In the book Denationalisation of Money- the Argument Refined (1976), Hayek proposed the abolition of the government’s monopoly over the issue of fiat money in order to prevent price instability. In fact, his defense of a complete privatization of money supply stemmed from his disappointment with central banks’ management, which, in his opinion, had been highly influenced by politics. Thus, the ultimate objective of the denationalisation of money advocated by Hayek was related to avoid political interference on monetary policy.
Therefore, the denationalisation of money would be achieved by the complete abolition of the government monopoly over the issue of fiat money. In the framework of a free market monetary regime, only those currencies that have a stable purchasing power would survive. The basic idea is that the possibility of banks issuing different currencies would open the way to market competition. Banks could issue non-interest bearing certificates and deposit accounts on the basis of their own distinct registered trade mark and the currencies of different banks would be traded at variable exchange rates. This proposal would leave the way open for a comprehensive privatisation of the supply of money.
Hayek underlined that the main advantage of the free market competitive order is that prices will convey to the acting individuals the relevant information to make decisions to adjust their activities in face of the competition of currencies. He highlighted the uses of money that would chiefly affect the choice among available kinds of currencies: i) as ash purchases of commodities and services, ii) as reserves for future needs; iii) as deferred payments, and iv) as unit of account. In his opinion, these uses are consequences of the basic function of money as a medium of exchange and the stability of the value of a currency as unit of account is the most desirable of all uses (Hayek, 1976: 67).
Competition and profit maximisation would lead to market equilibrium where only those banks that pay a competitive return on liabilities to their clients could survive. Since currency corresponds to non-interest-bearing certificates, the crucial requirement is the maintenance of the value of the currency. Under Hayek’s theoretical framework, the market forces would determine the relative values of the different competing currencies. In other words, the exchange rates between the competing currencies would float freely. So, in equilibrium, only currencies guaranteeing a stable purchasing power would exist. People would not want to hold on to the currency of an issuer that was expected to depreciate relative to one that was expected to hold its value in terms of purchasing power over goods and services. The marginal costs of producing and issuing a currency (notes and coin) are rather low (close to zero) and the nominal rate of interest would be driven (close) to zero. Banks that failed to build up stability for the value of their currencies would lose customers and be driven out of financial business.
After reading this proposal, the question that arises is: are current digital currencies bringing to reality Hayek’s ideas?
In the last ten years, mainly aftyer the 2008 global crisis, the increasing digitalization of financial transactions is also related to changes in the banks’ competitive environment, where the intense growth of the startups called fintechs, especially since 2010, has revealed a new articulation between finance and technology. As a result of the advance of new non-bank competitors (fintechs), big banks have begun to establish collaborative partnerships with selected fintechs in order to produce new technological solutions in the areas of payment systems, insurance, financial consultancy and management, besides digital currencies.
In this digital environment, new technologies – such as advanced analytics, blockchains and big data, in addition to the use of robotics, artificial intelligence, besides new forms of encryption and biometrics – have been enabling changes in the provision of financial products and services that could challenge current central banks’ patterns of policy and regulation.
HAYEK, F. A. von (1990 ) Denationalisation of Money: The Argument Refined, 3rd. edition, London: Institute of Economic Affairs.