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Competing Money Supplies, Lawrence H. White
2 paragraphs found.
 

What would be the consequences of applying the principle of laissez-faire—that is, completely free markets—to money? While the idea may seem strange to most people, economists have debated the question of competing money supplies off and on since Adam Smith’s time. In recent years, trends in banking deregulation, developments in electronic payments, and episodes of dissatisfying performance by central banks (such as the Federal Reserve System in the United States) have made the question of competing money supplies topical again. Nobel laureate Friedrich A. Hayek rekindled the discussion of laissez-faire in money with his 1976 monograph Denationalisation of Money.Milton Friedman, in a 1986 article coauthored with Anna J. Schwartz, reconsidered the rationales he had previously accepted for governments to provide money. Other leading economists who have entertained the idea of laissez-faire in money include Gary Becker and Eugene Fama of the University of Chicago, Neil Wallace of Pennsylvania State University, and Leland B. Yeager of Auburn University.

 

Robert Greenfield and Leland B. Yeager, drawing on earlier work by Fischer Black, Eugene Fama, and Robert Hall, have proposed another kind of laissez-faire payments system that they claim would maintain monetary equilibrium at a stable price level. Instead of redeeming their notes for gold, silver, or government-issued paper money, banks would redeem notes and deposits for a standard “bundle” of diverse commodities. Instead of a one-dollar or one-gram-of-gold note, for example, Citibank would issue a note that could be redeemed for something worth one unit of the bundle. To avoid storage costs, people would redeem a one-bundle claim not for the actual goods that form the bundle, but rather for financial assets (e.g., treasury bonds) equal to the current market value of one bundle. There would be no basic money, such as the gold coin of old or the dollar bill of today, serving both as the accounting unit and as the redemption medium for bank liabilities. This regime also has no historical precedent. Some critics have argued that it lacks the convenience of having a standard basic money as the medium of redemption and interbank settlement.