The following article on currency competition was written by Leah Stiles, a student of government and history at Regent University. She has completed a Koch leadership program and an internship with the Foundation for Economic Education.
Millennia ago, the first men to construct homes out of mud and reeds could never have foreseen coming, towering skyscrapers of glistening steel and glass. Similarly, bygone farmers trading eight chickens for one pig could never have predicted that, one distant day, humans would utilize money and enjoy the corresponding freedom to conveniently and directly buy and sell goods beyond their loftiest musings.
Beyond these brief examples, history repeatedly demonstrates that a truly astounding, uncoordinated creative process will continue to indefinitely and unimaginably improve human life and society. The only natural enemy to this process is the intervention of outside force.
Classical liberal philosopher Friedrich Hayek discusses this inventive process at length and employs the term “spontaneous order” to encapsulate the unplanned, creative outcomes of human interactions. Hayek further argues that, of all that has arisen from spontaneous order, money is one of the most direct and important examples. However, this argument has major implications for the way that society presently views money and its ability to continuously and spontaneously evolve.
In a society driven by a fascination with government and its assumed powers of central planning, it is often taken for granted that something as vital as money must be managed by government agents. Alas, as classical liberal thinkers would contend, this assumption ignores the long history of money’s inception and evolution. Perhaps even more dangerously, it overlooks what free and unconstrained money and exchange could one day become. Under the continued limits and restrictions of government control, mankind may never know what opportunities could await them under a system of free and efficient money.
What is money and from where did it come?
Before proceeding further with the classical liberal argument, a brief discussion of money’s function and history is in order. Put quite simply, Ludwig von Mises explains that, in a market that fosters exchange, “the function of money is to facilitate the business of the market by acting as a common medium of exchange” (Mises 1953, 29). Through this market process of production, consumption, and exchange, the market discovered that certain commodities were more effective media of exchange than others and, at first, these commodities varied considerably but eventually narrowed (Mises 1953, 32).
A discussion of the specific commodities employed would be here unnecessary. Instead, the vital principle is that the market gradually demonstrated that trading good for good in a barter system is inefficient. In its place, media of exchange began to signify certain values that could stand in for an unimaginable combination of goods and that could universally satisfy the needs of those from whom one wished to purchase a good. Ever since, money has served as the primary method of fair exchange and compensation.
Because it was clearly necessary that said media of exchange were legitimately valuable, governments initially began to manufacture coins that were identical in weight, manufacture, fineness, and other vital factors affecting value (Mises 1953, 71). Additionally, early states also began to provide a stamp guaranteeing the sanction and legitimacy of each piece of money. However, this limited interaction with the monetary system has increased steadily and significantly.
Hayek explains that this minting power, under Roman emperors, became a treasured part of a ruler’s sovereignty for its ability to increase the ruler’s revenue. During the Middle Ages, princely revenue became chiefly focused on this minting power and its benefits for the ruler (Hayek 1976, 28-29). Thus, Hayek argues that “as coinage spread, governments everywhere soon discovered that the exclusive right of coinage was a most important instrument of power as well as an attractive source of gain” (Hayek 1976, 28-29). From this point, discussions of “the good,” or even of economic efficiency, halted and were replaced by arguments of symbolic government power.
Thus, presently and for some time, “the principal instrument of monetary policy at the disposal of the State is the exploitation of its influence on the choice of the kind of money” (Mises 1953, 219). Consequently, the state controls the mint, money-substitutes, and the individual’s choice of his or her medium of exchange (Mises 1953, 219).
Regardless of this level of control, government’s power over monetary policy remains limited by something that no human institution can overcome. Governments lack perfect or prophetic knowledge to foresee the actual consequences of any given intervention (Mises 1953, 239). As such, governments of today are just as limited in perfect, future knowledge as yesteryear’s inhabitant of the house made of mud and reeds. Defenders of interventionist monetary policies thus vest limited minds with the power to curb unlimited possibilities.
Implications and applications
With all of this in mind, when one analyzes law, language, and the myriad other societal elements effected by spontaneous order, one cannot help but observe that monetary institutions are the least developed and progressive (Hayek 1988, 103). Hayek strongly condemns and explains this state of affairs by writing that “money has almost from its first appearance been so shamelessly abused by governments that it has become the prime source of disturbance of all self-ordering processes in the extended order of human cooperation” (Hayek 1988, 103). Essentially, he contends that government monopoly of monetary matters has made any form of experimentation or evolution impossible.
The implication of this government patronage of money is that alternative means have yet to be discovered or tested. Indeed, we have no idea what money could become or how much more efficiently it could meet human needs. The natural alternative to this government monopoly is to limit the role of government in monetary affairs and to allow the market to discover absent innovation.
Admittedly, even though many around the world agree that the present monetary structure is broken, few are willingly to minimize or abolish government intervention. Instead, most merely ask that the government approach the topic differently – essentially handing government more mud and reeds and asking that they construct a different house. However, the same leaks and dangers will await a home constructed out of the same inefficient materials.
As such, we must work to alter economic policy broadly and the ways that individuals view their money, government, and market. Indeed, as Mises contends, “there cannot be stable money with an environment dominated by ideologies hostile to the preservation of economic freedom” (Mises 1953, 438). If economic freedom were restored as a primary value, then the solution to the monetary problem would lay in restoring control to the market and fostering a system of free trade in money. This is Hayek’s “practical proposal” (Hayek 1976, 23) for discovering the most efficient, market-driven medium of exchange.
If more voices advocated for such a change in the monetary system, small and uncoordinated sparks of ingenuity would likely ignite a torrent of creative possibilities that would render our current system as archaic as the trading of chickens for pigs. Indeed, in the face of a vastly undiscovered field of possibilities, all that we can know with certainty is that humankind would benefit from such an opportunity to explore and to create. When faced with the status quo, this is justification enough.
Hayek, Friedrich. Denationalization of Money. London: The Institute of Economic Affairs, 1976.
Hayek, Friedrich. The Fatal Conceit: The Errors of Socialism. Chicago: The University of Chicago Press, 1988.
Mises, Ludwig Von. The Theory of Money and Credit. New Haven: Yale University Press, 1953.