In a previous post I wrote for the Adam Smith Institute, I argued that with the emergence of new digital currencies and, in particular, crypto-currencies (the most prominent of which, being Bitcoin), one can wonder how different Free Banking might look in the modern economy.
In the past, monetary rules had been based on metallic content; now, they are often focused on inflation-targeting, nominal-GDP targeting and so on. Though Free Banking would be desirable, Ben Southwood and Sam Bowman have previously argued for nominal GDP targeting in its stead, as the pragmatic, preferred alternative for monetary policymakers. Saying that, George Selgin argues that most free banking systems lead to effectively 0% NGDP targets.
Of course, the one thing that all these monetary rules have in common is their aim to foster expectations-stability. However, stabilising expectations with respect to one variable often still leaves unstable expectations with respect to another variable; modifications of the Taylor rule may stipulate that we should raise or lower interest rates according to the output gap, inflation rate etc. but this still does not mean that people will be able to forecast when or by how much the interest rates will rise in advance since one’s expectations with respect to other important variables are hardly stable.
Bitcoins have a monetary rule with respect to the rate of increase of the money supply that is determined by an algorithm that periodically halves the speed at which miners are rewarded to the successful miner (mining being the process by which they are created) and, furthermore, the number of bitcoins in existence can never exceed 21 million. However, Bitcoins still suffer from exchange-price volatility. Other crypto-currencies also have different monetary rules. So it’s quite clear that developments in the state of technology enable different types of monetary rules to be implemented.
In a modern free banking system, then, there would be competing monetary rules between the various different currencies (whether they are issued by banks or obtained through other mechanisms made possible by the state of technology). Since each monetary rule implemented hitherto attempts to stabilise expectations with respect to a certain variable, picking a currency would essentially involve each agent choosing between differing monetary rules and, therefore, independently and rationally stabilising their expectations according to their priorities. Even Keynes wrote on the importance of understanding
“the dependence of the marginal efficiency of a given stock of capital on changes in expectation, because it is chiefly this dependence which renders the marginal efficiency of capital subject to the somewhat violent fluctuations which are the explanation of the Trade Cycle” since “this means, unfortunately, not only that slumps and depressions are exaggerated in degree, but that economic prosperity is congenial to the average business man.”
So even in a Keynesian framework, modern free banking, through more diverse, competing monetary rules, could help ease the excessive malaises of business ‘cycles’!
Ultimately, there is clearly need for systemic monetary reform across most economies and a free(r) banking system is a definite possibility. The fact that it has not existed in a very long time, however, means that we should, theoretically, expect it to look different (given the modern context) than it did historically.