Bringing gold and silver back as America's Constitutional money

Nikhil Sridhar Scholarship Essay 2021

Posted on November 3rd, 2021 -

Money and the Myth of the Public Good

“Only free banking would have rendered the market economy secure against crises and depressions.” -Ludwig von Mises (2008)

For the last century, the dominant narrative in the intellectual history of monetary theory is that the nature of money dictates that it must be provided by the state. Advocates of money’s state provision, even those of market-oriented leanings, insist that money is a public good or that the production of money by private enterprise is not consistent with socially optimal levels of production because of intrinsic market failures. With even a basic understanding of economic history and the tools of intermediate economics, one need not be an extreme libertarian to see that this view is far removed from reality.

Although this topic features a rich history of contentious literature, in this brief essay I consider the arguments for the public provision of money using the same premises offered by the interventionists, and show that it is indeed faulty logic, rather than sound theory, that leads one to champion the state’s monopoly on money. I will first consider the criteria for public goods and then go over the major types of “market failure” and demonstrate that money, as an economic good, fits none of the criteria to justify state intervention. Note that this is not an acceptance of this framework, but a demonstration of the failure of economists to adequately justify the public provision of money from their own bases.

In his 1954 paper The Pure Theory of Public Expenditure, Paul Samuelson (1954) outlined the fundamental criteria of public goods, which contemporary economics has since classified as non-rivalrous and non-excludable. If money is truly a public good, then it must fulfill both these criteria. First, is money non-excludable? The answer is as straightforward as the question: money cannot be non-excludable. If I possess a dollar, then you cannot possess that same dollar. Similarly, if I spend a dollar, you cannot simultaneously spend that same dollar, thus making money rivalrous. In other words, although money is accepted as a generally used medium of exchange does not mean that one person’s cash balances, whether in their pocket or bank account, can be consumed by someone else.

Now let us consider the applicability of “market failure” criteria to money. The most common argument is that the private production of currency leads to a natural monopoly, which, in turn, leads to a level of monetary production below the socially optimal level. A historical review of free banking systems on a gold (or silver) standard show that, although there was convergence in the base money, lightly regulated systems exhibited substantial competition. As Larry White (1984) illustrates, the Scottish system was rife with fiercely competing note-issuing banks until the eventual adoption of central banking. Similarly, the Canadian experience with private note-issue featured over 20 competing note-issuing banks prior to the First World War (Dowd 2002).

The historical evidence is bolstered by economic theory. A good that exhibits natural monopoly must, from the perspective of neoclassical economics, face continually decreasing average costs for a single producer to emerge. Banks, however, do not face continually declining average costs, since they must back at least a fraction of their notes with real reserves that are costly to acquire. Failing to do so will lead to competing banks (or users) redeeming notes for reserves, generating adverse clearings which will, eventually, cause the bank to fail if they don’t rectify their practices. Additionally, the marginal benefit to the bank of each note is a function of the acceptability of their notes. As history shows (White 1999), banks fiercely competed on non-price grounds to ensure the acceptability of their notes, which can be a costly endeavor.

Another market failure-based argument is that the improper management of the money supply generates negative externalities, specifically in the form of financial instability and undesirable changes in the price level. Once again, history provides a sweeping refutation of this argument. Those same examples of Scotland and Canada were not only marked by fervent competition, but they also were known for their remarkable financial stability. Compared to their neighbors, England and the United States respectively, these economies demonstrated a startling resilience to financial panics and busts that marred the reputations of the financial systems elsewhere (Briones and Rockoff 2005).

In fact, the ability of banks to respond to price signals in the market for money, largely through the mechanism of reserve demand and clearings, gives private note-issuers a strong incentive to meet the demand for money (White 1999), unlike their counterparts in central banks which are instead incentivized to maximize the wealth of the state (Selgin and White 1999). Consequently, private banks tend to stabilize the overall flow of money, creating largely stable prices, adjusting for positive technological developments, over the long run (Selgin 1994).

Even without resorting to (albeit more accurate) heterodox theories of the market process, I have demonstrated that money fails to fit into any of those categories that are typically used to justify its state monopoly provision. I will conclude by conjuring a further steelman of the opposing view. Even if it were the case that each of the arguments I presented were invalid, economists should be wary of falling into the nirvana fallacy (Demsetz 1969). Whatever imperfections one might conceive exists with the private provision of money, he must compare it to the reality of a century of failed attempts by central banks to achieve those same goals that private enterprise has done with little accolade.


Briones, Ignacio, and Hugh Rockoff. "Do economists reach a conclusion on free-banking episodes?." Econ Journal Watch 2, no. 2 (2005): 279.

Demsetz, Harold. "Information and efficiency: another viewpoint." The journal of law and economics 12, no. 1 (1969): 1-22.

Dowd, Kevin. Experience of Free Banking. Routledge, 2002. Samuelson, Paul A. "The pure theory of public expenditure." The review of economics and statistics 36, no. 4 (1954): 387-389.

Selgin, George, and Lawrence H. White. "A fiscal theory of government's role in money." Economic Inquiry 37, no. 1 (1999): 154-165.

Selgin, George. "Free banking and monetary control." The Economic Journal 104, no. 427 (1994): 1449-1459.

von Mises, Ludwig. Human Action: A Treatise on Economics. Auburn, Alabama: Ludwig von Mises Institute, 2008.

White, Lawrence H. "Free banking in Britain: Theory, experience, and debate, 1800–1845." (1984).

White, Lawrence H. The Theory of Monetary Institutions. Malden: Blackwell, 1999.