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.