Improving money through competition….

Interesting piece by Norbert Michel, Director, Center for Data Analysis.

He says most forms of money have been discovered by the private sector only to be monopolised by State later. The State’s record in monetary matters has been mostly poor barring a few period. Even in those periods there must have been unintended consequences which are rarely mentioned. Best way to restore monetary stability is to improve money through competition. This is also what supporters of free banking also argue:

Money is the means of payment for virtually all goods and services. Most innovations in the means for payment have originated in private markets, but they were later monopolized by the government, thus mitigating their benefits. Policymakers rarely think about improving money with the same competitive market forces that improve other goods and services. That competitive process is the best way to expose weaknesses and inefficiencies in existing products, thus improving people’s lives.

Congress should avoid policies that single out alternative forms of money and impede people from using their preferred medium of exchange. Although it cannot provide absolute protection, allowing competitive private markets to provide currency would present as powerful a check on the government’s ability to diminish the quality of money as possible.

He says Post World War-II there are two types of money in US:

The U.S. monetary system consists of two types of money:

  1. Base money, often referred to as outside money, is the ultimate means of payment in the economy, and it comes from outside the private sector (i.e., the government).
  2. Inside money, often called credit money, consists of claims to the underlying base money, and it comes from inside the private sector.

Private financial firms compete to provide various types of credit money, such as checkable deposits with bankcards, money market accounts, and travelers’ checks. These financial firms are heavily regulated, often to the detriment of their ability to operate, but few policymakers question whether they should actually provide money.

Even fewer policymakers question whether anyone other than the federal government should provide base money, despite its fundamental economic importance. Because the Federal Reserve is the monopoly provider of base money, the U.S. government ultimately determines the total amount—and type—of money that private firms can create.  This monopoly necessarily limits the extent to which competitive processes can strengthen money, and exposes the means of payment for all goods and services to the mistakes of a single government entity.

Precisely because people are so vulnerable to the abuse of money (including modern monetary policy errors), Congress should not interfere with citizens’ ability to opt out of official currency.The competitive process is, ultimately, the only way to discover what people view as the best means of payment.

There are interesting references here which are not part of monetary economics syllabus in most universities. In all other things we are taught competition matters but not in money where powers are to reside with central bank. There is wide history of free banking which was quite successful as well but we hardly look at the evidence.

There is a reason Friedman said: Most economists do not question central banks as it provides them glamorous job opportunities. It is not just quetioning central banks in op-eds but even in teaching…



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