Thursday, 19 October 2017


Is Money a Public Good?

February 17, 2011
in Blog

It is a common position in welfare economics that government should let the market work except in those situations where it fails to deliver efficient results. One of those situations is the case of public goods, which are non-excludable in its provision and non-rival in its consumption. Clean air and national security are two common examples. The clean air any person breaths does not affect other people from breathing clean air as well. A similar thing occurs with national security, no one can be excluded from its provision and the security provided to anyone is the same that is provided to his neighbor. The army cannot decide to protect a person but not his neighbor. If the producer cannot exclude consumers and the product is non-rival on consumption then there is an incentive by everyone to “free-ride” from others. That is, let other buy the product and then consume from it for free. Then, the argument follows, public goods may be under produced. That is, the market fails to deliver efficiently.

Nonetheless the market by itself usually finds ways to privately provide public goods. The question is not then if the government can provide a public good, the question is if it can do it better than the market. But is money a public good? If there are no economic reasons for the government to provide private goods and money is not a public good, then this is not a valid economic reason to have a government monopoly in the production of money.

Some economists, for example White (1999), argue that is not so straightforward that money is a public good. Money holdings in wallets and bank accounts fail to be non-rival. People cannot consume the balance of other people’s accounts. The fact that money is commonly accepted as a medium of exchange by the rest of the community is just one of the characteristics that make it money, not a public good. In a similar way my lunch cannot be eaten by someone else, my cash holdings of money cannot be used by others. Non-rivalness is not, then, a characteristic present in money.

But, if the government provides through a Central Bank monetary stability of money to the whole market by issuing money, is not that stability a public good? Everyone enjoys a non-rival and non-excludable monetary stability. Leaving aside the relevant question of how much stability central banks actually achieve, the stability argument still does not hold as a public good. If the good is excludable, as money is, then the stability is also excludable. People who hold different currencies do not enjoy the same stability. Holders of Argentinean Pesos face a different inflation rate than holders of US Dollars. Stability is a characteristic of money, but not a good in itself. As White’s (1999, p. 91) exemplifies: “[T]he tastiness of my chocolate doughnut may correspond to the tastiness of your doughnut, provided both have come from the same batch, but that does not make doughnuts (or ‘tastiness’) a public good.”

The argument of money stability as a public good only holds if money supply is already monopolized (i.e. by a central bank). In such case everyone is enforced to hold the same currency. Under that particular condition then the quality of the issued currency affects everyone and is “as if it were a public good.” But this cannot be an argument for money as being a public good because it already requires the fulfillment of the conclusion: centralized government provision.

As Vera C. Smith (1936) has shown, central banks have historically been the outcome of government’s need to finance their fiscal deficits rather than to provide monetary stability. Central banking is not the result of a market failure, but, on the contrary, the outcome of government failure.

Nicolas Cachanosky is a doctoral student in economics at Suffolk University, as well as a previous Sound Money Essay Contest winner.

Image by Suat Emon /


  1. David May 28, 2015 3:49 PM

    Very interesting. I question the claim that non-rival is not a characteristic of money. When banks lend your $10,000 to others then you and other parties both use that $10,000 dollars. Borrower gain capital and you and the bank gain interest, but you are free to spend your money as you like- hence money can be non-rival. However, since you can withdrawing the $10,000 at anytime then money can be rival, meaning that money is a good can be both non-rival and rival.

  2. Nicolas Cachanosky February 18, 2011 5:44 PM

    Ok. The argument of public goods would be a potential response to point 1 (Money is an economic good as any other and its price should be determined in the market) as a support to some involvement in money. Some argue that this process fails if the good is public. My post argues in contra that position. But yes, points 2 and 3 are also potential problems.

  3. manuelgar February 18, 2011 5:22 PM

    What I mean is that we all agree that the important issue about money is stability, and therefore we raise the question that if stability should be a public good, then I cannot think of a financial crisis which is not due to a debt problem.

    I understand that If all agents can honor their liabilities, the probability of a financial crisis is very low.

    Therefore monetary stability would be achieved through controlling credit. And the only way of centrally controlling credit is 1) controlling all goods, so the central planner decides who gets credit and at what interest, or 2) controlling time preference.

    So the arguments I propose against money / monetary stability being a public good are that 1) Controlling credit is impossible because controlling all goods means full socialism which would block economic calculation (Mises) and 2) Setting time preference by decree is not possible.

  4. manuelgar February 18, 2011 4:32 PM

    What I mean is that i don´t think it´s possible to centrally manage credit unless the central planner controls all the goods (1) or controls time preference (2 and 3). Controlling all goods would imply "full" socialism, and controlling time preference is in my opinion impossible.

    The arguments that I propose against money as a public good are the following:

    1. Money is an economic good as any other and its price should be determined by the market.
    2. Controlling credit through centrally managing all goods blocks economic calculation (Mises)
    3. Determining time preference by decree is impossible.

  5. Nicolas Cachanosky February 18, 2011 4:05 PM

    I'm not sure I follow the question. The argument that financial stability is a public good already requires a central management of money supply. But if this is not the case under competition, then this argument does not hold as a support of central banking. Maybe there are other arguments, but public goods does not seem to be an easy one.

    Financial crisis usually happen because of regulation, monetary policy, of fiscal deficits and then the government "forcing" the banks to lend to them. This is not a public good problem, this is a regulation problem.

  6. manuelgar February 18, 2011 1:43 PM

    Ok, but I understand that financial crisis are caused by too much credit / debt. Then we are talking about credit management or control.

    I only can think of three ways of centrally mananaging credit: 1) A central entity owns all goods and decices wether they should be lent out 2) A central entity decides if the goods owned by the agents should be lent our or not 3) A central entity decides if an agent may borrow goods from other agents.

    Wouldn´t this mean that credit exchanges are a public good, and should be centrally managed?

  7. Nicolas Cachanosky February 18, 2011 11:56 AM

    As long as national security during peace avoids potential threats, it is still a service. If a policeman is standing in front of my house he provides a service even if his presence makes theft go on other direction.

    On the economic and non-economic good you're right. Air may not be an economic good and so that wasn't a good example in my post. I see now that on trying to find clarity I may have produced confusion. But, economic goods are still commonly divided between private and public. But this division is not absolute, all or nothing. Some goods are "more public" than others. A bigger park can have more non-rival consumption than a small park. At some point satiation may be reached, but it is still a public good for those consuming it. If I'm a producer of a park and have no way to exclude people from walking in, I will have a hard time finding people to pay for it. This does not mean that a public good must be provided by the government, many public goods are provided by private producers. The market finds it way out to make it profitable enough.

    I think the stability argument points to something else than just purchasing power or change in relative prices. But to avoid high inflation, deflation or financial crisis (like a bank run, etc.). That kind of instability problems and not just stability in the level of prices. This is something that for some cannot be achieved by the market. But I agree that monetary prices should be let free to change.

    Maybe the stronger reasons to support government involvement in money is the instability argument. Financial (money) markets are, it is argued, inherent unstable, or the equilibrium is unstable. If you "push it away" the system may collapse rather than going back to equilibrium. That's why you need a monetary authority to regulate reserve's requirements and act as lender of last resort, etc. There are, however, theoretical studies that say that central banks are not needed and also empirical research showing those results.

  8. manuelgar February 18, 2011 10:52 AM

    Regarding stability as a positive externality, is it really? I mean, if we consider that price (in this case the price of money) fluctuation is a necessary information for economic calculation, which fluctuations fall within stable fluctuations and wich ones not, what are the tresholds, who determines those tresholds?

  9. manuelgar February 18, 2011 10:15 AM

    I would like to raise the following question: Why should money be considered such a special good different from others that makes it necessary to be centrally managed? Why not consider money as a good that satisfies a need (i.e. liquidity) the same way that bread satisfies hunger?

    If we think that a central planner is unable to succesfully determine the price of bread, then it will be unable to determine the price of money as well.

  10. Diego Quijano February 18, 2011 9:06 AM

    I have been wondering, based on the discussion above….. What is provision of national security?
    For example, when are you "provided" with the service or good of national security? There are two options, either your country is at war or at peace. If it is at war, then a particular person can definitely be excluded from the service….I.e, the army cannot be everywhere all at once, it has to choose where to focus its resources for defense or attack, etc, it has to choose where and when….it cannot be everywhere.

    If the country is at peace, then, is "national security" simply an externality and not really a service or a good, since it is clear that to really "use" the good, you will be face with limited resources and time constraints….

    On another note, I think that the use of the terminology of public good is in the end confusing and doesnt really serve to understand the problem any better. In the end, if there are too many users of a public good you can be excluded…. Better to use the economic vs. non-economic good, and to understand when something becomes an economic or non-economic good. Clean air can be a non-economic good, but in an packed room with no airconditioner…it begins to come under the umbrella of human action….people start doing things to gain access to the good (ie, leave the room, open the window, etc)..

    On another note, I would say that stability in the purchasing power of money is simply a consequence of a large number of people demanding a particular good as a medium of exchange over a long period of time, which allows for people to build expectations that others will keep accepting it in the future…

  11. Nicolas Cachanosky February 17, 2011 10:54 PM

    Thank you MartinL,
    The post touches on two arguments of money as a public good. First that is a public good in itself. But this is not the case if money is actually rival in its "consumption." You can exclude me from using the money you have in your bank account. So money is not non-rival.

    The second one has to do with the argument that a stable money is a public good to the whole community. This argument has, I think, two problems. One, stability is a quality of money, not a good in itself. Thus the example of the chocolate doughnut. If that were the case then doughnut's tastiness should be a public good as well. But second, this only holds if all people have to use the same money, what usually requires a central bank (monopoly). It's like saying that money is a public good because you make it so by having a central bank in the first place. You can find these two explained in the reference I provided of White's book.

    Fiduciary media does not make money public. One of the most quoted case of free markets in banking is the case of Scotland (before Peel's Act) where different private banks issued their own banknotes. Money was a private good provided by private suppliers.

    Gabriel, yes, that sounds correct. This "stability" (or more generally: quality) is more like an externality than a public good. But a public good is a limit case of a positive externality. Eventhough if we see this as an externality, I think it would be in a very broad sense of external effects. If we apply such broad concept of externality then everything that the market provides may result in similar effects, not just money. Should government then become the monopolist provider of any product that has also a positive externality (i.e. education)?
    So, short answer: yes. It could be interpreted as a positive externality, but because a public good is a limit case of positive externalities if all people are required to use the same money then that externality may in fact become a public good… or that's how I understand the argument.

    Thanks both for your comments and thoughts,

  12. Gabriel Zanotti February 17, 2011 9:14 PM

    Nicolás, just a question: In your argumentation, monetary stability seems to be more a positive externality than a public good…. Am I wrong?

  13. MartinL February 17, 2011 12:49 PM

    Excellent article Nicolas.

    so, money will be a public good only when its fiduciary?.
    In a monopoly gold backed system, ( or "convertibilidad 1 dolar=1 peso" ) money loose his public good characteristic?.