The Swiss central bank’s recent move to de-peg the Swiss franc from the euro reminds us of the importance of choice in currency. By pegging the Swiss franc to the euro, the Swiss central bank was in effect subsidizing the euro by refusing to compete with it. If carried into the long term, this would have meant a de facto monetary union between the euro and the franc. Fortunately for most people however, the Swiss central bank maintained its legal independence from the euro and the peg was eventually ended, thus freeing the holders of Swiss francs from the new round of money-supply inflation that is expected from the European Central Bank.
Those who have their savings in euros are not so lucky. Those in the Eurozone who work hard to save and invest will have the value of their euros reduced to further subsidize and bail out politically-connected investors who have financed southern European governments. All the while, the government of the European Union will enrich itself and its friends through the money-creation mechanism. Such are the expected results of the expansion of government’s money monopoly in the Eurozone.
The Government’s Money Monopoly
The European monetary experiment illustrates anew for us how a monetary monopoly is an indispensable component of an effort to achieve political unity and more powerful government. As Philipp Bagus has noted, the currency known as the euro is just as much a political instrument as it is an economic one. It greatly enhances the monopoly power enjoyed by the nascent state known as the European Union without having to first achieve true de jure political union. The central bankers of a unified Europe are far more powerful than the central bankers of any one European state could ever hope to be.
Although much further down the road in this respect, the United States is subject to a monetary union similar in many ways to that of the European Union. In the eighteenth century, state currencies were abolished with the victory of the new American Constitution in 1788, and the First Bank of the United States was created shortly thereafter. At that point, the central government’s control of the money supply was far from complete, however. A true functioning monopoly over the money supply did not arrive until the twentieth century with the Federal Reserve System, which through its regulatory power was able to impose a de facto money monopoly on the United States.
Today, it is nearly impossible to conduct business in the United States without using US dollars, and the federal government, which tightly regulates the financial system, greatly discourages to the point of utter impracticality the use of privately-produced or foreign currency for daily business in the US.
Why Currency Competition Is Important
From a central planner’s perspective, the ideal monetary situation is a single global currency controlled by a single central bank. With only one currency, a government could inflate at will without threat from any competing currency save a black market trade in commodity monies, which would of course be outlawed. In other words, the less competition a central bank has from other currencies, the better.
Toward the other end of this spectrum is a global economy with at least dozens of competing currencies. Some currencies would be more stable and respectable than others, but all would be at least somewhat restrained by the knowledge that every currency, if devalued too much, will at some point be abandoned in favor of a more reliable and stable currency.
Thus, if one wishes to restrict the power of states, and to enhance personal and economic freedom, one of the most meaningful first steps must be to oppose state control over the money supply, and failing that, to weaken the state’s monopoly through competition and secession.
Baby Steps Toward Currency Freedom
Interestingly, in spite of a century of a totally centralized money supply, and a constitutional prohibition on state-issued currency, some American states still imagine themselves as having a role in the monetary system. In the wake of the 2008 financial crisis, for example, lawmakers from thirteen states suggested their home states take advantage of a loophole in the Constitution (of sorts) and make gold and silver coins legal tender in their states as a hedge against economic disaster. Utah went slightly further:
Utah became the first state to introduce its own alternative currency when Governor Gary Herbert signed a bill into law [in 2011] that recognized gold and silver coins issued by the U.S. Mint as an acceptable form of payment. Under the law, the coins — which include American Gold and Silver Eagles — are treated the same as U.S. dollars for tax purposes, eliminating capital gains taxes.
Since the face value of some U.S.-minted gold and silver coins — like the one-ounce, $50 American Gold Eagle coin — is so much less than the metal value … the new law allows the coins to be exchanged at their market value, based on weight and fineness.
While a step in the right direction, this sort of thing is obviously a long way from offering anything actually resembling significant currency competition for the US dollar.
Utah and “the Ute”
Nevertheless, for the sake of argument, let’s say that Utah (which certainly has its own idiosyncratic secessionist history) were to go even farther than this and issue its own currency (called “the ute”) which it declared to be legal tender in Utah alongside the US dollar. Using the old Swiss franc as a model, in this scenario, the Utah Central Bank is also legally obligated by the Utah legislature to ensure that the ute enjoys 20 percent gold backing.
Would everyone immediately flock to using the ute? Probably not. The US dollar would still have the advantage with huge network effects on its side. There’s no reason to believe people nationwide would start hoarding utes any more than Europeans today hoard Swiss francs. Nevertheless, the impact on monetary freedom for many Americans over time could be significant. Americans looking for a safe haven could buy utes, and traveling to Utah to set up accounts denominated in utes would not be practical for most people. Other states would be free to adopt utes also as legal tender or to simply allow people to conduct business in utes.
Through all of this, everyone would still be free to use the US dollar. Those concerned about the ute being “sketchy” or at the mercy of sinister Utah inflationists could simply choose to not use utes.
But even this little bit of competition for the dollar would diminish the monopoly power the Fed now enjoys. While a minor consideration in terms of the immense global economy, the existence of the ute would partially restrain those looking to inflate the dollar freely. Those who understood the impact of Fed’s easy money policies on their dollar holdings could abandon the dollar for the ute. Now regarded as “the Switzerland of North America” the ute becomes a model for some other states as well, and as they adopt their own currencies, or each other’s currencies, the Fed’s monetary monopoly would be impacted even more.
An Extremely Modest Proposal
Even a little bit of monetary choice is better than virtually no choice at all, but obviously, such a proposal is extremely moderate and hardly resembles what we’d call “free-market banking.” The “ute” scenario assumes the presence of central banks (albeit competing ones) and currencies that are at best partially backed by commodity money. On the other hand, the fact that this scenario will seem so radical and politically implausible to many illustrates just how far we’ve come from sound money and freedom in money.
Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.