We are so accustomed to our present currency system that it is difficult to imagine a system of more than one currency circulating side by side. However such a monetary system has existed and successfully functioned in the past in many countries, either de jure or de facto. One very good, long-lasting example is the case of China between 1650 and 1850, where copper coins and silver taels circulated as parallel currencies.
In the 1970s F. A. Hayek ignited a discussion on the subject with the publication of Choice in Currency and Denationalisation of Money, which essentially advocated the end of the government monopoly to issue money, and that private institutions should be allowed to print money, letting the market choose the one deemed best.
With the euro in crisis, we could learn from this analysis. I would also subscribe to the idea of currency competition as the best means to have a stable monetary system, without the ever-present pernicious government intervention. I would envisage a system where there is an ‘anchor’ currency 100 per cent backed by gold, effectively the same as the old gold coin standard. Coinage may be issued by the ECB, by governments (if they wished) as well as by private institutions. It would be 100 per cent backed by gold. However, this gold currency would not be the only currency. It would be a parallel currency alongside any national fiat currency that a country currently within the eurozone wished to reintroduce. The price of goods and services would be quoted in the gold currency. However, both the local currency and the gold currency could be used to settle payments at the spot exchange rate. There could be more than one local currency circulating.
I call this the DLCCS-Dual level Currency Competition System and it would be the best system to solve the current euro crisis. Further details of how it could be introduced can be found in my recent published booklet.
People would hardly have any problem using different currencies. Before the introduction of the euro it was quite common in Europe for people living in cities located very close to the borders of other countries to use two or even three different currencies daily to pay for products and services. Furthermore, in some countries in Latin America, people use the US dollar not only as a unit of account but also as physical currency for their purchases.
Fiat or commodity based currencies that are exchanged at fixed rates set by the government are vulnerable to economic realities, and such arrangements rarely end well. An interesting example took place in the 1960s in the US when silver prices went up and people began redeeming silver certificate banknotes for the underlying silver dollars until the government halted redemption in 1968.
With regard to the concern that different designs of currency (in this case, the proposed currency backed by gold) may cause inconvenience, Hong Kong is an illustrative example. Currently, there are four different designs for the Hong Kong dollar: one from the government and three Hong Kong dollar banknotes issued by private banks in various denominations. There are also different designs on banknotes issued by different banks in Scotland and also different designs used on coins in the eurozone.
The essential reason for government monopoly of the issuance of money has little to do with the notion that government is a better manager of money, and everything to do with power. Government is not an abstract entity; it is constituted of people who have ideas, philosophies and interests, many times colliding with what is best for those who they may simply regard as thehoi polloi. Quoting George Washington: ‘Government is not reason, it is not eloquence – it is force. Like fire, it is a dangerous servant and fearful master.’