Hayek, private currencies and Zimbabwe


In 1976, Hayek proposed that a government’s monopoly over the issue of currency in its country should be broken. He argued that any body, public or private, should be allowed to issue currency, and these bodies would be forced by competition to keep their currencies stable. It is likely that the resulting private currencies would have a fixed value relative to one or more commodities for two reasons: firstly, it would limit the total value of currency in existence, which in turn would drastically reduce inflation. Secondly, it will enable these currencies to be used in legitimately in countries with legal tender laws (like Britain). A legal tender law ensures that any debts in a private currency can also be paid in the currency mentioned in the law (Sterling, in Britain’s case). Declaring that a unit of private currency is worth a fixed amount of one or more commodities means a debt in the private currency could be paid by providing enough of a second currency to purchase the commodities that the debt represents on the open market.

I believe that these private currencies exist today. There are already institutions that issue perpetual, zero-coupon notes with values proportional to one or more commodities. Millions of these notes are traded on stock exchanges every day (though not quite as many as other major currencies). I am referring to commodity-backed exchange traded funds (ETFs). Debts denominated in shares of an ETF can be paid in any currency by buying these shares on the market to deliver to the creditor. Existing ETFs allow the number of shares in circulation to be increased or reduced; anyone can give the fund money to buy more commodities in return for new shares, and existing shareholders can compel the fund to sell some of its backing commodities to redeem their shares in another currency.

Hayek has said currency is an adjective, so these notes can already be referred to as a private currency. The next step towards breaking the government’s monopoly over the issue of money is for companies or individuals to start lending and taking deposits of these shares. As long as the interest (in shares) gathered from loans exceeds the interest paid (in shares) to depositors, this activity will be profitable. I imagine there is already a large demand in terms of depositors of shares, given that there are people who are willing to hold these shares for no interest. Given that we are in an economy of nominal deflation, there should be no shortage of people willing to borrow these notes either.

Hayek also believed that if a government was the only issuer of money, then monetary policy would become politicised to the detriment of the economy. It will therefore be interesting to watch Zimbabwe as its government has suspended their own currency, thereby opening the market to competition. The public can now choose to use a variety of currencies, some of whom are issued by government with no political interest in Zimbabwe. Time will tell whether competition and the removal of national politics from monetary policy will increase price stability in Zimbabwe.