(David McBee, Public domain)
Professor George Selgin, Director of the Cato Institute’s Center for Monetary and Financial Alternatives, said, during the CASE/mBank seminar, that nowadays it is almost a foregone conclusion that it should be the state that runs the production and circulation of money. But it has not always been the case. Prof. Selgin cited the example of 7th century BC Lydia where private enterprises minted coinage. Later, cowrie shells, tobacco, copper bracelets, wheat or beads fulfilled the basic monetary criterion of being an accepted unit of exchange and a store of value.
The problem began with metal commodity money as opposed to beads. Prof. Selgin’s argument was that as soon as governments interfered they monopolised and debased metal coinage, as a fast means of paying debt. Furthermore, he seemed to imply that it was in the inherent nature of governments to interfere in this way with the monetary system.
He said that it was not the lack of quality that drove private business away but overregulation and structural issues. Thus the gold excavated by miners in the American gold rush of the 1840s was minted privately to a high standard, that is of the gold content. And at that time there was no regulation. There were around 20 private mints and some went out of business, others were bought out. Those that bankrupted did so because of the inferior quality of their product. The market itself settled the matters. “After all, isn’t a mint just another factory that instead of making nuts and bolts produces money?” he asked.
Once government got its hand in then debasement of coinage continued with Henry VIII as an example. One could have added that of Frederick the Great of Prussia flooded Poland with false coins to destabilise its economy in the 18th century. Monopolies by government existed to provide short-term sources of coins rather than a long-term quality of products or services.
Paper money, like banking, started off as a private enterprise. Paper currency originated as a result of the poor quality and constant debasement of coins. The goldsmiths of London issued “running cash” notes instead of coins. Nonetheless, government intervened, although the Bank of England started as a private institution with a goal to raise revenues rather than to ensure a high quality of coinage, it became aligned with the state and state politics.
Can private banks handle money circulation?
Prof. Selgin cited two examples: Scotland in the 18th century and Canada in the 19th, where private management of the money circulation was successful and stable. The Scottish one was a stable system with multiple banks issuing pounds and pence. There was only one crisis in 1772, and the system did not have to be bailed out by the Bank of England.
Similarly with Canada, that had a stable system with few crises. The Canadian system was able to extend its branches nationwide that redeemed notes which had travelled across the country, The US was more local and had state banks and currency stopped at the state line. This interrupted trade, or at least made the expense greater as brokers gathered up money to redeem from large cities back to their native states.
What is the future of cryptocurrencies?
Nowadays, it is difficult to envisage a non-state system. The Federal reserve, for instance, could be totally privatised and open to other competitors but that would risk hyperinflation. There could be an international agreement to return to the pre 1914 gold standard but this would require a level of international unanimity that would be difficult if not impossible to attain. Or there could be a spontaneous establishment of a third alternative — Bitcion, according to Prof. Selgin. “The latter, as any digital money, is synthetic commodity money,” he stressed.
Bitcoin and any other cryptocurrency could be a refuge in a crisis such as the one in Venezuela, but so are the USD and Prof. Selgin argues that bitcoin is more a philosophical rebellion against intrusive government. At present, there are no macroeconomic advantages to a new coin trying to break in the network. Only stable digital currencies would be able to establish monetary networks. Bitcoin is not just a better version of the USD. This is the vicious circle: a cryptocurrency has to be stable to be established, but has to be established to be stable. Furthermore, it is a currency heavily dependent on a constant and uninterrupted supply of electricity. One blackout is all that is needed and the money and accounts are frozen or will disappear. Prof. Selgin is convinced that the private market should supply money in all its forms with deregulated banks competing with government.