The end of the central banks’ monopoly

This revolutionary idea will be discussed in the next year’s XVII. Gottfried von Haberler Conference, taking place May 12, 2023 in Vaduz, Liechtenstein.

For centuries on end, roughly all governments have acquired and reserved for themselves the power of monopoly for the creation and issuance of money. Over time the ruling classes discovered and developed elusive methods to inflate the currency which they control. And as a consequence, they briskly declared it ‘legal tender’ or ‘fiat’ money. What makes this autocratic privilege politically and socially such a grave threat is not just the governments’ power, but more to the point their exclusive privilege to produce money and to force their people to use and accept it at a set price.

Although a currency monopoly appears to have hardly ever generated good or beneficial results except for the rulers and their desire to enhance their unopposed coercive powers, the money prerogative apparently grew into an almost universally accepted and deep-rooted legend. Indeed, the vast majority of economists, of monetary professionals or sociologists almost never seriously pondered to challenge this somewhat dazing fabrication. In other words, the privilege of issuing money is virtually unchecked and became synonymous with economic power, despite the fact that governments everywhere and at all times were and still are the chief cause of currency depreciation. Faced with expenditures beyond control, staggering debts, and raging inflation, most governments find it impossible to resist the political pressures. Indeed, the temptation to interfere with the coinage, thereby assuming to gain some short-lived economic boost through creative fiscal policy measures, is usually too strong to resist.

A solution: the self-interest of monetary agencies

In such a revolutionary system, in which private financial institutions create currencies that compete for acceptance, the stability in value is presumed to be the decisive factor for acceptance. Since, unlike other commodities, money does not serve by being used up, but by being handed on, competition will favor currencies with the greatest solidity in value due to the fact that a devalued currency hurts creditors, and an upward-revalued currency will hurt debtors. As a consequence, the chief attraction the issuer of a competitive currency has to offer customers is the assurance that its value will be kept stable or otherwise made to behave in a predictable manner. In other words, issuers of notes would be careful to maintain a constant price between a predetermined basket of goods and their currency with the intention of retaining their existing customers and gaining new ones. Monetary institutions may find through experimentation that an extensive basket of commodities, etc. forms the ideal monetary base. Such baskets are part of the assurance that the value of their currencies will be kept stable or otherwise made to perform in a foreseeable fashion. Institutions would issue and regulate their currency primarily through loan-making, and secondarily through currency buying and selling activities. It is postulated that specialized electronic platforms would report daily or hourly information on whether institutions are managing their currencies within a previously-defined tolerance. Issuers who fail to maintain a stable exchange rate are then expected to lose market share. The maintenance of exchange rates in the quest for market share would better regulate monetary value than a central bank. After all, money is the only object that will never get ‘cheaper’ through competition, because its desirability and appeal are exclusively based on its staying ‘expensive’. So – whom should we trust regarding our money? Politicians, economists or the people?

it seems necessary to consider the feasibility of free banking in order to gain a proper perspective on the role central banks play in a market economy.

Whatever the chances of political success for a radical ‘Denationalization of Money’ will be in the near future, it seems necessary to consider the feasibility of free banking in order to gain a proper perspective on the role central banks play in a market economy. If the market is competent to evolve a stable and self-regulating monetary order in the absence of a privileged central bank, then central banking cannot be regarded as a necessary framework without which a free market economy would collapse. It must instead become evident that central banks exist for a different reason. By shrouding monetary policy with fiscal policy measures, central banks serve governments as an effective source of revenue through money creation.

In times of worldwide raging inflations it is long overdue, essential and worthwhile to reconsider the purpose of central banks and promote the revolutionary idea of applying the principles of free markets to the creation of money and its consequences. At the forthcoming XVII. Gottfried von Haberler Conference on May 12, 2023, internationally leading scholars will discuss this intriguing and promising topic.

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