25 Jan 2019

Is non-state money possible? A report from the mBank-CASE seminar

This was the question addressed by Professor George Selgin, an outstanding American monetary economist who works on the history of money and monetary thought. It’s a topic that’s very current in light of the rise of Bitcoin payments, the growing popularity of other digital currencies and the discussion in Poland in late 2018 of taxation of individuals and companies on trade in cryptocurrencies.

Professor Selgin started his very interesting and ideally structured talk by narrowing down the question in the title. He proposed a discussion of two interesting fundamental questions: First, is non-state circulating money possible, or, can we depend on the private sector to provide us with a means of payment that will be in universal circulation? The second and even more important question is: Can we have a complete monetary system in which all types of money are provided by the private sector, and the state doesn’t play a significant regulatory role?

Selgin stated that the answer to both questions is yes, and devoted much of the rest of his time to a convincing presentation of the evidence not only that such solutions are hypothetically possible, but that history provides us with examples of them functioning with full or at least very significant success. “We might even envy them today, given the performance of our own relatively heavily regulated monetary systems,” he said.

Non-state monetary systems and private currencies in the past

Historically, the first to appear was commodity money, which took the form of valuable goods (such as shells, tobacco or beads), which were the subject of valuation and exchange even before they became money. The emergence of early commodity money required no intervention from any authority, neither in the choice of the commodity nor in the regulation of the way it was used. Selgin pointed out that “So far as we know, these early forms of money were both privately supplied and privately managed, to the extent that they were managed at all.”

Historically speaking, government entered the sphere of money and started to play a significant role in it when precious metals (silver and gold) started to be used as money, and it did so in particular by taking a monopoly over the minting of silver and gold coins. History contains many episodes of private coinage. Selgin discussed one of them: the positive experience with private mints during the California Gold Rush, which began in 1848. In response to demand from miners, private entrepreneurs spontaneously set up about 20 mints. This and other stories clearly demonstrate, our guest said, that “coinage is not a natural monopoly, and that it can be left to private industry with good results.” Private coinage didn’t survive, not because it produced poor-quality coins (in fact, competition eliminated deceptive and inefficient producers), but because “government authorities themselves wanted to produce coins, and to produce poor-quality coins, which they could do only by outlawing competitors” and taking on a monopoly. Currency debasement was a very widespread practice: coinage monopolies allowed governments to meet urgent obligations by producing shoddy coins, a solution that was easier than increasing tax rates and collecting them.

The next part of the talk concerned the history of paper money, a significantly more important element of today’s currency system around the world. As Selgin stressed, paper money, at least in the West, was a private, market-driven innovation. Some of the earliest private banknotes in Europe, if not the earliest, were issued in the mid-17th century by London goldsmiths. This happened before the establishment of the first central banks, Sweden’s Riksbank and the Bank of England, which were later credited with issuing the first banknotes. “The main impetus behind the development of paper money by both private and early public banks, was the poor quality of official coins.” In light of the constant debasement by mints, and counterfeiting on the market (clipping and sweating of coins), banks’ services became attractive: deposits and paper banknotes constituted an obligation by the bank to pay a specific amount in standard or “ideal” coins, which turned out to make commercial transactions significantly easier.

“Although history offers many instances of private or ‘commercial’ banks issuing redeemable banknotes, and some commercial banks—mainly in Ireland, Scotland, and Hong-Kong—continue to issue their own paper notes even today, in most places governments have taken over the production of paper currency, much as they previously took over the manufacturing of coins, generally by establishing central banks to which they’ve granted monopoly privileges,” Selgin said. “With a handful of exceptions, paper currency is provided either by a single national monetary authority or by a multinational authority.” Why did this happen? According to the speaker, just as in the case of the takeover of coinage by the authorities, fiscal considerations were particularly important. “As banks became more popular and bank money was more widely substituted for coin, and mint monopolies became less and less fiscally advantageous, governments found themselves with a very powerful motive for extending their monopoly privileges to include paper currency as well as coin.”

Monetary history shows that private (as opposed to state) money is possible: In the past, the private sector supplied high-quality coins and paper money. Additionally, we can easily imagine a monetary system operating successfully in the past in which the government didn’t play any role (Scotland was close to this for almost 100 years starting in the mid-18th century; this case was discussed at greater length in the presentation). The important question today is: How would a contemporary non-state monetary system look; is it even possible at all?

The potential for private currencies to function today

We already have digital alternatives for old-fashioned banknotes; digital technologies are also in use that make it possible to directly settle person-to-person (P2) transactions, such as M-Pesa, which allows people to make payments using their mobile phones, independent of the traditional banking system. The banks themselves are still providing substitutes for the state-supplied, or “basic” money, and we can imagine greater engagement of the banks in electronic monetary or P2P payment systems, insofar as the state allows them. “But what about basic money itself?” Selgin asks. “How, in other words, would the private sector handle, not just the provision of close substitutes for today’s basic, state-supplied monies, but the provision of basic money itself?”

Selgin sees three possibilities, each of which is controversial. He rejected the first two – privatization of the central bank (in this case the U.S. Federal Reserve), meaning the privatization of fiat money, or a return to the gold standard. He assessed the former as a bad idea, and the second as unrealistic.

The third scenario leading to the establishment of fully private basic money is “the spontaneous emergence of a ‘parallel’ basic money system – one that would at first coexist with the established, official fiat money system.” Can synthetic commodity money such as Bitcoin (as Selgin demonstrated, Bitcoin has some of the attributes of commodity money) or another cryptocurrency based on blockchain technology become a serious competitor to existing fiat moneys? And if so, could a monetary system based on such a synthetic money prove to be better than existing fiat-money systems? Our guest isn’t optimistic: “Although we can imagine a future fully private monetary system, entirely divorced from any existing established national fiat money, and it is even possible that such a system would be superior to any existing arrangement, it is much harder to envision a process by which any economy could spontaneously escape from an established fiat money to embrace such an ideal money.” The difficulty is that for a commodity to become money, it must be sufficiently widely used as such. For that to happen it has to be attractive for a very large number of users; the more there are – the bigger the network is – the more successive people will be inclined to join them. Money, as Selgin stressed, is “obviously a network good.” This has consequences for its evolution: “Once a particular monetary standard is in place, it’s extremely difficult for any incompatible, would-be alternative money to compete with it.”

Dr. Ewa Balcerowicz, CASE


Watch the seminar