Smackdown! George Selgin Edition


From the comments:

Your arguments about currency competition has merit w.r.t. proposals for competing base or fiat monies. It has none w.r.t. competitive supply of redeemable bank monies–which is what I (and Larry White) have written about at length. Such monies can be fully compatible with underlying base money, and so are able to make inroads into the “network” of users of such–as they have done in numerous historical instances. If you look at my EJ article on “Adaptive Learning and the Transition to Fiat Money [gated],” you’ll see that the analysis there tales network externalities very seriously indeed.

That is fair enough, and I probably should have made the distinction. Both George Selgin and Larry White have done extensive historical research about private coinage around the world. Selgin’s book, Good Money, tells the story about private coinage in Britain at the turn of the 19th century.

The gist is that since metal prices were tightly controlled, the opportunity cost of using silver or copper for coinage in Britain was much to high for coins to actually be minted. As a result, during the beginnings of Britain’s industrial revolution, they were facing a shortage of “small change” in which to purchase items and pay workers. Just to gain some idea, imagine that we only printed $100 bills. That is the situation that was facing the British industrialists and consumers. The royal mint was being bombarded on one side by the industrial North, claiming that they desperately needed pence. On the other, pub owners in London were claiming that they had so many copper coins that they were unable to get rid of them.

Why this disconnect? Transaction costs. Thus arose private coinage at the point of use (and the “company store”, which share such history — much to the chagrin of leftists everywhere!).

This is the way I understand the difference that Selgin identifies: If you have convertible currency (into gold, silver, etc.) then what the actual monies represent is a claim on an asset. That is not so in fiat money systems — and thus my criticism holds. So in effect, under a commodity standard all monies represent a claim on what could be wildly diverse asset classes, which depend on a bank’s Business Plan. As such, different currencies would really be able to differentiate themselves — a very conservative bank’s currency would be much different than a very profligate bank. My criticism was an elaboration of Gresham’s law, only instead of specifying “bad money” I specified “competitive advantage”…which need not be “bad” (or inflationary). However, in all of this, you are still dealing with the same type of money system (which is shared the world around), which involves positive interest rates, debt issue (which is not a conspiracy), centralization, and a hierarchical structure. Economists generally ignore these features, but as I will eventually get around to writing about — they are very important to the functioning of this type of money system.

I will also make the even stronger claim that money systems shape and define our interaction with the world in a very interpersonal way.

Perhaps I’m very wrong, but when I encounter people that want “currency competition” (like Ron Paul), what they are really advocating is that a convertible commodity money be able to compete against government issued legal tender. This type of competition is a practical impossibility because of the reasons I outlined in the previous post. It is this type of setup that I refer to when I say that currency competition is a stupid concept.

Update: I don’t feel like this is a very good argument. This could stem from the speed at which I concocted it, or the fact that I’m not being nuanced enough…either way, you, the readers, deserve better!

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2 thoughts on “Smackdown! George Selgin Edition

  1. Contrary to your self judgment, I find this to be a perfectly good post. That said, I must ask, if competing currency is a stupid idea and bound to fail, what is the harm in allowing them? If they are just going to be crowded out, as you suspect, why have laws against them?

    My guess is there is niche market need that these currencies would fulfill. Most likely, they would never displace a national currency, but would not be crowded out to extinction, and would overall be a benefit to the economy, if just a marginal one.

    I take it you are B2B currency proponent though, yes?

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