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Money essentially must be perceived as a social device for avoiding moral hazard problems in large modem societies to undermine any form of intertemporal exchange of goods and services. The rules of the money game are a (liberal) substitute for the tight social control, by which small, narrow and basically static communities prevent systematic “exploitation” of some members by others.

Since the rationale of money results exactly from the fact that most individual promises (to deliver suitable goods and services at a suitable date) of market participants would not be fulfilled, a “competitive” money supply (which would require freedom to enter and exit the industry) implies something of a. contradictio in adjecto. Actually, money supply has characteristics of a. natural monopoly, given the public.

good nature of money’s acceptance which requires some form of general agreement. True, the public monopoly of providing the “ultimate” money (base money) has often been abused at all times in history, but this fact as such does not give sufficient reason to abolish the public monopoly altogether, no more than the experience of bending the law has ever led to an agreement on purely private law. The simple reason is that the latter would almost certainly make things worse rather than better.

Acceptance of any modem money whatsoever depends on the confidence of the public that promises of banks (liabilities in the form of demand deposits) are not issued extensively. The systemic consequences of the latter would be an increase in the general price level and/or the creation of bad assets. The cost of extensive money creation will thus be externalised to a large degree while the benefits (higher profit) will be perfectly internalised to the bank.

This classical public choice problem explains why it would be illusory and very risky to leave the money supply to free market competition. The inevitable public nature of money has exactly been the reason, why even the toughest liberal economists and philosophers, like Henry Simon, Irving Fisher, James Buchanan, Milton Friedman and many others, never advocated for a complete privatisation of the monetary system, although they heavily criticised existing arrangements. Friedrich A.

von Hayek, who stimulated a revival of interest in free banking issues with his provoking proposal for “denationalising money” (1976), is the exception rather than the rule. Note, however, that these arguments reflect the rationale given above to a certain degree only, and they go even further in some respects. A coherent framework of bank regulation has so far not been established. Although there seems to be little doubt with regard to the necessity of public regulation of banking as such, the degrees and forms are still matters very much open to debate.

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