Unprecedented chaos was seen in the world’s money markets
recently. Currencies in South East Asia dramatically lost value when compared
to the US dollar. In the case of Indonesia one US$ now buys approximately
11,000 Rupiah against just 2,500 before the collapse. A similar fate -
though the collapse has not been as dramatic - has befallen the Thai Bhat,
the Malaysian Ringitt and the Korean Won.
- Is it a failure of capitalism?
- Are economies to remain alternately in a boom
or a bust mode?
- Are currency controls of the kind we have seen
in India or Sri Lanka the answer?
The answer to all these questions is a resounding “No”.
The failure is not of capitalism or free markets. It is not free trade or the relative freedom in currency movements which has led to this debacle. It is in fact the failure of the authority which has an exclusive monopoly on issue of money government.
What is the solution?
The recent shake-up might help us raise a very fundamental
question - is it really necessary for the government to have a monopoly
to issue currency? Is it true that government alone needs to have a right
to issue currency the world over?
Yes, governments had the monopoly in issuing money and
yes that is the reasons for periodic booms and busts. Yes, that is the
reason for continuous inflation and now, the reason for fears of deflation
in many countries. But why blame anyone else for devastating losses in
value of currencies when the sole authority for issue has always rested
with governments.
A moments reflection should make it clear to anyone that it is governments & governments alone which must bear all responsibility for things going wrong-disastrously wrong-in the currency markets. To blame the market, or currency speculators, is merely an attempt to shift responsibility-a task at which all politicians in all countries are equally adept.
This brings us back to the question - what, if any, is the solution? One can perhaps make a case for government to allow a sound monetary policy. Do not keep printing notes to meet deficits, do not spend more than you earn, do not overload the economy with debt, back your currency with the equivalent amount in real assets-gold or some other sound currency.
If governments do follow this prescription, will it work? Yes, perhaps. The proper question, however, is: will governments ever follow this painful prescription? The answer is again no.
Demanding fiscal discipline at all times from politicians is like asking cats to start barking. It is not in the nature of cats to do that. Similarly, it is not a characteristic of politicians to control expenditures. Making promises comes easy to those who run for public office, but fulfillment of even a part of these promises require money. You can visualize what happens when you give control over currency to politicians - printing presses are ordered to work at full speed. It is any wonder then that the currency debasement - all currencies continuously loosing value - or what we call inflation is our fate. The value of the rupee today is but a fraction of what it was when we gained independence.
So, how do we solve this problem, if no government has ever been able to exercise fiscal discipline for any great length of time?
There is one and only one answer. Any country which follows that prescription will reap immense rewards. Inflation will be zero. Citizens will be happy and booms and busts will belong to the history books. Government must immediately end its monopoly over the issue of currency-in other words denationalize money.
How does one privatize money? By the government allowing anyone to issue notes and coins. No, we are not talking of counterfeiting here. We are talking private agencies issuing IOU’s which can then be used as legal tender.
Will anyone accept anybody’s IOU’s as notes? Of course not. Only the most reputed of the reputed agencies will be able to do that. In all probability, it will only be private banks which will initially be able to issue money. After all who else has so much expertise in dealing with money. In fact banks are already doing it. When they sell traveler’s cheques, or operate credit cards, what is it if not legal tender which operates just like money?
What would prevent private agencies from going ahead and printing unlimited quantities of currency and thus going the way of the governments? Confidence. No one will ever have confidence in a bank’s notes if it ever did that. Surely it will then spell doomsday for the bank or the issuing agency. This fear of annihilation and the paramount need to keep the population’s confidence in its notes will ensure that a policy of “sound” money is followed.
Issuing banks or other financial institutions would issue IOU’s redeemable specie on presentation. They would be backed by something of real value-whether it be gold, platinum, silver or notes of other banks or a basket of commodities, or other financial instruments, or even government instruments of governments who are, at that time, following prudent policies of sound money.
It may be noted that there will not be any single issuing authority. It is the market which will decide how many private agencies issue notes, and in which notes the public has confidence. These and only these will become “ tender” for our day to day transactions.
Initially, government can also be one of the issuing authorities. Competition from private agencies will ensure that it does not print notes indiscriminately. After all which notes would you prefer? The ones issued by government which lose value everyday or those issued privately which never lose value.
Will this ever happen? Well, who could have predicted the collapse of communism. But happen it did. Perhaps it will happen in our lifetime or perhaps not. Who can tell? Is it worth fighting for? Definitely. And it will only come about when we all put pressure on our government to end its monopoly over issuing of currency. What better time than now when the utter chaos in the world’s money markets has so dramatically highlighted, yet again, the governments failure to manage money, as has been its failure to manage any other aspect of our economy.
(Rakesh Wadhwa is Executive Director of Casino Everest, in Kathmandu.)
(C) Liberty Institute, New Delhi, 1999
