Denationalization of money

Starting from a thoroughgoing economic liberalism, Hayek believed that competition was the key to the functioning of the market mechanism. The government's monopoly of the right to issue money has caused damage to economic equilibrium, and he pointed out and argued the feasibility and superiority of a competitive monetary system through his research. Hayek claimed that the denationalization of money is the fundamental direction of the reform of the currency issuance system, and that the replacement of the state-issued monopoly money by the private bank-issued competitive money (i.e., free money) is the ideal currency issuance system. Therefore, his claim is called "currency denationalization" or "free money". Hayek's doctrine is echoed in his earlier proposal of neutral money. The core idea of the neutral currency theory is to stabilize the money supply and maintain the neutrality of the currency. But this only stays in the theoretical analysis, and it is difficult to put into practice, lack of practical application significance.

In the face of the constant occurrence and intensification of inflation in countries around the world since the 1950s, Hayek, starting from economic liberalism, put forward the idea of monetary denationalization on the basis of further research. It is believed that the root cause of the loss of neutrality of money to the extent of destroying the economy lies in the government's monopoly of the right to issue money, and that it is necessary to break the monopoly, replace the national currency with competitive currency issued by privately owned banks, and establish an internal constraint mechanism for currency issuance, in order to effectively limit the supply of money, maintain the value of the currency and the stability of the market economy, and eliminate unemployment and inflation.

Disadvantages of government monopoly of currency issuance
According to Hayek, the reason why the government has a firm monopoly on the issue of money is not due to the inability of private individuals or private enterprises to provide full-value, good money, but because the government's monopoly on the issue of money enables those in power to benefit from it. Not only does it provide the government with substantial revenues and serve as an important source of finance for the government in the long run, but because all transactions in the economy can and must be conducted only with government-issued currency, it becomes a symbol of the government's power. In this way, the monopoly on the right to issue money becomes an important pillar of government power and has a special attraction for those in power.

The government will do everything possible to maintain this privilege and will never give it up easily. Historically, governments have held the privilege of issuing money for a very long time, and rulers have treated the right to mint money as sacrosanct and an important expression of their power. Thus, although private operators (especially bankers and merchants) wanted full-value, stable money, and were perfectly capable of issuing good private money themselves, when they attempted to replace government-issued money with privately-issued money, they were unmercifully suppressed and outlawed by the rulers. According to Hayek, in the era of mint circulation, the government's monopoly of the right to issue money did not give rise to very obvious mischief, but in the stage of paper money circulation, its evils began to show themselves. With the expansion of the circulation of paper money, paper money gradually detached from the relationship with the minting of money, the issue of paper money is not limited by the precious metal reserves, purely depends on the will of the government.

Historical experience has shown that all government-issued paper money will sooner or later lose its value, because the government, which has monopolized the issuance of money, considers its own financial needs first, so it inherently lacks the self-awareness to limit the issuance of paper money to the boundaries required for circulation, or, in other words, it does not have the internal constraints of issuing money. This is where the potential for economic turmoil lies. It is in this context that currency issuance can still be externally constrained if there is an external force that can effectively restrain the government's power to issue currency. But since the judicial, political and military powers of modern countries are all puppets of the government and are subordinate to the will of the government, they are virtually non-existent. Because of the lack of strong internal and external constraints, the government dares to abuse the right to issue money as long as it is in its own favor. This abuse of the privilege to make the money supply is too large, will inevitably cause inflation, leading to economic chaos and the outbreak of crisis.

Hayek studied many historical facts and believed that deflation is temporary and regional; while inflation is persistent and widespread. The history of social and economic development is to a large extent a history of inflation, and it is the history of inflation manipulated by the government, serving the interests of the government. Inflation destabilizes the value of the currency and undermines the conditions necessary for economic stability. In addition, the government's monopoly on currency issuance ensured that deficit fiscal policies were pursued. As a result, huge government spending, huge fiscal deficits, and galloping inflation combined to pound the economy. Depression, unemployment, economic stagnation and rising prices are a few bitter melons on this same bane.

Feasibility and benefits of private banks issuing money
According to Hayek, the national currency argument is a bias. The fact is that issuing money is not something that only the government can do, but that private individuals should and are fully capable of issuing stable and good money. Hayek's argument for this starts with an analysis of the definition and uses of money. Looking first at the definition of money, Hayek argues that the definition of money is misunderstood to mean that there can only be one universally accepted currency within a country, but this is not the case. Historically, gold and silver have coexisted as money for a long time. Several foreign mints often circulated simultaneously within a country, and it was not uncommon for neighboring countries' paper money to be universally accepted in each country's border towns. Thus, within a country, not only one type of currency is accepted for use, especially when one type of currency can be quickly converted into another at a certain rate, or in countries where exchange controls have been abolished, various currencies can be circulated to different degrees and in different regions. It is therefore difficult to draw the dividing line between what is and what is not currency in circulation in a country.

Regardless of who issued, as long as there is "universality" and become a generally accepted means of exchange, should be money, so the use of currency than the word money more descriptive. Secondly, from the use of money, Hayek believes that the main use of money is as a medium of exchange, specific uses are: a) for the purchase, that is, because the price of various commodities is indicated by money, the buyer according to the price to pay a certain amount of money can complete the transaction, even if the use of different currencies, as long as there is a certain conversion ratio merchants will accept it and delivery; b) as a reserve for future payments; c) used as a standard for deferred payment, that is, people sign a variety of contracts in currency as a unit of calculation, although the contracting period of the change in the value of currency will make the contracting parties or benefit or damage, but because of the borrowing and lending is often set on one side, so the market forces are unlikely to be biased in favor of a particular side of the tendency to interest, as long as the interest rate can be adapted to the expected price changes, the temporary gain or loss of such a final tendency to be leveled off. d) used as a reliable unit of account. Through the above analysis, Hayek believes that: a currency no matter who provides, as long as the generality, can become a generally accepted means of exchange, can be used as currency for real and future payments and become a reliable unit of account. Therefore, what is important for currency is not who issues it, but how to satisfy the intrinsic requirement of currency, i.e., to ensure monetary stability. Hayek further argues that it is not only feasible but also beneficial for private banks to issue currency. This is due to the fact that since the currency issued by private banks is subject to the constraints of their economic strength, they must bear the full responsibility of their issuance, and if they issue money indiscriminately without regard to the consequences, it is they themselves who will be directly jeopardized, causing their credibility to decline until they go bankrupt or fail. Therefore, there is a strong internal constraint mechanism for the issuance of currency by private banks, which makes the currency they provide inherently stable and of good quality. This is in line with the objective requirements of the economy for money.

The idea of currency denationalization
Hayek believed that, in order to completely get rid of the "inflation" predicament, and to maintain stable economic development in the long term, the fundamental way out is to reform the existing currency issuance system and monetary policy, to abolish the government's monopoly on the issuance of currency, and to abolish the national monetary system. His assumption is that once private banks are allowed to gain the public's trust and assume responsibility for currency issuance, they will certainly act prudently, and each currency-issuing bank will limit its own currency issuance and take the initiative to maintain the value of the currency, thus ensuring that the market mechanism can give full play to its role in safeguarding the stable development of the economy. In this regard, he made three points of analysis:
a) Allowing private banks to issue currency will not result in an unlimited increase in the types of currency. Since free money is competitive, the result of competition will be that only a few large and reputable banks will really be able to circulate and use the currency issued by them. Most other banks would have to give up their own currency and use the currency issued by the large, reputable banks. Thus, over-issuance becomes anathema to the banks that issue the currency. They must control the amount of currency issued, maintain currency stability, and keep enough reserves to meet the various payments required, otherwise, other banks that do not issue currency and the public will not choose the currency it issues.

b) Allowing private banks to issue currency would fundamentally cause a major change in the business policy of commercial banks. The use of free money commercial banks, although not directly subordinate to the issuing bank, but the issuing bank in order to maintain the value of the currency issued by the bank, it is necessary to try to use their own currency of the bank's business activities have some constraints, in particular, the strict limitations on the issuance of derivative credit notes, which will change the business policy of the commercial banks, so that all banking activities must be carried out in a prudent manner, and must be for the consequences caused by the full responsibility of all consequences. In this way, since these banks will in fact assume responsibility for the settlement of checks, they will change to a large extent their dependence on the national central bank and will strengthen their management of less liquid assets.

c) The first step towards denationalization of the currency is to sensitize the public about free money. There is a need for a "free-money campaign" to make the public understand, through publicity and public opinion, that the root cause of inflation, unemployment and economic turmoil lies in the government's monopoly of currency issuance, to realize that denationalization of the currency is a practicable and most desirable monetary system, and to dispel doubts and misunderstandings about the issuance of currency by private banks, so that they can work for the cause in their own interests to strive for and adopt an attitude of positive cooperation from the perspective of their immediate interests. At the same time, Hayek also analyzed the advantages and disadvantages of other options. He believed that the restoration of the gold standard was not a complete solution to the problem because of its imperfections; and he also expressed great skepticism about the option of establishing a unified European currency because this supranational currency would still not be a privately competitive currency, it would not be superior to national currencies, and the consequences would be even worse as the difficulty of managing it would be further increased. Therefore, the best and only way out is to give the right to issue money to private banks, who would provide the economy and society with a stable and reliable currency, which is the fundamental solution.