
monetary reliability (i.e., the reliability of money price signals for
calculation and exchange) when it manipulates money and credit flows in
pursuit of "full employment" levels of output. Frankel has described
the situation as one of "conflict between money as a tool of state
action and money as a symbol of social trust."10
Crucial to the economic usefulness of money is the predictability
of its exchange-value or purchasing power. The greater the general
stability of monetary conditions of the economy, the more efficiently
does resource allocation based upon subjective valuation and
availability of economic goods take place. Unpredictability in
the value of the money unit, on the contrary, is the quality of a money
that proves most valuable for political purposes. Government may most
profitably expand the number of money units in circulation when the
inflationary consequences are unanticipated, especially by the economic
sectors which are destined to experience the greatest loss of wealth
due to the actions of the authorities. Where inflationary expectations
of market participants underestimate the effects of politically
expedient monetary disturbances on the system, the resulting changes in
the distribution of wealth and income, and the unanticipated transfers
of capital, are an indication that political goals are, by a crude
process, being achieved at the expense of economic ends. Alternatively,
if such monetary manipulations for political purposes are being unsuccessfully
executed, this may indicate that individual agents in the market sector
are successfully anticipating and, as a result, guarding themselves
against movements in the currency's purchasing power. In this event,
economic activities requiring the use of money are then succeeding at
the expense of political programs.
In sum, the economic role of money within the market order is that of a general means serving no one particular end but rather an ever-changing set of private ends.11
In order for this role to be most efficiently filled, the value of the
money unit must be stable, or, at least predictable. By serving
"economic" interests, money serves social interests in general.
In its political role, however, currency serves as an instrument to
advance special interests. Unlike the market function of money, the
political function of money is not end-independent, but endspecific.
Whether the end consists of implementing full-employment policy or
creating revenue, monetary systems that have been set up to permit
manipulation of the money stock for the benefit of special rather than
general interests tend to systematically destabilize
the market. The resulting disturbances are the consequence of the
falsification of economic calculations caused by price distortions. The
distortions, in turn, result from the unpredictable changes in, and
consequent uncertainty about, the structure of relative prices affected
by policy decisions.
Several important works by economists and accountants have discussed
the negative consequences of monetary expansion undertaken for
political ends, as those consequences fall on particular private groups
Others have considered the burden of such manipulations in terms of
their disruption of the overall orderliness of a monetized exchange
Axel Leijon-hufvud has cogently summarized the way in which
inflationary monetary policies interfere with microeconomic
Transactors will not be able to sort out the relevant
"real" price signals from the relative price changes due
to…inflationary leads and lags. How could they? Messages of changes in
"real scarcities" come in through a cacophony of noises signifying
nothing…and "sound" no different. To assume that agents generally
possess the independent information required to filter the significant
messages from the noise would…amount to assuming knowledge so
comprehensive that reliance on market prices for information should
have been unnecessary in the first place.14
The economics profession generally acknowledges that use of monetary
policy for full-employment purposes involves some sacrifice. There is
little consensus, however, concerning the nature and significance of
this "trade-off." The properties of the "Phillips curve" —the graphic
representation of a supposed trade-off between lower inflation and
lower unemployment—have been the subject of extensive theoretical and
empirical investigation. Economists of the Austrian School have
recently been joined on one issue by those of the Monetarist School,
and especially the "Rational Expectations" wing of the latter. Both
groups advance the proposition that any increase in output or
employment that is induced by monetary expansion must be temporary and
self-reversing. Such an increase results only from mistaken actions
influenced by the false price signals generated by the monetary
expansion. Unexpectedly rapid money growth may bring greater measured
output and employment today, but it does not bring greater output or
employment tomorrow, and is indeed likely to depress aggregate
productivity in the long run due to its structurally disruptive impact.15 Unquestionably, it brings greater inflation of prices.
The contrary belief that discretionary money and credit management
can achieve positive policy outcomes has been associated with Keynesian
economic thought. The literature in support of discretionary policy is
vast, as is the literature in opposition.16 The issue is still very much alive in the economic journals.
The questions of the feasibility of generating (short-run) increases in employment and output through monetary expansion, and
of the consequences of such a policy for the (long-run) reliability of
money and money price signals, are matters for an impartial wertfrei economic science to investigate. However, the question of the relative desirability
of such various policy-dependent outcomes, no matter what theoretical
and empirical propositions one may accept, calls for a normative,
value-oriented appraisal. The non-value-free nature of such an
appraisal might have been emphasized by placing between quotation marks
the words "problem" and "mismanagement" in the subtitle above.
A preference for long-term stability in the purchasing power of a
community's monetary unit—as opposed to policy-induced changes of
dubious duration in levels of aggregate resource utilization—is a major
impetus behind recent arguments for reform of existing monetary
arrangements. An even greater impetus to reform is a perception of the
injustice inherent in a system that enables those in authority to
systematically plunder the real wealth of the citizenry via an
"inflation tax" —clearly a most insidious form of "taxation without
representation." Economists in the field of monetary political economy
have concluded that an extremely serious problem of design exists in
the present organization of the governmentally controlled money supply
system. In their view the money-using public's demand for long-term
monetary stability is not being met. The task remaining for specialists
in the field is therefore clear: to discover and develop a more
appropriate means for realizing of the goal of monetary stability.
Let us now consider what these writers have proposed.
III. The Proposed Remedies to Bureacratic Corruption of Token Currency
A. Gold: A Note on the "Classical" Solution
The oldest and certainly most familiar solution to the corrupting
effects of state-controlled paper money is a return to a gold standard.
To many of us, the idea of reintroducing the use of specie (coined
precious metals) and specie-convertible bank liabilities as exchange
media is practically synonymous with a return to stable money. The
essential virtue of a monetary system based on "hard" currency is
perhaps best expressed by one of the leading proponents of the gold
standard, Hans F. Sennholz. He writes, in his Inflation or Gold Standard:
It is undoubtedly true that the fiat standard is more
workable for economic planners and money managers. But this is the very
reason why we prefer the gold standard. Its excellence is its unmanageability
by government. And we also deny that the fiat standard, which is
characterized by rapid self-destruction and has failed wherever it was
tried, compares favorably on purely
scientific grounds with the gold standard, which is as old as man's
civilization. Out of the ashes of fiat money the gold standard always
springs anew because it is no technical creation of a few expert
advisers, but a social institution that flows from economic freedom and
As anyone pursuing the question of monetary reform soon discovers, a
mountain of literature—both popular and technical —has been published
over the years on the nature and benefits of commodity money. Ludwig
von Mises, in The Theory of Money and Credit, has deeply
explored the distinctions among the three types of money: commodity
money, credit money, and fiduciary, fiat, or "token" money. Of late,
the leading advocates of the reinstitution of a gold standard have
included Murray N. Rothbard, Henry Hazlitt, and Hans F. Sennholz.18
Of related interest is the concept of a "commodity reserve" currency
convertible not into coin but into a wide "basket" of standardized
goods. Unlike a gold coin standard, a commodity reserve system would
necessarily have to be the technical creation of a few expert advisers.
This proposal has been discussed by Friedrich Hayek and Milton Friedman
Although much has been written on the pros and cons of a return to
gold as the solution to the chaos of politically controlled fiat money,
this classic debate will not be considered in further detail here.
Instead we turn to reform proposals not based on
re-establishment of convertibility for government-issued currencies. In
this context, two alternative means of preventing continued government
mismanagement of currency production have been suggested: imposing
legislated constraints on the behavior of the monetary authority or,
more radically, abolishing the government's monopoly in currency
production. An extremely significant literature has grown up in recent
years out of the debate between these two camps concerning the most
appropriate structure for a purely token money system. The first group
supposes continued government monopolization, while the second argues
for a free market in the issue of private currency.
B. Monetary Rules:
The Call for a "Constitutionally Constrained" Government Monopoly
The by-now-mainstream response among monetary economists to the need
for reform of the existing currency arrangements is the proposal that a
"monetary constitution" be constructed and imposed upon those
authorities who are vested with the responsibility for managing the
nation's money supply. Such a
"constitution" would lay down binding rules defining in detail the
money-supply procedure to be followed. Fundamental to this program is a
perpetuation of the existing market structure in currency production,
namely government-run or nationalized monopoly.
At present, the United States clearly lacks any explicit legal rule
restricting the federal government's money-creation behavior. Indeed,
it lacks even general constitutional limitation upon
governmental efforts to "manage" the economic system overall. As Neil
H. Jacoby notes, "It is a remarkable fact that the federal Constitution
says practically nothing about the role of the President in guiding the
national economy. Present institutions of control have evolved outside
the Constitution and to a considerable extent outside of federal
statutes." Jacoby conjectures that the Founding Fathers neglected
"problems of economic stabilization" due to the fact that [s]uch
problems did not exist in the predominantly rural and agricultural
society of about four million souls that was the United States in 1789."20
Existing statutes concerning the federal government's control over
the monetary system are so vague that they may be interpreted in almost
any fashion. They are therefore of little help in legally constraining
the monetary authorities. This ambiguity is apparent in the original
Federal Reserve Act of 1913, which broadly directed the monetary
authorities to regulate the nation's currency so as to "accommodate
commerce and business."21
The Act was initially designed to guide the authorities within the
context of the gold reserve standard that existed at the time. The
elimination of the gold standard brought about by World War I, however,
rendered the Act inadequate to constrain bureaucratic behavior.22
With the end of the gold standard, money-creation authorities in the
United States and other nations became free to follow more "activist"
macroeconomic policy measures. The Keynesian intellectual underpinnings
of such monetary policies as they have evolved in the last half-century
have been dissected by "Public Choice" economists James M. Buchanan and
Richard E. Wagner, and by Austrian economists F.A. Hayek and Murray N.
Two Rationales for Rules
As already suggested, the various programs that monetary
constitutionalists have proposed rest on two basic planks. First, they
propose to maintain the existing government-run monopoly of the
currency industry. Secondly, they advocate that a binding
money-creation "rule" be imposed on the monopoly authority. As we shall see below, a number of different rules have found advocates.
Imposing a strictly defined and inflexible rule of monetary
discipline, of whatever kind, is taken by monetary constitutionalists
to represent "nothing more than the replacement of an undefined and
potentially biased system of monetary policy by a defined system."24
They share the belief, as expressed by Milton Friedman, that "the
monetary structure needs a kind of monetary constitution, which takes
the form of rules establishing and limiting the central bank as to the
powers that it is given, its reserve requirements, and so on." By
defining the "rules of the game" of currency production, the monetary
constitution will supposedly require that the government execute plans
affecting the money supply "by law instead of by men." It will remove
the "extraordinary dependence on personalities, which fosters
instability arising from accidental shifts in the particular people and
the character of people who are in charge."25
As a result, such a monetary constitution will greatly diminish the
wide fluctuations in economic activity which in the past have allegedly
resulted from "the granting of wide and important responsibilities that
are neither limited by clearly defined rules for guiding policy nor
subjected to test by external criteria of performance."26
Before discussing some of the specifics of the various monetary
constitutionalists' programs for institutional reform, it is
interesting to note that there appear to exist two very different
theoretical rationales behind the advocacy of these reforms.
Many proponents of a binding monetary rule argue for its necessity
on the grounds that those in control of the currency production
apparatus are faced with insurmountable limitations of knowledge. They
argue that the authorities' inability to forecast precisely the lagged
responses of the economic system to their policy actions renders the
achievement of monetary stability via discretionary "fine-tuning"
technically impossible. Given the present state of knowledge, then,
some sort of inflexible and binding managerial "constitution" is
perhaps the most reasonable procedure available. Most notable among
those advancing this "informational limitations" argument are the
Monetarist authors Phillip Cagan, Anna J. Schwartz, and Milton
Friedman. Friedman expresses this position in the following way:
[A "simple" monetary rule] is also likely to strike many
of you as simpleminded. Surely, you will say, it is easy to do better.
Surely, it would be better to "lean against the wind," in the
expressive phrase of a Federal Reserve Chairman, rather than to stand
straight upright whichever way the wind is blowing…[T]he matter is not
so simple. We seldom in fact know which way the economic wind is
blowing until several months after the event, yet to be effective, we
need to know which way the wind is going to be blowing when the
measures we take now will be effective, itself a variable
date that may be a half year or a year or two years from now. Leaning
today against next year's wind is hardly an easy task in the present
state of meteorology.27
An alternative framework for analyzing the problematical behavior
and consequences of an "unconstrained" government monopoly in currency
production, though it leads to the same policy conclusions, has been
developed and utilized by James M. Buchanan and other Public Choice
theorists.28 These writers emphasize the monetary authorities' motivational
shortcomings, rather than their informational limitations. The
authorities, according to this viewpoint, actually lack the proper intentions
to be allowed to exercise discretionary powers in the day-to-day
management of the supply of currency. Buchanan and H. Geoffrey Brennan,
for example, base the case for a rule constraining government's
currency-creating activities on "government behavior in the
'worst-case' setting," a setting in which the "natural proclivities" of
politicians and bureaucrats predominate. The "natural proclivities" of
political functionaries involve, according to these theorists, the
tendency to make decisions and take actions based upon a
"narrowly-defined self-interest" which "run[s] counter to the basic
desires of the citizenry."29
Richard E. Wagner argues in the same vein: "Existing monetary
institutions create a link between politics and monetary control. The
consequence of monetary monopoly combined with the pursuit of political
self-interest can be macroeconomic discoordination." More specifically,
given the government's notorious and seemingly irresistible tendency to
consistently overspend and contribute annually to an already enormous
federal deficit, its monopoly over the production of currency "alters
the constraints within which government conducts its activities, and
alters them systematically by creating the bias toward monetary
expansion."30 As Gordon Tullock notes, monetary administrators are
…people who have no great security of tenure. Under the
circumstances, maximizing the present value of income over the next few
years, rather than over the entire income stream, is their objective.
In general, inflation is a better way of achieving this objective than
is an effort to give a good reputation to your currency…31
In short, monetary systems granting monopoly privileges and
permitting the wide use of discretion to those in power will most
certainly function in a manner which maximizes the prospects for
achieving political ends through monetary means. As a result, such
systems tend to do "maximum, rather than minimum violence, to the logic
of the market economy, sufficing to transform it from a harmonious to a
self-destructive system."32 As Wagner has emphasized, "it is contrary to reason and to history to expect that a monopoly position will fail to be exploited for the benefit of those in a position to practice such an exploitation."33
Suggestions Concerning the Rule's Content
Constitutionally constrained monetary systems are, as John
Culbertson defines them, "token money systems with explicitly defined
behavioral properties." Various monetary rules differ according to the
particular economic variable whose behavior is singled out for explicit
control. There are basically two sorts of rules: (1) those that focus
on the behavior of some monetary statistic, such as Milton Friedman's
well-known proposal for a fixed annual growth rate in some measure of
the stock of money; and (2) those that focus on the behavior of some
non-monetary statistic, such as proposals for stabilizing the price
level or interest rates. In either case, the monetary authority is
required to manipulate the monetary variable(s) under its immediate
control—for the Federal Reserve System this is the sum of currency plus
bank reserves—so as to keep the economic "target" variable on track.
Upon closer examination of proposals involving the first sort of
rule, it becomes evident that their long-run aim is usually identical
to those rules which directly focus on maintaining a constant consumer
price index. Friedman's proposal, for example, calls for a three to
five percent annual growth rate in a particular measure of the money
stock. This growth-rate interval is chosen, he acknowledges, "so that
on average it could be expected to correspond with a roughly stable
long-run level of final product prices…A rate of 3% to 5% per year
might be expected to correspond with [such a] price level."34
Elsewhere Friedman argues that the "optimal" growth rate of the
quantity of money would be that rate expected to correspond with a falling price level, specifically a price level falling at a percentage rate equal to the real rate of interest.35
Friedman and others have extensively discussed the details of possible programs incorporating a constant-money-growth-rate rule.36 E. S. Shaw has elaborated a version of the program specifying a 4% growth rate.37
In all cases, inflexibility inherent in such programs has come under
criticism. Martin Bronfenbrenner claims greater efficiency on behalf of
a "lag" rule, "according to which the growth rate of the money supply
is adjusted to prior fluctuations in the growth rates of real national
output and the velocity of the circulation of money." He argues that
such a rule "may be worthy of consideration as a compromise between the
rigidity of the Friedman-Shaw proposals and complete reliance on that
combination of forecasting ability, political pressure, and administrative routine which passes as 'judgment' or 'discretion.'"38
Other writers suggest that the rule adopted should be a "flexible" one,
containing "override provisions" which permit it to be subjected to
"frequent review" and "modification…as may be needed for maintenance of
stability in the value of money."39
Yet inflexibility also has its defenders. They contend that the
monetary rule, once put into operation, should function so
"mechanically" and serve its purpose so effectively, that "hereafter,
we may hold to it unrationally—on faith—as a religion, if you please."40
Several authors have proposed and examined rules which constrain the
monetary authorities by directing them specifically to maintain a
constant price level rather than a constant money growth rate. Foremost
among these authors are Jacob Viner, Henry Simons, Clark Warburton, and
William H. Hutt.41
James M. Buchanan's prescription for monetary management more broadly
emphasizes predictability rather than simple constancy in the level of
The number of different monetary rules which could be devised is
virtually infinite. Those which have been engineered to date suggest
just a few of the many possibilities. Yet, despite disagreement among
these theorists on the specific content of the constitutional
constraint proposed, unanimity reigns concerning the necessity and
importance of the constitutional construct itself. All would agree with
Milton Friedman where he writes,
The main point…is not so much…the content of these or alternative rules as to suggest that the device
of legislating a rule about the stock of money can effectively achieve
what an independent central bank is designed to achieve but cannot.
Such a rule seems to me the only feasible device currently available
for converting monetary policy into a pillar of a free society rather
than a threat to its foundations.43
Suggestions Concerning the Money Monopoly's Organization
The passing years have witnessed numerous and detailed suggestions
concerning the specific content of a constitution or rule that would
define the appropriate procedure for money creation and control. The
same cannot be said, however, of recommendations concerning the
internal organization of the currency management apparatus. Although
monetary constitutionalists concur on the necessity of concentrating
the control of the currency industry in the hands of a single producer,
there have been few detailed suggestions concerning this monopoly's
specific setup and day-to-day internal operation. Henry Simons, in his
classic article, "Rules Versus Authorities in Monetary Policy,"
proposed placing the money-creation power presently "dispersed
indefinitely, among governmental agencies and private institutions, not
to mention Congress itself," under the jurisdiction of the Treasury,
which might then be "given freedom within wide limits to alter the form
of the public debt—to shift from long term to short term borrowing or
vice-versa, to issue and retire debt obligations in a legal tender
In order to "eliminate…the private creation and destruction of money,"
Milton Friedman suggests that the right to produce and control the
supply of token units in circulation be granted exclusively to "the
Central Bank" or "the Reserve System."45
In general, though, the various authors offer no clear prescriptions
concerning the possible internal structure or appropriate bureaucratic
characteristics of the monopoly agency that they advocate. W. H. Hutt
merely refers to "a monetary Authority,"46
without giving details on the possible nature of this agency, while H.
Geoffrey Brennan and James Buchanan speak simply of "government," in
their recent book The Power to Tax. Lack of descriptive
precision on this matter is not surprising, however, since the monetary
constitutionalists believe that the content of rule constraining the
privileged producer, rather than the set-up of the producing agency, is
crucial to the success of their proposals.
The Anticipated Results of a Monetary Constitution
With constitutionally constrained monetary management, its advocates
contend, the currency industry will no longer be a primary source of
uncertainty and structural discoordination for the economy. Instead,
the management will conduct its activities in such a way that monetary
conditions become economically "neutral," permitting the emergence of
what John M. Culbertson refers to as a "zero-feedback" monetary system.
Such a system does not add to "the net positive feedback of the
economic system" which tends to make it "prone to excessive
self-feeding movements" away from equilibrium. It does not create
inflations and recessions in the name of stabilization policy. Instead
it allows the "financial side of the economy" to operate as the
"feedback-control" or coordinating mechanism.47
In sum, the legislation and enforcement of a monetary constitution,
by appropriately restricting the actions of those with jurisdiction
over the money production apparatus, will, it is believed, create a
framework wherein the circulating medium behaves in harmony rather than
in conflict with the exchange system.
C. A Free Market Money System:
The Competing Currencies Alternative
For decades, programs for a rule-restrained government monopoly had no serious rivals in the area of proposals for reform of
the existing, politically dominated monetary system. In the literature
of monetary policy, the constitutionalists' suggestions were the only
seriously proposed alternative to the status quo —the gold
standard aside—that promised to insure stability in the circulating
medium's exchange-value. Then, in 1976, F. A. Hayek published a short
but professionally shocking book entitled Denationalisation of Money: An Analysis of the Theory and Practice of Concurrent Currencies.
Hayek seriously proposed the exciting, challenging possibility of a
spontaneous monetary order providing for its own token currency needs,
without the involvement of government. The result was a major explosion
of research into this new—free market—alternative to the state's historically exclusive right to issue currency for the economy.
From "Bitter Joke" to "Crucial Issue"
First presented by Hayek "as a sort of bitter joke,"48
the proposition that the free market might provide the best
institutional vehicle for the production of monetary services has
emerged as the single most important development in the area of
monetary reform in recent years. This free market approach to money is
not to be confused with the so-called "Free Money" policies advocated
earlier in this century by such inflationists as Silvio Gesell in The Natural Economic Order and Henry Meulen in Free Banking, an Outline of a Policy Individualism (1934). Those policies were designed to permit abundant rather than sound
private monies. The program behind the "Free Money Movement" called for
by Hayek requires, by contrast, nothing less than a radical switch from
the government's traditionally closed monopoly in the token currency
industry to a regime of free trade in the production and choice of
exchange media. Hayek would allow government to continue to produce
currency only as one competitor among many: "What is so dangerous and
ought to be done away with is not governments' right to issue money but
the exclusive right to do so and their power to force people to use it and accept it at a particular price."49
Proponents of free trade in currency predict that a program for monetary reform which places competitive
rather than "constitutional" constraints on the individual money
producer will prove to be far more effective in orienting managerial
activities toward satisfying the needs of a currency-consuming public.
Given the success of the market system in other realms of production,
Hayek argues that the appropriate control of monetary aggregates to
meet the demands of transactors "will be done more effectively not if
some legal rule forces government, but if it is in the self-interest of
the issuer which makes him do it, because he can keep his business only
if he gives the people a stable money." Raising the informational as
well as the motivation problems of monetary
central planning and nationalization, he adds that "the monopoly of
government of issuing money has not only deprived us of good money but
has also deprived us of the only process by which we can find out what would be good money."50
It would be difficult to overstate the seriousness and urgency with
which Hayek advocates the denationalization of money as a means for
reforming the existing system. He does not propose the end of the
monetary monopoly merely as a temporary expedient, to tide us over
until we are able to design a constitutional mechanism that will
channel the government monopoly into more commendable modes of
behavior; nor as a standby plan in case the present system collapses.
His alternative of monetary self-organization requires nothing less
than the permanent removal of all barriers to entry and free
competition in the currency and banking industries. And what is more,
it promises nothing less than an end to the catastrophic effects of
central-bank-caused business cycles:
It is very urgent that it become rapidly understood that
there is no justification in history for the existing position of a
government monopoly of issuing money…(T)his monopoly…is very largely
the cause of the great fluctuations in credit, of the great
fluctuations in economic activity, and ultimately of the recurring
depressions…. (I)f the capitalists had been allowed to provide
themselves with the money which they need, the competitive system would
have long overcome the major fluctuations in economic activity and the
prolonged periods of depression.51
Earlier Advocates of Free Trade in Money: From Smith to Spencer
Earlier discussions of the nature and consequences of a regime of
free trade in the money and banking industries may be found in the
works of several classical political economists.52 Adam Smith, for example, in his unsurpassed Inquiry into the Nature and Causes of the Wealth of Nations
(1776), expressed support for Scotland's policy of laissez faire
towards the issue and circulation of private bank notes used in
commercial exchange. Smith explained that substantial economies could
be gained by employing redeemable paper currencies in place of gold and
silver coin, as the displaced coin could then be exported in exchange
for productive capital goods. Nevertheless, he was also aware of the
potential dangers of such paper monies:
The gold and silver money which circulates in any
country, and by means of which, the produce of its land and labour is
annually circulated and distributed to the proper consumers, is…all
dead stock. It is a very valuable part of the capital of the country,
which produces nothing to the country. The judicious operations of
banking, by substituting paper in the room of a great part of this gold
and silver, enables the country to convert a great
part of this dead stock into…stock which produces something to the
country…. The commerce and industry of the country, however,…though
they may be somewhat augmented, cannot be altogether so secure, when
they are thus, as it were, suspended upon the Daedalian wings of paper
money, as when they travel about upon the solid ground of gold and
The insecurity for domestic banknote users was, in Smith's words,
mainly due to "the accidents to which they are exposed from the
unskillfulness of the conductors (issuers) of this paper money."
Smith's solution, not surprisingly, was free competition:
(The) multiplication of banking companies…, an event by which many people have been much alarmed, instead of diminishing, increases the security of the publick. It obliges all of them to become more circumspect in their conduct, and…to guard
themselves against those malicious runs, which the rivalship of so many
competitors is always ready to bring upon them…. By dividing the whole
circulation into a greater number of parts, the failure of any one
company, an accident which, in the course of things, must sometimes
happen, becomes of less consequence to the publick. This free competition
too obliges all bankers to be more liberal in their dealings with their
customers, lest their rivals should carry them away. In general, if any branch of trade, or any division of labour, be advantageous to the publick, the freer and more general the competition, it will always be the more so.54
John Stuart Mill, in his Principles of Political Economy
(1848), also offered arguments for relying—with some qualifications
—upon private sector competition in the production of money and banking
services. He noted:
The reason ordinarily alleged in condemnation of the
system of plurality of issuers…is that the competition of these
different issuers induces them to increase the amount of their notes to
an injurious extent…. (But) the extraordinary increase in banking
competition occasioned by the establishment of the joint-stock banks, a
competition often of the most reckless kind, has proved utterly
powerless to enlarge the aggregate mass of the banknote circulation;
that aggregate circulation having, on the contrary, actually decreased.
In the absence of any special case for an exception to freedom of industry, the general rule ought to prevail.55
The irrepressible Herbert Spencer, in Social Statics, also voiced his support for private enterprise in servicing the public's credit and currency needs. Spencer wrote:
Thus, self-regulating as is a currency when let alone, laws cannot improve its arrangements, although they may, and continually do, derange
them. That the state should compel every one who has given promises to
pay, be he merchant, private banker, or shareholder in a joint-stock
bank, duly to discharge the responsibilities he has incurred, is very
true. To do this, however, is merely to maintain men's rights—to
administer justice; and therefore comes within the state's normal
function. But to do more than this—to restrict issues, or forbid notes below a certain denomination, is no less injurious than inequitable…
When, therefore, we find α priori reason for concluding that in any given community the due balance between paper and coin will be spontaneously maintained—when we also find that three-fourths of our own paper circulation is self-regulated—that the restrictions on the other fourth entail a useless sinking of capital—and further, that facts prove a self-regulated system to be both safer and cheaper, we may fairly say…that legislative interference is…needless.56
Recent Discussions of the Competitive Supply of Money
Scholarly analysis of the properties of a competitive system of privately issued "token" monies—monies not
redeemable on demand for precious metals—appears to be confined to
recent decades. One of the first major theoretical discussions of such
a system is William P. Gramm's "Laissez-Faire and the Optimum Quantity
of Money," which appeared in 1974.57
Developing a model of the currency industry characterized by a
"perfectly" competitive market structure, Gramm counters the claims
made by monetary economists Harry Johnson, Paul Samuelson, as well as
Boris Pesek and Thomas Saving. These scholars claim that competition in
the production of nominal money balances wastes resources and results
in a non-optimal quantity of money, implying, therefore, that the
currency industry is subject to "market failure."58
In his excellent "Theory of Money and Income Consistent with Orthodox
Value Theory," also appearing in 1974, Earl Thompson also analyzes the
efficiency and macroeconomic stability properties of a system in which
"competitive money creators" or "bankers" supply the needs of
currency-using transactors. Thompson demonstrates the beneficial
consequences that follow when we properly apply the standard
assumptions of orthodox neoclassical value theory to a perfectly
competitive production-and-exchange economy in which the provision of
money is also subject to perfect competition. The result is an
equilibrium quantity of real money balances which is: (1) determinate;
(2) "Pareto optimal" (i.e., all resources go to their highest-valued
uses); and (3) consistent with Say's Law of Markets (i.e., inconsistent
with permanent, aggregate resource unemployment).59
In November of 1974, another major work on the competing currencies question was published in the Journal of Money, Credit, and Banking.
In his article "The Competitive Supply of Money," Benjamin Klein dealt
the final blow to those arguments against monetary competition. Klein
refutes the criticism that such a system would necessarily generate a
hyper-inflation, leading to an infinitely high level of money prices.
He demonstrates that we could expect such a result only when the "brand
names" or "trademarks" of the various privately issued token monies are
not protected from counterfeiting. He provides an excellent discussion
of the process by which the competitive system would punish a money-producing
firm that attempted to cheat its customers by deceitfully manipulating
the supply of its brand of money, and how, correspondingly, it would
reward a firm that operated to preserve its customers' trust. Klein
concludes with a short historical discussion and a consideration of the
pros and cons of competition, but he comes to no strong conclusions
concerning the preferability of a competitive market structure over the
existing closed government monopoly.60
In two later articles, Klein applies his theoretical apparatus to the
questions of European monetary unification and the seignorage profits
earned by currency issuers.61
Shortly after Klein's first article, Gordon Tullock's "Competing Monies" appeared in the Journal of Money, Banking, and Credit
(1975). This fascinating article, after suggesting some possible
examples of historical precedents in the use of competing private token
issues, offers an important theoretical analysis of the microeconomic
process by which a depreciating currency might gradually be given up in
favor of another more stable one.62
Tullock's article triggered an interesting exchange between himself and
Klein concerning the authenticity and frequency of historical instances
of competing private monies.63
Hayek and the Denationalization of Money
F. A. Hayek's 1976 pamphlet, Choice in Currency: A Way to Stop Inflation, represented the beginnings of the first major attempt toinvestigate seriously the practical
possibilities of a system of competing paper issues. It was here that
Hayek began to address the question, "Why should we not let people
choose freely what money they want to use?" —and to answer it: "There
is no reason whatever why people should not be free to make
contracts, including ordinary purchases and sales, in any kind of money
they choose, or why they should be obliged to sell against any
particular kind of money."64
The program presented in Choice in Currency involves domestic competition among different national government
monies, each of whose circulation is presently confined almost
exclusively to its country of origin. But over a period of eight
months, the program quickly evolved into a full-blown scheme of
competing private (as well as governmental) monies. The result of this development was Hayek's pathbreaking Denationalisation of Money: An Analysis of the Theory and Practice of Concurrent Currencies. First published in 1976, this work was subsequently revised and extended.65
It provides the best existing account of, and the best case for, free
competition in the production and control of privately issued token
monies. Hayek's analysis of the hypothetical working of a laissez-faire
monetary system may seem deceptively simple, due to its brief treatment
of a novel idea. The analysis should be closely read and carefully
considered by the interested reader, as it has been misunderstood by
more than one writer in the area.66 The author comes to the firm conclusion that "the
past instability of the market economy is the consequence of the
exclusion of the most important regulator of the market mechanism,
money, from itself being regulated by the market process."67
Since Hayek's Denationalisation of Money was first published,
several other authors have made significant contributions to the small
but rapidly growing discipline of currency competition. These include
Lance Girton and Don Roper, whose "Substitutable Monies and the
Monetary Standard" (1979) gives a clear and concise statement of the
"theory of multiple monies" and discusses some of the major issues
connected with the choice-in-currencies question.68
Roland Vaubel's "Free Currency Competition" (1977) is an excellent
study offering an extremely thorough overview of the subject and its
controversies. In addition, it provides some personal predictions
concerning what Vaubel believes to be the most likely outcome of a
competitively determined currency industry.69
Vaubel refers to two as-yet-unpublished works, Wolfram Engels' "Note
Issue as a Branch of Banking" and Wolfgang Stutzel's "Who Should Issue
Money? Private Instead of Public Institutions? Bankers Instead of
Politicians!", that further discuss and argue for a free market in
Among lay audiences concern with understanding the existing monetary
mess has reached a high level of intensity in recent months. In order
to satisfy this popular demand, a number of nontechnical introductory
articles on the competing token monies alternative have recently
appeared. Among these are pieces by economists Martin Bronfenbrenner,
F. A. Hayek, Lawrence H. White, and Peter Lewin.70
In addition, a number of works have examined historical incidents of
privately-issued monies (token, fiduciary, and commodity),
complementing research done on the purely theoretical level.71
The Competitive Process of Currency Production
The hypothetical day-to-day operation of an established competitive
token monetary system is in fact no more (or less) mysterious than is
the working of the market process in any other production domain.
Private issuers would compete in a number of dimensions to meet the
community's demands for monetary services: purchasing-power behavior
over time, convenience of use in exchange, convenience of use in
accounting, and so on. Depending upon the preferences of currency
consumers, the producer would adjust
the existing supply of nominal units of his money so as to provide the
appropriate degree of appreciation or constancy in his money's value.
The purchasing-power control technique (or "rule") employed in actual
practice by any given firm is, under a competitive system, a matter to
be determined exclusively by the subjective judgments of the monetary
Because people's exchange needs are different, preferences with
respect to changes in the exchange-value of currencies can be expected
to vary over the population of money users. This would result in issuer
specialization to meet the unique requirements of particular user
interests. Similarly, tastes may differ with respect to the index of
commodity prices devised to monitor deviations from the desired level
or rate of change of the purchasing power of a money. On this point,
Hayek explains: "Experience of the response of the public to competing
offers would gradually show which combination of commodities
constituted the most desired standard at any time and place."72
In short, under competitive conditions, the monetary standard, the
monetary rule, and the purchasing-power behavior of money are all
determined by expressed choice in the marketplace rather than by
arbitrary political command.
Over time, those issuers who most effectively satisfy the demand for
monetary services would profit and expand their market shares. Others
who, for example, increase the value of their currencies when most
money-holders prefer stable tokens, or stabilize their monies when most
users prefer appreciating tokens, would be driven out of business or be
forced to maintain a more modest circulation due to reduced profits.
Which sort of monies would actually prove most popular, only the
competitive market process can tell. For instance, Roland Vaubel points
out, while purchasing-power appreciation tends to enhance a money's
desirability as an asset (or "store of value"), purchasing-power
constancy may enhance its desirability as an accounting device (or
"standard of value").73
The case for competition appears the logically superior one.
However, doubts and queries about the operation of the system have
nevertheless been expressed. Critics have especially emphasized
potential problems concerning the stability and emergence of efficient
supplies of currency when competition is allowed to regulate its
Is a Free-Market Monetary System Stable?
The issue of stability centers on the question of the controlability
of a currency's value under a "perfectly" competitive scheme. This is
sometimes framed, inversely, as the problem of "infinite"
levels of money prices presumably resulting from a laissez-faire
regime. Boris Pesek, for example, expresses the belief that in the long
run a competitive paper currency system would generate a situation in
which "money is so 'abundant' as to sell for a zero price and be a free
good," producing a "regression into full-time barter since free money
is worthless money, incapable of performing its task of facilitating
exchange of goods among persons."74
Benjamin Klein, as noted earlier, has demonstrated that such a result
depends on improperly specified or protected property rights in the
currency industry, and would emerge in any market in which
brand names could be counterfeited. In such a market, producers and
consumers lack a signaling mechanism by which to identify the outputs
of different firms in the industry, so that a low-quality product
cannot be identified and shunned in advance. Explains Klein:
It is true that if, for example, a new money producer
could issue money that was indistinguishable from an established money,
competition would lead to an overissue of the particular money and the
destruction of its value. The new firm's increase in the supply of
money would cause prices in terms of that money to rise and, if
anticipated, leave real profit derived from the total production of the
money unchanged. But there has been a distribution effect—a fall in the
established firm's real wealth. The larger the new firm's money issue
the greater its profit; therefore profit maximization implies that the
new firm will make unlimited increases in the supply of the money,
reducing the established firm's profit share close to zero (unless it
If the established firm legally posseses a trademark on its money,
this "externality" of the new firm's production represents a violation
of the established firm's property right and is called counterfeiting.
Lack of enforcement of an individual's firm's property right to his
particular name will permit unlimited competitive counterfeiting and
lead to an infinite price level. This merely points up the difficulties
in the usual specification of competitive conditions. If buyers are
unable to distinguish between the products of competing firms in an
industry, competition will lead each firm to reduce the quality of the
product it sells since the costs of such an action will be borne mainly
by the other firms in the industry…. [I]ndistinguishability of the
output of competing firms will lead to product quality depreciation in
Thus, in order to solve the paradox of infinite price levels, we
need only introduce into a competitive currency model that was designed
to prove the instability of free trade in money an assumption implicit
in all standard analyses of competitive industry: the premise that
products are distinguishable with respect to origin. (This is not
inconsistent with another assumption of "perfect competition" models:
that products are completely indistinguishable or identical with
respect to their flow of services.) On making this assumption the proof
is reversed, and we may deduce stability properties typically found in
a perfectly competitive world. Criticisms of the stability properties
of a free-market monetary system in this case point up a potential
problem concerning the appropriate
legal structure necessary for a properly functioning competitive
system, rather than a problem of the competitive market structure itself, given a well-defined system of property rights.
Could Private Token Currencies Emerge? Would They?
The emergence of a competitive token monetary system from the
existing domestic government monopoly raises two questions. First,
there is the issue of how in theory a system of multiple monies could
emerge; and second, there is the question of whether in practice such
an evolution should be expected to take place once the requisite
property rights structure has been established for the industry.
Posing the first question, Henry Hazlitt asks:
(H)ow does a private issuer establish the value of his
money unit in the first place? Why would anybody take it? Who would
accept his certificates for their own goods and services? And at what
rate? Against what would the private banker issue his money? With what
would the would-be user buy it from him? Into what would the issuer
keep it constantly convertible? These are essential questions.76
Indeed, new currencies would not appear or be accepted overnight.
During the gradual process of establishing a private currency, the
issued certificates would not immediately be greeted by money-users as
currency. At the outset they would be supplied to the public in the
form of money substitutes. These money substitutes would be
supplied under an explicit contract guaranteeing the bearer some
minimum rate of exchange between these certificates and one or more
commodities or pre-existing currencies. Currency entrepreneurs would of
course decide which commodities or monies to use in this process, and
money-users would then choose from among the alternatives offered.77
Only later, after the issuing firm had fostered sufficient consumer
confidence in its trademarked tokens by making the necessary
investments in the firm's "brand-name capital,"78
would the issued notes begin to take on a monetary life of their own.
The point marking this transformation is reached when currency-users
effectively acknowledge the new currency as "monetized" by no longer
routinely demanding that it be converted into another more liquid
asset. Instead transactors begin circulating the notes as an
independent exchange medium in their daily business.
Empirical doubts about the second question—whether a
competitive currency system would in fact spontaneously emerge under
the right legal conditions—are almost without exception framed in terms
of the economic concept of "transactions costs." They are presented on
the basis of a number of confusions, widespread
within the economics profession, concerning the notions of "cost,"
"choice," and "competition." Such confusions are all too familiar to
Arguments that deny the likely emergence of concurrent privately
issued monies under laissez faire typically run as follows. People
employ goods "having currency" for a variety of reasons, the most
important among these being the purpose of transacting economic
exchanges. In its capacity as a medium of exchange, a monetized
commodity, due to its quality of being highly marketable, provides the
transactor with a device which allows him to economize on the time and
resources required to complete his desired set of exchanges. Thus far
the argument is unobjectionable. Confusion enters in the form of a non sequitur
when the argument leaps to the conclusion that, to the individual
agent, "money is more useful the larger its transactions domain." On
this basis Roland Vaubel argues that
Since the cost of using money falls as its domain
expands, the quality (and, hence, the value) of the product money and,
consequently, the marginal value productivity of the factors engaged in
its production increase so that the money industry must be viewed as a
(permanently) declining-cost industry.79
This argument leads Vaubel to conclude: "Ultimately, currency
competition destroys itself because the use of money is subject to very
sizeable economies of scale. The money-industry must be viewed as a
'natural monopoly,' which at some stage must be nationalized." He adds
that since it is "undisputed that lines of production that are subject
to permanently declining cost must at some stage be nationalized (or,
in an international context, be 'unified'), the fact that currency
competition will lead to currency union must be regarded as desirable."80
This argument labors under some rather common misconceptions. First,
only individuals transact, and they do so only with one other
individual or organization at a time, rather than with the entire
economic order or "transactions domain." Further, there are likely to
be many sectors of the monetized system with which these actors have
little or no interest in dealing. These submarginal transactions areas
vary from person to person. It is not at all obvious, then, that a
money will be "more useful" to any given agent, the more
universal or extensive the domain within which the money (or monies) he
uses circulates. Some degree of specialization and heterogeneity in the
currency industry's supply of services may in fact persist indefinitely
because of persistence of differences in the needs and purposes of the
various money-using members of a community.81
In that case, several different issues may circulate side by side, each
servicing the individuated demands of a separate subset or
"neighborhood" of the "global" transactions domain. And, of course these currency areas may overlap.
The exact configuration of the resulting monetary mosaic is
unpredictable under a competitive monetary arrangement since each
currency consumer's choice from among the array of currencies available
to him is made according to purely subjective benefit-cost
calculations. Accordingly, the aggregate impact of consumers' choices
in determining a given currency's domain will be revealed only after
the execution of the particular plans that are based upon these
calculations. Since their requirements may, for example, be highly
localized geographically, it seems unreasonable to conclude a priori
that a system of several concurrently circulating monies is "likely to
be purely transitory, and that the only lasting—and again
desirable—result will be currency union."82
A second problem with the prediction of a "spontaneous
monopolization" of the currency industry concerns the misconception of
the competitive process that underlies this forecast. Surely, no one
can resist reaching the conclusion that "competition destroys itself"
in any industry in which marginal costs of production are
continuously falling; no one, that is, who has adopted the
entrepreneurially static notion of "perfect competition" as a
benchmark. In that conceptual framework, the criterion of a
"competitive" industry refers to a specific magnitude or pattern ("many" firms or price equal to marginal and average costs), rather than to the end-independent (and unceasing) process
(rivalrous pursuit of profits) that characterizes the operation of the
system. It naturally follows that any industry not obeying the
perfectly competitive "pattern" must by definition exhibit
Once we recognize, however, that real-life competition is a dynamic
and unending discovery process, we no longer can meaningfully judge an
actual industry's competitiveness by comparing it with some final
static state of "optimality," "perfection," or "equilibrium." So long
as the necessary legal framework is in force, the competitive process is at work whether one firm or many firms persist. In Brian Loasby's words: "[T]he critical question is, not what should the pattern of resource allocation look like, but how
is it to be achieved; and the perfectly competitive model, which has
defined the terms of the argument, provides no recipe for achieving
anything. Actual competition is a process, not a state; and perfect
competition can exist only as the description of a state.84
Vaubel goes on to offer one more criticism of the efficiency of
competing currencies. He argues that because "a good like
money['s]…precise purpose is to reduce transaction cost, information cost
and risk (as compared with barter), a diverse plethora of private
issuers in the industry is likely to be "particularly inconvenient" due
to the "diseconomies of small scale." He further argues that these
effects "do not disappear if all banks of issue are led or forced to
denominate their monies in the same standard of value."85
The issue of whether several concurrently circulating exchange media
would present an inconvenience to currency-users depends, again, on the
individual users' subjective evaluations of the benefits and costs
involved. The outcome cannot be conclusively determined a priori
by the theorist. What is more, it is of interest to note that economic
historian Hugh Rockoff has offered evidence which suggests by analogy
that the benefits of a multi-issuer system may in fact outweigh the possible inconvenience in the estimations of consumers:
[I]t seems unlikely that the heterogeneous nature of the
currency (of the nineteenth century) was a major brake on economic
growth, for in many crucial respects the system was little different
from that which prevails today. Locally we use demand deposits. But
these are not generally acceptable as a means of payment. Each time we
wish to make a purchase by check from a businessman we force him to
make some judgement about the quality of the money we are offering.
Instead of having to worry about different kinds of bank notes a
merchant today must worry about different kinds of deposits which could
be as numerous as his customers. Counterfeiting currency is now rare,
but forged checks and insufficient balances are a constant irritation.
Yet no one today would argue that the heterogeneity of our deposit
money is a serious impediment to the growth of national income…[T]he
inefficiency of a heterogeneous currency should not be exaggerated.86
Skepticism From Gold Standard Advocates
It should be mentioned that a few advocates of the gold standard
have questioned the feasibility of privately circulated issues of
explicitly "token" form.87 Their criticisms are clearly directed not against market-oriented monetary reform per se
(as the gold standard they advocate is itself a market-controlled
monetary system), but rather against a system of irredeemable and
exclusively paper monies. According to these skeptics, the Hayekian
paper regime could never exist. A purely fiduciary money is simply not
possible in a world of free and rational agents; and it follows, they
argue, that a system of competing paper issues is also impossible:
In a truly free society,…Professor Hayek and his bank
would be allowed to issue paper certificates. So would we and our
neighbors down the street. The real question is: Who would accept
such certificates for their goods or services? Remember, they are not
legal tender. Their value could not be insured…It is difficult to
believe that sophisticated businessmen would long accept such paper
certificates when, in a free society, they could ask for and receive
gold or certificates redeemable in gold….
Given the fact that few people now alive have ever known sound money
and given the general ignorance of sound monetary theory, it is possible
that some established banks might find some who would accept their
privately issued paper certificates. But, as Hans Christian Andersen
tells the story of the illusion of "The Emperor's Clothes," sooner or
later some innocent bystander would point out that such paper
certificates are not the most marketable commodity in a free society
and hence not "money."88
It is surprising how many basic confusions concerning the theories
of subjective valuation, money, and the spontaneous order have been
included in such a short passage. The implication that an established
token issue's acceptability is necessarily dependent upon its
possessing a governmentally sanctioned "legal tender" status ("Remember
they are not legal tender") is false. In contrast to these would-be
Misesian writers, Mises himself notes:
The law may declare anything it likes to be a medium of
payment…But bestowing the property of legal tender on a thing does not
suffice to make it money in the economic sense. Goods can become common
media of exhange only through the practice of those who take part in
commercial transactions…. Quite possibly, commerce may take into use
those things to which the State has ascribed the power of payment; but
it need not do so. It may, if it likes, reject them.89
If these writers mean to suggest that token money is exclusively a "creature of the State," perhaps they should say so directly.
The bald assertion that a newly issued private money's value "could
not be insured" is also incorrect. More than one author has explained
how and why such "value insurance" for new monies might hypothetically
be made available to interested-but-wary potential customers.90
What is worse, the assertion represents a disconcertingly unannounced
jump in logic. It leaps from a general and objective analytical
discussion of the issues to a highly specific and essentially
entrepreneurial judgment concerning the dimensions in which the market
for insurance services could or could not operate in the future. An
economist oversteps his bounds in going beyond purely scientific
explanations of the operations of the competitive process in the
currency industry into the realm of concrete predictions concerning the
industry's future organization ("supply-side") and qualitative
("demand-side") features. Such prediction is the concern of
entrepreneurs. In these instances, criticism seems to reveal a basic
misunderstanding of the literature concerning the Hayekian private
paper money system in particular, and of the theory of the spontaneous
order as a fluid discovery process in general.
The fact of the matter is that individuals do transact with and are willing to hold merely "token" currencies.91
Even more generally, we may note that presumably rational, valuing
agents, when situated within the context of a social system,
continuously engage in various "customary" activities or follow
established "norms" or procedures that do not yield obvious and direct
benefits to them. These modes of
behavior have evolved to facilitate social intercourse, though
frequently those practicing them may be incapable of articulating or
rationalizing those functions explicitly.92
The question is, should we deny or ignore the actual existence of
certain forms of money or various other "products of human action but
not of human design" simply because their acceptability seems
"difficult to believe"? Or should we recognize that such structures do
indeed exist, although to date their occurrence remains to be
satisfactorily explained? To the inquiring mind, the answer seems
Additional and more practical objections to a system of free-market paper monies have been developed in the literature.93 A number of these have come (somewhat surprisingly) from the program's chief proponent, F.A. Hayek.94
Rules and Commands: Their Confusion by the Constitutionalists
Finally, one of the most important arguments against monetary
competition is implicit in a leading defense of a constitutionally
constrained monopoly. This argument, which has been frequently invoked
by monetary constitutionalists of both the Monetarist and Public Choice
camps, seems, again, to rest on some rather serious misconceptions: The
use of money, it is argued, is directly analogous to the following of
legal rules of conduct within a civilization. Further, both the law and
money come under the category of highly social "multi-purpose
Since the extra-market constitutional mechanisms devised in the past
appear to facilitate the successful functioning and development of the legal order, it seems naturally to follow that the creation of such a mechanism for the monetary order would serve to enhance its
operation and progress as well. The creators and practitioners of law
are continuously guided in their deliberations by a metal-legal
framework of general principles that provides a point of reference for
"producing" proper legislation. Similarly, might not the creators and
practitioners (managers) of the currency system be disciplined in their
day-to-day activities by a set of principles? A monetary constitution
would thereby insure that the "proper" monetary services would be
produced and made available to market participants.96
Two rather basic errors mar this argument. The first is that an analogy per se
demonstrates nothing. It may indeed be true the use of currency in
economic interactions has characteristics similar to those of the
adherence to legal rules in social interactions. But it does not follow
that it is therefore necessary for efficiency that the production of
money be carried out within an institutional framework analogous to
that created for the production of
laws—a closed, govermentally controlled, jurisdictional monopoly. If
this conclusion really were thought to follow, moreover, it would prove
too much. That is, it would be unclear why its proponents have not also
endorsed the socialization of religion, say, or the development of a
constitution mandating and defining an overall set of principles for
the production and use of language in society. If the evolution of
optimal "supplies" of languages and language areas is allowed to be
determined by spontaneous order, why then should not optimal money
supplies and currency areas be so determined as well?
The second and more serious problem with the above argument is that
the specific analogy used is flawed. It overlooks a crucial difference
between currency and rules: laws (written down explicitly or not) are prerequisites for market activity. Money, while it does facilitate such activity, is not a prerequisite. Money is a good
with a distinct demand and supply. Being an economic commodity capable
of providing specific services to its users, there is no apparent
reason why its production cannot be regulated by the same rules which guide the creation of all goods—the body of laws protecting competitive activity.
When it is claimed that currency production must be supervised by
its own "special" legal framework and protected from the competitive
process by being manufactured only by government, whereas other goods
may be produced competitively under the standard legal framework
calling for free and equal exchange, a confusion between the notion of abstract rules and that of particular commands is apparent. Those advocating a monetary constitution propose not
an abstract rule for the promotion of the general welfare of those who
manage their affairs within the nexus of the monetized exchange system,
but what is in essence a monetary command—a command being
defined as a rule "for the performance of assigned, specific, tasks"
—for centrally planned money production. They, in short, take a
"constructivistic" approach to monetary matters.97
Indeed, money and law are both "multipurpose" tools facilitating social
interchange. But whereas laws are procedural dictates, money is an
As Hayek has pointed out on numerous occasions,98 what generalized "principles of justice" or "rules of just conduct" are intended to generate is not a command society (which would
be the result if these "rules" were defined according to the
endspecific criterion implied by the monetary constitutionalists), but
rather a competitive society. The proper role of constitutional laws or
principles is that of arbitrarily defining the set-up of the apparatus
(government) by which the generalized rules of conduct of the liberal
social order may be enforced. The French classical liberal Frederic
Bastiat put the entire matter succinctly in The Law: "liberty means competition."99
And, as Girton and Roper state clearly with respect to the monetary
system of an open society in particular: "Competition in money issue provides a rule enforced by the market, and a monetary standard that is attractive compared to current monopoly paper money standards."100
Monetary Constitutionalists as Entrepreneurs in Scientists' Clothing
By denying currency the status of a privately producible "good"
capable of being regulated by the pressures of market competition (and
instead elevating it to the status of a supramarket social tool which
needs by its very nature to be supplied by a non-market governmental
agency), the monetary constitutionalists are in fact stepping out of
realm of scientific conjecture and into the domain of entrepreneurial
conjecture. In the case of each program for a monetary constitution or
"rule," the author has tacitly adopted the approach of the hypothetical
currency producer-entrepreneur seeking the best production method. But
rather than admit this, and in the process acknowledge that the only
objective test of the correctness of such conjectures is the
profit-and-loss test of market competition, each author continues to
use the rhetoric of scholarship in the development of a "scientific"
argument for his own particular "brand" of currency and its production
design. What we have here is a case of entrepreneurs in scientists'
IV. Conclusion: Competition as the Proper Response to Ignorance
Economists have clearly articulated the need for reform of the
existing monetary system. The available alternatives for change have in
recent years also taken clear and unambiguous shape: either continued yet constrained monopoly or
free-market competition in the supply of currency. The case for
competition rather than constitutional restriction seems at present to
be far stronger. The essence of the argument for free currency
competition has perhaps been best expressed by Brian Loasby, who writes:
The argument for competition rests on the belief that
people are likely to be wrong…. In the end, the case against an
authoritarian system of resource allocation rests on the same principle
as the case against an authoritarian structure in any discipline: part
of the case…is that no person or body of persons is fit to be trusted
with such power; the (other) part…is that no one person or group of
persons can say for sure what new knowledge tomorrow will bring.
Competition is a proper response to ignorance.101
Comments and suggestions from Gary Anderson, James Buchanan, Robert
Tollison, Gordon Tullock and Daniel Orr on earlier drafts of this essay
are gratefully acknowledged. Of course they are absolved of
responsibility for any errors or omissions that remain. Lawrence H.
White contributed extensive editorial services to the final draft.
1. [C]arl Menger, "On the Origin of Money," Economic Journal
2 (June 1892): 239–255. A modern version of Menger's theory has been
developed by Robert A. Jones, "The Origin and Development of Media of
Exchange," Journal of Political Economy 84 (Nov. 1976): 757–775.
2. Karl Brunner and Allan H. Meltzer, "The Uses of Money: Money in the Theory of an Exchange Economy," American Economic Review 61 (Sept. 1973): 799.
3. Brian Loasby, Choice, Complexity and Ignorance (New York, Cambridge: Cambridge University Press, 1976) p. 165.
4. In addition to those already cited, see W.W. Carlile,The Evolution of Modern Money (London: Macmillan, 1901); W. Stanley Jevons, Money and the Mechanisms of Exchange (London: Kegan Paul, 1905); W.T. Newlyn, The Theory of Money (London: Oxford University Press, 1971); Boris P. Pesek and Thomas R. Saving, Money, Wealth and Economic Theory (New York: Macmillan, 1970); C.A.E. Goodhart, "The Role, Functions, and Definition of Money," in G.C. Harcourt, ed., The Microfoundations of Macroeconomics (Boulder, Co.: Westview Press, 1977), pp. 205–277; Leland Yeager, "Essential Properties of the Medium of Exchange," Kyklos 21 (Jan. 1968): 45–68; William H. Hutt, "The Nature of Money," South African Journal of Economics 20 (March 1952): 50–64; Hutt, "The Yield from Money Held," in Mary Sennholz, ed., The Economics of Free Enterprise (Princeton: Van Nostrand, 1956): pp. 196–216; Hutt, "The Notion of the Volume of Money," South African Journal of Economics 20 (Sept. 1952): 231–241; Hutt, "The Notion of Money of Constant Value," South African Journal of Economics (Sept.–Dec. 1953); Hutt, "The Concept of Idle Money," in The Theory of Idle Resources (Indianapolis: Liberty Press, 1977); Murray N. Rothbard, "The Austrian Theory of Money," in Edwin G. Dolan, editor, The Foundations of Modern Austrian Economics
(Kansas City: Sheed and Ward, 1976), pp. 160–184; Joseph M. Ostroy and
Ross M. Starr, "Money and the Decentralization of Exchange," Econometrica 42 (Nov. 1974): 1093–1113; Morris Perlman, "The Roles of Money in an Economy and the Optimum Quantity of Money," Economics 38 (Aug. 1971): 233–252; Jack Hirshleifer, "Exchange Theory: The Missing Chapter," Western Economic Journal(Economic Inquiry) (June 1973): 129–146; Robert Clower, "A Reconsideration of the Microfoundations of Monetary Theory," Western Economic Journal (Economic Inquiry) 6 (Dec. 1967): 1–8; Harold Demsetz, "The Cost of Transacting," Quarterly Journal of Economics 82 (Feb. 1968): 33–53; and R.A. Radford, "Money in a Prisoner-of-War Camp," in Jonas Prager, ed., Monetary Economics: Controversies in Theory and Policy (New York: Random House, 1971), pp. 6–8.
In the case of the U.S. Federal Reserve System, this is only a
shorthand way of describing the usual process of monetary expansion.
More precisely, the Fed injects new bank reserves into the system,
enabling commercial banks to issue new money.
An especially important transfer of the first type, namely to
capitalist investors from other income groups, occurs when new money is
injected as loanable funds made available by the central bank. This
transfer, known as "forced savings" because it involuntarily restricts
the availability of resources for consumption, plays an important role
in the Austrian theory of the trade cycle. See F.A. Hayek, "A Note on
the Development of the Doctrine of 'Forced Saving'," in Profits, Interest and Investment (New York: Augustus M. Kelley, 1975), pp. 183–197; and Prices and Production (New York: Augustus M. Kelley, 1967), pp. 18–22, 85–91.
7. See John Culbertson, Macroeconomic Theory and Stabilization Policy (New York: McGraw-Hill, 1968); Nancy Smith Barrett, The Theory of Macroeconomic Policy (Englewood Cliffs, NJ: Prentice Hall, 1975); Michael R. Darby, Macroeconomics (New York: McGraw-Hill, 1976); and Rudiger Dornbusch and Stanley Fischer, Macroeconomics (New York: McGraw-Hill, 1978). Also relevant are E.S. Phelps et. al., Microeconomic Foundations of Employment and Inflation Theory (New York: W.W. Norton, 1970); and Don Patinkin, Money, Interest, and Prices
(New York: Harper & Row, 1965). For a survey of recent developments
by a pioneering "Rational Expectations" theorist, see Robert E. Lucas,
Jr., "Methods and Problems in Business Cycle Theory," in Studies in Business-Cycle Theory (Cambridge: MIT Press, 1981), pp. 271–296.
8. See also Milton Friedman, "Government Revenue from Inflation," Journal of Political Economy 79 (July–Aug., 1971): 846–856; Eamonn Butler, "How Government Profits from Inflation," Policy Review 6 (Fall 1978): 73–76; Leonardo Auernheimer, "The Honest Government's Guide to the Revenue from the Creation of Money," Journal of Political Economy 82 (May–June 1974): 598–606; Martin Bailey,"The Welfare Cost of Inflationary Finance," Journal of Political Economy 64 (April 1956): 93–110; and Michael Mussa, "The Welfare Cost of Inflation and the Role of Money as a Unit of Account," Journal of Money, Credit, and Banking 9 (May 1977): 276–286.
9. But for an alternative view—that of monetary statism—see G.F. Knapp,The State Theory of Money (London: Macmillan, 1924); and Abba P. Lerner, "Money as a Creature of the State," American Economic Review 37 (May 1947 supplement): 312–317.
10. S. Herbert Frankel, Money: Two Philosophies (England: Basil Blackwell, 1977), p. 86. See also this book's recent sequel, Money and Liberty (Washington: American Enterprise Institute, 1980).
11. On the importance of such institutions see F.A. Hayek, Law, Legislation and Liberty, vol. II (Chicago: University of Chicago Press, 1978), ch. 7.
12. These include William T. Baxter, Solomon Fabricant, et al., Economic Calculation Under Inflation (Indianapolis: Liberty Press, 1976); Ludwig von Mises, Human Action: A Treatise on Economics (Chicago: Henry Regnery, 1966), pp. 550–565; Axel Leijonhufvud, "Costs and Consequences of Inflation," in Information and Coordination
(New York: Oxford University Press, 1981), pp. 227–269; William D.
Bradford, "Monetary Position, Unanticipated Inflation, and Changes in
the Value of the Firm," Quarterly Review of Economics and Business
16 (Winter 1976): 47–53; and Benjamin Klein, "The Social Costs of the
Recent Inflation: The Mirage of Steady 'Anticipated' Inflation," in
Karl Brunner and Allan H. Meltzer, eds., Institutional Arrangements and the Inflation Problem (New York: North Holland, 1976), pp. 185–212.
13. See Constantino Bresciani-Turroni, The Economics of Inflation (London: George Allen and Unwin, 1937); C.A. Phillips, T.F. McManus and R. W. Nelson, Banking and the Business Cycle (New York: Arno Press, 1972); Ludwig von Mises, On the Manipulation of Money and Credit (Dobbs Ferry, NY: Free Market Books, 1978); F.A. Hayek, Monetary Theory and the Trade Cycle (Clifton, NJ:Augustus M. Kelley, 1975); Hayek, Full Employment at Any Price? (London: Institute of Economic Affairs, 1975); Hayek, "Full Employment, Planning and Inflation," in Studies in Philosophy, Politics and Economics
(New York: Simon and Schuster, 1967), pp. 270 –279; Milton Friedman,
"The Effects of a Full-Employment Policy on Economic Stability," in Essays in Positive Economics (Chicago: University of Chicago Press 1966), pp. 117–132; Otto Eckstein, "Instability in the Private and Public Sectors," Swedish Journal of Economics
75 (March 1973): 19–26; and Benjamin Klein, "Our New Monetary Standard:
The Measurement and Effects of Price Uncertainty, 1880–1973," Economics Inquiry 13 (Dec. 1973): 461–484.
14. Axel Leijonhufvud, Information and Coordination, p. 259. Italics in the original deleted.
The long-run Phillips Curve, to use that manner of speaking, is said to
be positively sloped rather than negatively sloped. See Hayek, Full Employment at Any Price?; Milton Friedman, "Nobel Lecture: Inflation and Unemployment," Journal of Political Economy 85 (June 1977): 451–472; Robert E. Lucas, "Some International Evidence on Output-Inflation Tradeoffs," in Studies in Business Cycle Theory,
pp. 131–145. On the Rational Expectations theorists as "neo-Austrians,"
see David Laidler, "Monetarism: An Interpretation and an Assessment," Economic Journal 91 (March 1981): 1–28.
For evidence and discussion supportive of reliance upon "discretionary"
money and credit management for the achievement of policy objectives,
see for example, Phillip J. Copper and Stanley Fischer, "Simulations of
Monetary Rules in the FRB-MIT-Penn Model," Journal of Money, Credit, and Banking
4 (May 1972): 384–396; C.R. Whittlesey, "Rules, Discretion, and Central
Bankers," in C.R. Whittlesey and J.S.G. Wilson, editors, Essays in Money and Banking in Honor of R.S. Sayers
(Oxford: Clarendon Press, 1968), pp. 252–265; L.R. McPheters and M.B.
Redman, "Rule, Semirule, and Discretion During Two Decades of Monetary
Policy," Quarterly Review of Economics and Business 15 (Spring 1975): 53–64; D.A. Peel, "Some Implications of Alternative Monetary Rules," Indian Economic Journal 27 (July–Sept. 1979): 81–94; Daniel Ahearn, "Automatic Increases in the Money Supply: Some Problems," in Jonas Prager, ed., Monetary Economics: Controversies in Theory and Policy, pp. 352–355; and Franco Modigliani, "Some Empiricial Tests of Monetary Management and of Rules Versus Discretion," Journal of Political Economy 72 (June 1964): 211–245.
Analyses critical of credit and currency control characterized by
discretionary "fine tuning" can be found in Henry C. Simons, "Rules
Versus Authorities in Monetary Policy," in Economic Policy for a Free Society (Chicago: University of Chicago Press, 1973), pp. 160–183; Martin Bronfenbrenner, "Statistical Tests of Rival Monetary Rules," Journal of Political Economy 69 (Feb. 1961): 1–14; Bron-fenbrenner, "Statistical Tests of Rival Monetary Rules: Quarterly Data Supplement," Journal of Political Economy 69 (Dec. 1961): 621–625; Milton Friedman, A Program for Monetary Stability
(New York: Fordham University Press, 1975); Edward S. Shaw, "The
Positive Case for Automatic Monetary Control," in Jonas Prager, editor,
Monetary Economics: Controversies in Theory and Policy, pp. 348
–351; and Bennett T. McCallum, "Price Level Stickiness and the
Feasibility of Monetary Stabilization Policy with Rational
Expectations," Journal of Political Economy 85 (June 1977): 627–634.
Further discussions of both the pros and cons of discretionary money
management are contained in Edward Gramlich, "The Usefulness of
Monetary and Fiscal Policy as Discretionary Stabilization Tools," Journal of Money, Credit, and Banking (May 1971); Richard H. Puckett and Susan B. Vroman, "Rules Versus Discretion: A Simulation Study," Journal of Finance 28 (Sept. 1973): 853–865; Victor Argy, "Rules, Discretion in Monetary Management, and Short-Term Stability," Journal of Money, Credit and Banking
3 (Feb. 1971): 102–122; Ronald S. Koot and David A. Walker, "Rules
Versus Discretion: An Analysis of Income Stability and the Money
Supply," Journal of Money, Credit, and Banking 6 (May 1974):
253–262; Wilfred Lewis, Jr., "The Relative Effectiveness of Automatic
and Discretionary Fiscal Stabilizers," in Robert W. Crandall and
Richard S. Eckhaus, eds., Contemporary Issues in Economics: Selected Readings (Boston: Little, Brown, and Company, 1972), pp. 178–181; and Erich Schneider, "Automatism or Discretion in Monetary Policy?," Banca Nazionale del Lavoro (June 1970): 111–127.
17. Hans F. Sennholz, Inflation or Gold Standard, p. 57.
18. See Murray N. Rothbard, "The Case for a 100 Percent Gold Dollar," in: Leland B. Yeager, editor, In Search of a Monetary Constitution (Cambridge: Harvard University Press, 1962), pp. 94–136; Rothbard, What Has Government Done to Our Money? (Novato, CA: Libertarian Publishers, 1978); Henry Hazlitt, The Inflation Crisis and How to Resolve It (New York: Arlington House, 1978); See also Joseph T. Salerno, "A Proposal for Monetary Reform:The 100% Gold Standard," Policy Report
(July 1981): 6–11. For an analysis and defense of free banking on a
species standard see Lawrence H. White, "Free Banking as an Alternative
Monetary System," in M. Bruce Johnson and Gerald P. O'Driscoll, Jr.,
eds., Inflation of Deflation? (Cambridge, MA: Ballinger Publishing Co., forthcoming).
19. See F.A. Hayek, "A Commodity Reserve Currency," in Individualism and Economic Order
(Chicago: University of Chicago Press, 1948), pp. 92–106; Benjamin
Graham, "The Commodity Reserve Currency Proposal Reconsidered," in
Leland Yeager, ed., In Search of a Monetary Constitution; Milton Friedman, "Commodity Reserve Currency," in Essays in Positive Economics; and Robert E. Hall, "Explorations in the Gold Standard and Related Policies for Stabilizing the Dollar," in Hall, ed., Inflation (Cambridge, MA: National Bureau of Economic Research, forthcoming).
The interested reader will also want to peruse "A Proposal for
Monetary Reform" (unpublished ms., Sept. 1980) by John F.O. Bilson, in
which an "equity" reserve standard is proposed. Under Bilson's scheme,
the Federal Reserve System is transformed into a "type of Mutual Fund"
which maintains a monetary base incorporating reserves composed of a
diversified portfolio of "internationally traded" financial assets.
20. Neil H. Jacoby, "The President, the Constitution, and the Economist in Economic Stabilization," History of Political Economy 3 (Fall 1971): 398.
21. Cited in Friedman,A Program for Monetary Stability
p. 85. An earlier version of the Act prepared by the Senate Banking and
Currency Committee did contain a clause specifically instructing the
Fed to manage the currency system for the clear and unambiguous
co-purpose of "accommodating the commerce of the country and promoting a stable price level."
(Hearings before the Committee on Banking and Currency, U.S. Senate,
63rd Congress, 1st session on S. 2639, 1913, vol. 2, p. 1730, sec. 15
of the bill.) It was deleted from the bill while in committee because
it was believed that such a provision was an unnecessary precaution. It
appears that a genuine ignorance of the potential importance of such an
explicit provision caused its removal from the Act. See Irving Fisher, Stabilized Money: A History of its Movement (London: George Allen and Unwin, 1935), pp. 148 ff.
22. For a detailed historical discussion see Milton Friedman and Anna J. Schwartz, A Monetary History of the United States, 1867–1960 (Princeton: Princeton University Press, 1971), pp. 189 ff. See also Irving Fisher, Stabilized Money; and C.A. Phillips, T.F. McManus, and R.W. Nelson, Banking and the Business Cycle.
23. James M. Buchanan and Richard E. Wagner, Democracy in Deficit (New York: Academic Press, 1977); James M. Buchanan, Richard E. Wagner, and John Burton. The Consequences of Mr. Keynes (London: Institute of Economic Affairs, 1978); F.A. Hayek, "The Campaign Against Keynesian Inflation" in New Studies in Philosophy, Politics, Economics, and the History of Ideas (Chicago: University of Chicago Press, 1978), pp. 191–231; and Murray N. Rothbard, For a New Liberty (New York: Collier Books, 1978), ch. 9.
24. John M. Culbertson, Macroeconomic Theory and Stabilization Policy, p. 453.
25. Milton Friedman, "Should There Be an Independent Monetary Authority?," in Leland B. Yeager, ed., In Search of a Monetary Constitution, pp. 224–225, 239, 236.
26. Milton Friedman, A Program for Monetary Stability, p. 86.
27. Friedman, A Program for Monetary Stability,
p. 93. See also Friedman, "The Effects of a Full-Employment Policy on
Economic Stability: A Formal Analysis"; and Phillip Cagan and Anna J.
Schwartz, "How Feasible is a Flexible Monetary Policy?," in Richard
Selden, ed., Capitalism and Freedom—Problems and Prospects (Charlottesville: University Press of Virginia, 1975), pp. 262–310.
28. See H. Geoffrey Brennan and James M. Buchanan, Monopoly in Money and Inflation: The Case for a Constitution to Discipline Government (London: Institute of Economic Affairs, 1981); Brennan and Buchanan, "Money Creation and Taxation," in The Power to Tax: Analytical Foundations of a Fiscal Constitution
(New York: Cambridge University Press, 1980), pp. 109–134; Richard E.
Wagner, "Economic Manipulation for Political Profit: Macroeconomic
Consequences and Constitutional Implications," Kyklos 30 (1977): 395–410; and Keith Acheson and John F. Chant, "Bureaucratic Theory and Choice of Central Bank Goals," Journal of Money, Credit, and Banking 5 (May 1973): 637–655.
29. Brennan and Buchanan, Monopoly in Money and Inflation, p. 23.
30. Richard E. Wagner, "Politics, Monetary Control, and Economic Performance: A Comment," Mario J. Rizzo, ed., Time, Uncertainty, and Disequilibrium (Lexington, MA: D.C. Heath, 1979), pp. 178, 180.
31. Gordon Tullock, "Competing Monies," Journal of Money, Credit, and Banking 7 (November 1975), pp. 496–497.
32. John M. Culbertson, Macroeconomic Theory and Stabilization Policy, p. 148.
33. Wagner, "Politics, Monetary Control, and Economic Performance," p. 179.
34. Milton Friedman, A Program for Monetary Stability, p. 19.
35. Milton Friedman, "The Optimum Quantity of Money," in The Optimum Quantity of Money and Other Essays (Chicago: Aldine Publishing Co., 1970), p. 34.
36. In addition to Friedman's above-cited works see Milton Friedman, Monetary Correction (London: Institute of Economic Affairs, 1974), and Friedman, "A Monetary and Fiscal Framework for Economic Stability," in Essays in Positive Economics, pp. 133–156. Also see Richard T. Selden, "Stable Monetary Growth," in Leland B. Yeager, ed., In Search of a Monetary Constitution.
37. E.S. Shaw, "Monetary Stability in a Growing Economy," in Moses Abramovitz, ed., The Allocation of Economic Resources (Standford: Standford University Press, 1959).
Martin Bronfenbrenner, "Statistical Tests of Rival Monetary Rules," pp.
1–2; "Statistical Tests of Rival Monetary Rules: Quarterly Data
Supplement," pp. 624 –625.
39. Clark Warburton, "Rules and Implements for Monetary Policy," Journal of Finance 8 (March 1953): 8; John M. Culbertson, Macroeconomic Theory and Stabilization Policy, p. 432.
Henry C. Simons, "Rules Versus Authorities in Monetary Policy," pp.
164, 169; Willford King, "Sound Money—Why Needed and How Obtained," in
Leland B. Yeager, ed., In Search of a Monetary Constitution, pp. 315–316.
Jacob Viner, "The Necessary and the Desirable Range of Discretion to be
Allowed to a Monetary Authority," in Leland B. Yeager, ed., In Search of a Monetary Constitution,
pp. 244–274; Henry Simons, "Rules Versus Authorities in Monetary
Policy"; Clark Warburton, "Rules and Implements for Monetary Policy";
William H. Hutt, Keynesianism—Retrospect and Prospect: A Critical Restatement of Basic Economic Principles (Chicago: Henry Regnery, 1963), pp. 100–101; and Hutt, A Rehabilitation of Say's Law
(Athens, OH: Ohio University Press, 1974), pp. 61–62. For Friedman's
case against a fixed price-level rule, see his "The Role of Monetary
Policy," American Economic Review 58 (March 1968): 1–17.
42. James M. Buchanan, "Predictability: The Criterion of Monetary Constitutions" in Leland B. Yeager, ed., In Search of a Monetary Constitution, pp. 155–183.
43. Friedman, "Should There Be an Independent Monetary Authority?," p. 243. Emphasis added.
44. Simons, "Rules Versus Authorities in Monetary Policy," pp. 175–176. This article first appeared in 1936.
Friedman, "A Monetary and Fiscal Framework for Economic Stability," p.
135; "Should There Be an Independent Monetary Authority?," pp. 233–234;
A Program for Monetary Stability, p. 99.
46. Hutt, Keynesianism, Retrospect and Prospect, p. 100.
47. John M. Culbertson, Macroeconomic Theory and Stabilization Policy, p. 423.
48. F.A. Hayek, "Toward a Free Market Monetary System," Journal of Libertarian Studies 3 (Spring 1979): 1.
49. Hayek, Choice in Currency: A Way to Stop Inflation (London: Institute of Economic Affairs, 1976), p. 16.
50. Hayek, "Toward a Free Market Monetary System," pp. 2, 5.
51. Hayek, "Toward a Free Market Monetary System," pp. 7–5.
52. For secondary accounts see Vera C. Smith, The Rationale of Central Banking
(London: P.S. King, 1936), chs. 6–10; Lawrence H. White, "Free Banking
in Britain: Theory, Experience, and Debate" (Ph.D. dissertation, UCLA,
1982), chs. 2–3; and Phillipe Nataf, "Free Banking: A Workable System,"
paper presented at the 10th annual conference of the Committee for
Monetary Research and Education, Harriman, NY, 14 March 1982.
53. Adam Smith, An Inquiry Into the Nature and Causes of the Wealth of Nations, Campbell-Skinner-Todd edition. (Oxford: Oxford University Press, 1976), I, pp. 320–321.
54. Smith, Wealth of Nations,
I, pp. 321, 329. Smith added the two qualifications that issuers be
restricted from issuing (1) notes below some minimum denomination and
(2) notes not unconditionally payable on demand. Both restrictions had
been imposed on the Scottish banks in 1765.
55. John Stuart Mill, Principles of Political Economy
(London: John W. Parker, 1848), p. 675. Mill believed in having a
non-market authority act as a central holder of bank reserves.
56. Herbert Spencer, Social Statics (New York: D.Appleton and Co., 1881), pp. 434, 436. Spencer placed no qualifications on his support for free banking.
57. William P. Gramm, "Laissez-Faire and the Optimum Quantity of Money," Economic Inquiry 12 (March 1974): 125–133.
58. Harry G. Johnson, "Equilibrium Under Fixed Exchanges," American Economic Review 53 (May 1963): 113; Paul A. Samuelson, "What Classical and Neoclassical Monetary Theory Really Was," Canadian Journal of Economics 1 (Feb. 1968): 9–10; Boris P. Pesek and Thomas R. Saving, Money, Wealth and Economic Theory (New York: Macmillan, 1970), pp. 69 ff.
Earl A. Thompson, "The Theory of Money and Income Consistent With
Orthodox Value Theory," in P.A. Samuelson and G. Harwich, eds., Trade, Stability, and Macroeconomics: Essays in Honor of Lloyd Meltzer (New York: Academic Press, 1974), pp. 427–453. On Say's Law see William H. Hutt,A Rehabilitation of Say's Law; and Axel Leijonhufvud, Information and Coordination, pp. 79–101.
60. Benjamin Klein, "The Competitive Supply of Money," Journal of Money, Credit, and Banking 6 (Nov. 1974): 423–453.
61. Benjamin Klein, "Competing Monies, European Monetary Union, and the Dollar," in M. Fratianni and T. Peeters, eds., One Money for Europe (London: Macmillan 1978); Klein, "Money, Wealth, and Seignorage," in Kenneth Boulding and Thomas Frederick Wilson, eds., Redistribution Through the Financial System (New York: Praeger, 1978).
62. Gordon Tullock, "Competing Monies," Journal of Money, Credit, and Banking 7 (Nov. 1975): 491–498.
63. Benjamin Klein, "Competing Monies: A Comment," Journal of Money, Credit, and Banking 8 (Nov. 1976): 513–519; Gordon Tullock, "Competing Monies: A Reply," Journal of Money, Credit, and Banking 8 (Nov. 1976): 521–525.
64. F.A. Hayek, Choice in Currency: A Way to Stop Inflation (London: Institute of Economic Affairs, 1976), pp. 17–18. The pamphlet's text has subsequently been reprinted in Hayek, New Studies in Philosophy, Politics, and the History of Ideas, pp. 218–231.
65. Hayek, Denationalisation of Money—The Argument Refined, 2nd ed. (London: Institute of Economic Affairs, 1978).
66. For example Henry Hazlitt, in The Inflation Crisis, and How to Resolve It, p. 184, mistakenly interprets Hayek as contemplating private monies each convertible into a basket of commodities. Hayek, Denationalisation of Money, pp. 106–107, clearly denies that convertibility would be necessary.
67. Hayek, Denationalisation of Money, p. 98.
Lance Girton and Don Roper, "Substitutable Monies and the Monetary
Standard," in Michael P. Dooley, Herbert M. Kaufman, and Raymond E.
Lombra, eds., The Political Economy of Policy-Making (Beverly
Hills: Sage Publications, 1979), pp. 233–246. See also Girton and
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71. Outstanding among these are Gordon Tullock, "Paper Money—A Cycle in Cathay," Economic History Review 9 (August 1957): 393–407; Luigi Einaudi, "Medieval Practice of Managed Currency," in Arthur D. Gayer, ed., The Lessons on Monetary Experience
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72. Hayek, Denationalisation of Money, p. 44.
73. Vaubel, "Free Currency Competition," pp. 445–446.
74. Boris Pesek, "[Optimal Monetary Growth:] Comment," Journal of Political Economy 76 (July–Aug. 1968): 889.
75. Klein, "The Competitive Supply of Money," pp. 429–430.
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77. See Hayek, Denationalisation of Money, pp. 42 ff; and Girton and Roper, "Substitutable Monies and the Monetary Standard," pp. 238–239.
78. See Klein, "The Competitive Supply of Money," pp. 432–438, for elaboration of the "brand-name capital" concept.
79. Vaubel, "Free Currency Competition," pp. 453, 458.
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81. Such heterogeneity within any given "industry" is inconsistent with models of "perfect competition." Compare Hayek, Denationalisation of Money, pp. 72 ff.
82. Vaubel, "Free Currency Competition," p. 440.
83. This is Vaubel's characterization of the currency industry: "Free Currency Competition," p. 458.
84. Loasby, Choice, Complexity and Ignorance, pp. 189–190. On competition as a process see also F.A. Hayek, "The Meaning of Competition," in Individualism and Economic Order (Chicago: University of Chicago Press, 1948), pp. 92–106; Hayek, "Competition as a Discovery Procedure," in New Studies, pp. 179–190; and Israel Kirzner, Competition and Entrepreneurship (Chicago: University of Chicago Press, 1973).
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87. Bettina Greaves and Percy Greaves, "On Private Paper Money," in Ludwig von Mises, On the Manipulation of Money and Credit, pp. 275–279; Henry Hazlitt, The Inflation Crisis, ch. 24.
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