One of the key theoretical and policy obstacles to overcome when trying to enable a genuine choice of monies amongst agents (through enabling them to trade, be paid in and pay their taxes in multiple monies, for example, without politico-legally privileging one money over another through contemporary laws – notwithstanding historical privileges) is that the ‘Monetary Policy Trilemma’ would make it very problematic. Enabling a choice of multiple monies (when viewed from the theoretical framework of a previous article would actually either solve the Monetary Policy Trilemma or make it irrelevant.
In short, the Monetary Policy Trilemma (or ‘Impossible Trinity’) states (with an empirical basis) that one cannot have, at the same time:
- Free Capital flows (absence of capital controls)
- Fixed Exchange Rates
- An independent monetary policy
Working, initially, from the assumption of free capital flows, one can wonder whether it is possible to have fixed exchange rates as well as an independent monetary policy. The fixed exchange rates would ordinarily be difficult without sacrificing independent monetary policy in the sense that pegging a currency’s exchange rate to another would mean that the central bank is bound to conduct monetary policy (through altering interest rates and buying and/or selling up currencies respectively, appropriately and accordingly, for example, and most simplistically) with a view to maintaining the fixed exchange rate.
In a free banking system, money-issuers (whether they be public, public-private or wholly private) would be able to conduct their own respective monetary policies for their clientele (who would, otherwise, have been bound to one monetary policy that is imposed upon them despite their diverse, varying preferences) whilst also maintaining fixed exchange rates in so far as it aligns with the preferences of their clientele (the agents using their money). Nevertheless, there is a concern that government and/or public-private partnership money issuers’ macro and microeconomic policy objectives may not align with those of the wholly private money issuers.
A Gradual Move
However, their monetary policy would still be sovereign and independent in so far as they have the capability of altering it in line with the appropriate agents’ (their clientele’s) preferences and their objectives. It must be conceded, however, that they would have a diminished proportional influence over the overall economic system. However, in absolute terms, since truly free banking would likely favour economic conditions for increased growth, it could be argued that they would have greater influence in absolute rather than relative terms in so far as agents continue choosing their monies.
Indeed, from a sequential game-theoretic perspective, it could be argued that, if public monies continued to exist and there was a gradual liberalisation towards free banking (wherein more public and public-private monies are introduced before giving free reign to wholly private monies) that the incumbent(s) (public/government money or monies) would still reap the benefits of having the first-mover advantage over new entrants into the new, truly competitive marketplace and, therefore, would continue to play a role in agents’ economic lives.
Furthermore, it is likely that the public, public-private and wholly private money issuers would cooperate to some extent in order to meet common macroeconomic objectives and, if this includes promoting the welfare of the peoples they are intended to serve (which is what central banks worldwide largely project as their missions), then the sovereign monetary policy could meet this in a more efficient, welfare-maximising way even if it does have proportionally diminished influence.
Finally, so long as agents continue to choose government monies for whatever reason, the monetary policy of these money-issuers would still be sovereign and independent in so far as they are working to align with and manage the expectations-management preferences (of which risk-management preferences are a significant, important subset) of their agents.
The Need For Cooperation
Even where some money-issuers may find incentive to harm other money-issuers for short-term gains since the overall marketplace would be adversely affected in the long-term and thereby diminish overall economic performance, other money-issuers would work together to limit that impact and, thereby, disincentivise, deter or punish such unscrupulous, immoral behaviour.
The contentions here may seem intuitively plausible to some, but it is difficult to have this considered more seriously without the use of some rigorous mathematical modelling to prove them. As such, an avenue for future research would be to conduct a computational simulation of a complex (socio)economic system wherein agents use monies as instruments of expectations-management (which was a theoretical contention in the aforementioned article) to predict whether, assuming free capital flows, fixed exchange rates and independent monetary policies are also possible.
For the latter, although private sector and public-private partnership monies may pose some problems, one might examine whether there is a scope for co-operation between public, public-private and wholly private money-issuing entities or even just between wholly public and public-private entities to meet the various macro- and microeconomic objectives of monetary policy so that monetary policy can still be ‘independent’ in the sense of not being bound to anything other than prevailing market forces.
Nevertheless, from a normative perspective, one may even conjecture that the monetary policy trilemma may become wholly irrelevant in a free banking context since there would be no need for sovereign monetary policy when agents are able to freely optimise their preferences with respect to a genuine choice of monies.
The Gendered Impact
‘Women still suffer gender pension gap’ is the title of the article published by the Financial Times (whose subtitle is is that “In developed and developing countries, the risk of old age poverty falls disproportionately on females”). This is an unsurprising finding when we consider that the gender pay gap more broadly largely persists, and so a gender pensions gap is logically expected and, indeed, predicted from this situation.
However, what is often not considered in either free banking or gender empowerment circles is the disproportionate impact the financial crisis and subsequent (unconventional) monetary policy has had on older women in particular.
Unprecedented cuts in interest rates and persistently low ones after the particularly acute phase of the financial crisis (and during the ongoing, depressing phase of it that we are currently experiencing) have worked to hit savers in particular and since there is a gender pension gap, this works to hit older women in particular.
This is even more frustrating when coupled with the consideration that contemporary governments’ austerity policies are seen as having an acutely gendered impact. Indeed, it was found that “Women are less likely than men to receive a pension and the benefits they receive are lower in most countries for which data exists, according to the UN’s Progress of the World’s Women report, released in April. In the EU, the poverty rate among elderly women is 37% higher than among men.”
However, such a monetary policy is only problematic when lower interest rates are imposed upon a population through legally enforced and imposed central banking regimes.
In a free banking regime, where peoples would have a genuine choice to use multiple monies as they see fit and according to their diverse, expectations-management preferences rather than being forced to live their economic lives according to an imposed monetary monopoly that aligns far more so with the preferences of governments and, more specifically, the special interest groups that have the resources to lobby them effectively.
People would be able to benefit from a wide variety of exchange rates, interest rates and optimise their preferences accordingly – therefore savers, as well as borrowers, would benefit and pensioners (alongside other peoples) could restructure their currency portfolios according to the monies that most suit their needs.
Therefore, although central banking has had both an acute and chronic gendered impact, enabling truly free banking is likely to have a gender-empowering effect more broadly across societies. Free banking can and would meet a myriad of social justice objectives; in this instance, it would help alleviate the symptoms of institutional sexism.
The violent exchange-rate fluctuations in pound sterling raise a host of issues that are causes for concern. Increased inflation is one of the primary concerns since this will eat away into the peoples’ real purchasing power and the real value of debt (personal, corporate and sovereign); the Bank of England reacted in a way that signaled their anxiety (through expanding QE and cutting the interest rate further) and, though these measures are well-intentioned, they will likely work to inadvertently further exacerbate the fallout from a catastrophic financial crisis (which many have argued is long overdue).
This stark concern regarding inflation for institutions is further exemplified most obviously by pension funds’ demands for inflation-linked bonds. However, one can wonder whether the situation would have been significantly different had we lived in a truly free market with free banking (where agents of all varieties have a genuine choice of trading in multiple monies and where imposed institutional factors do not de facto privilege certain monies over others for various purposes)?
In a free Banking regime, even as the pound dropped in value, agents would have the ability to switch (whether that be pre-emptively or after the fact) to monies that they had more confidence in – currently, most peoples around the world are essentially forced to live economic life according to the imposed expectations-management preference profiles of governments. That means that all peoples are subjected to and are at the mercy of increasingly restricted financial markets even when these speculations and/or (dis)investments are unjustified.
In a free banking regime, although some would still choose to stick with the pound for practical reasons, many would choose to reallocate and optimise their currency portfolios accordingly and, therefore, help mitigate the detrimental consequences associated with inflation and (geopolitical) uncertainty more broadly.
This would, furthermore, ensure that people have greater incentive to become educated about the financial markets and system more generally which would help tackle the information asymmetries that led to the previous financial crisis (which we continue to suffer from, to this day).
With multiple monies, there would be multiple exchange rates, interest rates, various commodities backing those differing monies, and so on. This allows agents to optimise their expectations-management preferences accordingly.
Nevertheless, even though governments and public perception may be largely averse to Free Banking (despite their misunderstanding and misreading of the term), the benefits of the choice of monies, as opposed to a monetary monopoly, cannot be understated and it may be that, initially, pragmatic liberalisations are needed with the end goal of genuine, authentic Free Banking.
Introducing public-private partnership monies is one way in which to do this to improve investment, stimulate trade, obtain credit market benefits and alleviate unemployment both in the UK and with its trading partners.
In any case, Britain (and the world more broadly) would be able to reduce this dimension of uncertainty and turmoil after political events (political risks having been present throughout history and which, for the foreseeable future, will continue to play a crucial role) if there was a truly Free Banking system in place, and it is still not too late for such policies to be announced and developed since Free(r) Banking systems are increasingly seen as serious contenders in the ongoing, heated debate for significant, much-needed monetary reform.
Central Banks And Local Governments
When considering moving towards a Free(r) Banking system in terms of enabling the genuine usage of multiple monies, the calls for such a system need not be done so in a way that is confrontational and hostile towards central banks. Instead, central banks can actually help facilitate the process by which society becomes accustomed to frequently using and reaping the benefits of multiple monies.
Specifically, introducing public-private partnership monies may be one way through which central banks can help facilitate the pathway to Free(r) Banking systems. Though one applies this conceptually to the case of the Bank of England in the UK, the reader will readily see that this principle can be applied to other central banks worldwide (such as the United States’ Federal Reserve system, the European Central Bank, the Bank of Japan, the People’s Bank of China, the Reserve Bank of India, etc.).
Essentially, central banks do, contemporarily, have the most longstanding expertise in conducting monetary policy and, therefore, in striving towards a Free(r) Banking system, their expertise would be invaluable to ensure a smooth transition to a regime that functions effectively and efficiently with multiple monies.
In the case of the Bank of England, the institution could begin more significant, autonomous operations in regions and areas – for example, there could be a Bank of England (Yorkshire), a Bank of England (London), a Bank of England (Cornwall), Bank of England (Manchester) etc. and each of these new banks could issue a Yorkshire, London, Cornish and Mancunian pound respectively.
The people of the UK could theoretically, for example, be free to use the Great British Pound but also the Yorkshire Pound, the London Pound, the Cornish Pound and the Mancunian Pound as it suits their diverse preferences (according to the prevailing exchange rates, interest rates, redemption potential, etc.) and in which they could pay taxes according to the proportion in which their incomes are paid in these various currencies.
Additionally, the license to manage and influence these new monetary policies could be auctioned off to private firms and entities according, perhaps, to quotas (where a percentage is allotted to open competition, a percentage to local/domestic/international businesses, to local/domestic/international financial institutions, to local/domestic/international tech firms etc.).
Supposing that these public-private partnership monies were expected to propagate and be used in such a way that they make up even 20% of the British economy in (the UK economy, in 2015, was estimated to total $2.849trn by the IMF in nominal terms) then the rights to formal (partial) ownership of their monetary policies could potentially raise billions via auctions.
Indeed, a variety of auction mechanisms can be designed to meet a variety of objectives (whether that be revenue-maximisation, ‘fair’ apportioning or otherwise). These new, more autonomous branches of the central bank could formally work with local councils rather than merely with Parliament and Her Majesty’s Treasury.
Since the public-private partnership monies would likely see the Bank of England form new, more autonomous branches that work in tandem with local and regional governments, this would mean that the various monetary policies could be tailored more closely toward the specificity of interests of local and regional industries as well as agents more generally.
For example, there may be some regions that have a higher proportion of savers or who export more and, therefore, these regions may prefer their central bank branches to issue monies with relatively higher interest rates and relatively lower exchange rates, respectively.
At the same time, peoples in these regions could trade in other regions’ monies and the national money if they so prefer since they would be able to pick and choose and allocate their portfolios accordingly with respect to their diverse preferences.
Greater Devolution Of Power
Introducing regional and local public-private partnership monies that all agents can trade in, pay taxes in and so on, alongside the usual pound as well as the other public-private partnership monies (and potentially even wholly private monies if policy makers are convinced of their benefits) would align perfectly with the desire and trend toward devolution of powers to councils, assemblies and so on.
Bank Branches Held Accountable
Currently, the Bank of England is largely formally accountable to the Government and Parliament but also indirectly through media outlets, think tanks, academia, etc.; however, devolution of powers to more autonomous, public-private partnership banking entities would also mean that fluctuations in exchange rates, interest rates, liquidity risk, credit risk, etc. would be held more accountable to various levels of government as well as devolved administrations (such as Northern Ireland, Wales, and Scotland). Incidentally, these greater powers granted to devolved administrations may incentivise the Bank of England to undergo a ‘rebranding’ exercise of sorts to become a ‘Bank of Great Britain’ (for example).
Auctions For Tax Cuts
As was mentioned in a previous article on the potential benefits of introducing public-private partnership monies (which also outlined the credit market benefits, its potential for alleviating unemployment and improving trade, amongst other things), there is the potential for billions to be raised by auctioning ownership of these monies.
For example, suppose that, on a modest estimate (as was suggested in an earlier section of this article), the expected proportion of the volume of transactions and assets held in these new, multiple, public-private partnership monies are 20% of the economy in some future years.
This would correspond to exactly $0.5698trn ($569.8bn); suppose further that private entities were willing to invest and, thereby, own up to 50% of the monies and that they valued this (again, on a very modest estimate) at 20% of expected proportion of transactions and assets in the economy in future years, this would correspond to around $113.96bn raised through auctions (depending on how these auctions are designed and how convinced entities are by the efficacy of such ideas, of course).
This figure, however low or high it may be, could be earmarked for tax cuts of all sorts (council, income, corporation, etc.) so, again, this would provide further incentive for various levels of government as well as private entities to cooperate with central banks in utilising their technical expertise to enable such a situation.
Central banks have an opportunity to work with rather than against the increasingly complex preferences of the populations’ welfare they are responsible for.
Monetary stability, soundness and honesty can be achieved with their cooperation, and the ideal of free banking systems with multiple monies does not necessitate for their wholesale abolition (which, given the precarious, global situation of uncertainty, is currently undesirable).
Credit: This article is an amalgamation of articles published, originally, by the author at The Cobden Centre (an Atlas Network think tank and one of Europe’s foremost economics think tanks based around the Austrian School of Economics).