Is Money a Public Good?

The wave of innovation in payments systems and the emergence of new digital monies has revived the debate on whether money should be a public good issued exclusively by central banks, or a private good created by entities in a currency market. The recently rejected referendum in Switzerland on the “Vollgeld”, or “sovereign money”, saw this topic come to the fore.

Proponents of an exclusive or stronger role for the government point to potential instabilities of monetary systems not backed by central banks, as well as to the possible rent extraction from emerging money monopolists. Conversely, in the cryptocurrency space, many would claim that privately issued currencies are largely superior to central bank monies given the potential benefits of competition in the currency market, and the fact that private currencies are not coined under distortive incentives that can lead the governments to create inflation and debase the currencies. These arguments often echo the theses of the Austrian school of economic thought.

What is a Public Good?

Economists define a public good as a good which fulfils two criteria:

  1. non-excludability in its provision - meaning that nobody can be prevented from enjoying the good;
  2. non-rivalry in its consumption - meaning that that one person enjoying the good does not limit the ability of others from enjoying the good at the same time.

Examples of public goods are clean air, national security and public lighting. The issue with public goods is that there is an incentive to “free-ride” them, by not contributing to their production while consuming them. This implies that in equilibrium they can be underproduced (or not produced at all) - a clear market failure. The government therefore has to step in and tax the population in order to produce them. Therefore, the argument goes, if money were a public good, governments should be the sole issuer of money.

Is Money a Public Good?

In a narrow sense, no. Money does not satisfy the non-rivalry criterion. The fact the money is a means of exchange is due to the potential mutual exclusivity of claims over it. In other words, money can be exchanged for goods because an exclusive claim to consume a good can be swapped for an exclusive claim to use money.

However, while money cannot be thought of as a public good in a narrow sense, many of the desirable properties of a monetary systems are. In particular the stability, uniformity, and interchangeability in a currency area are public goods - in that they are characterised as being both non-excludable and non-rivalrous.

For and Against Government Monopoly on Money

One of the arguments proposed against the government monopoly on money (and in favour of cryptocurrencies) is the Austrian critique of fiat money (Hayek, 1976). In a nutshell, fiat money issuance is distorted by the government incentive to inflate currencies to extract taxes in the form of seigniorage. To prevent that, private entities should issue non-interest-bearing monies that would compete in a currency market. Consumers would stick to the currencies bringing them a better store of value over time, and market competition would guarantee that only monies with stable values stay in the market. This, in turn, would curtail the ability of governments to abuse their power as issuers of money.

The Austrian argument seems to have limited support from the historical perspective. In fact, in the past, private money not backed by fiscal authority has universally failed in providing stable value to the users. This is, for example, what happened in the US in the free banking era in 1837-1883.

The weakness of private money is due to the intrinsic dynamic instability of privately issued currency: if trust evaporates, it suddenly loses transaction value. Lacking a backer of last resort that can mobilise fiscal revenues, the value of a private currency can suddenly drop to the value of the paper on which it was printed. This fact and the desire of the national state to keep control of the seigniorage have historically justified the institution of a monopoly of the issuance of legal tender, that is common in many legal systems.1 There are however many examples of countries with weak Institutions and underlying economic Issues (e.g. Zimbabwe, Venezuela and Argentina) where governments have abused their ability to seigniorage revenue.

The monopoly of state over money is in practice restricted to the coinage only. However, the importance of maintaining `public goods’ such as the stability of the payment systems underpin much of the financial regulation.

The Future of Monetary Systems

In modern economies, money is created exclusively by the state but in a joint public-private venture. Private banks create by far the largest share of the money as electronic deposits, while banknotes and coins minted by central banks form a smaller share of the total money aggregate. These systems can easily accommodate the use of other form of money as a means of exchange and storage of value as long as they share the same unit of account is maintained e.g. credit card money vs bank notes both denominated in Pounds Sterling.

Although the role of cryptocurrency is currently negligible in aggregate terms, the rise of privately issues electronic currencies could have important implications for the role of central banks’ money in ensuring stability and uniformity in an economy.

The reason is that private digital currencies could substitute fiat money in private use, and possibly supersede it. This would entail a number of consequences. First, it would limit the efficiency of monetary policy by weakening the effect of the central bank interest rate on the economy. Second, it would move seigniorage revenue from banks to new (potentially oligopolistic) money issuers.2 Third, a small number of currencies privately issued by large global companies could create their own currency area, breaking up the uniformity of the monetary system.

A Central Bank Digital Currency (CBDC) is thought as the obvious way to grant the existence of public money accessible to everyone, and to maintain a uniformity of money in the payment system of a digital economy. In fact, convertibility of deposits and digital currencies into a CBDC would restore substitutability and uniformity across different type of money. However, the general equilibrium implications of introducing a CBDC are yet to be fully understood.

Conclusion

While money in a narrow sense cannot be considered as a public good, the stability and uniformity of a monetary system are. The use of electronic currencies and cryptocurrencies entail radically different scenarios where the role of public money may disappear. A Central Bank Digital Currency is a possible way to grant the existence of public money. The equilibrium effects of the co-existence of private electronic currencies and CBDC are yet to be fully understood.

Bibliography

Izabella Kaminska, “Private money vs totally-public money, plus some history (FT)”  
https://ftalphaville.ft.com/2014/11/21/2049012/private-money-vs-totally-public-money-plus-some-history/

Markus K Brunnermeier, Dirk Niepelt, “Public versus private digital money: Macroeconomic (ir)relevance”, 2019
https://voxeu.org/article/public-versus-private-digital-money-macroeconomic-irrelevance

Chi Hyun Kim, Alexander Kriwoluzky, “Public or Private? The Future of Money”, Monetary Dialogue Papers, December 2019

Footnotes

1 For example, Article 1 (8) of the US Constitution reads “The Congress shall have the right to coin money, to regulate the value thereof.” This right was transferred to the Federal Reserve Bank in 1913 by the Federal Reserve Act. In Europe, the ECB has “the sole right to authorize the issuance of banknotes within the EU” (ECB Statute). Similar propositions appear in laws and constitutions around the world.

2 In the case of truly decentralised cryptocurrencies, there will be limited incentive to exploit seigniorage revenues in the traditional way of printing money. However, there may be an incentive to have a monetary supply policy which is lower than what is optimal for the economy, which would have the effect of transferring wealth to the existing currency holders at the expense of others.

Disclaimer

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