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Currency Competition: The British Debate
By Samuel Brittan
Introduction
It would probably be best for me to concentrate on the recent British debate. Not only do I know it best, but I do not think that the earlier debates on free banking in previous centuries in various countries have any very direct relevance. This is because, until some time in the 20th century, it was generally assumed that money was based on an intrinsically valuable commodity, usually gold or silver, or some combination.
In earlier times freely floating paper currencies, not officially convertible into gold or silver anything else, were regarded as emergency or temporary expedients. An example was the U.S. dollar after the Civil War. During episodes of free banking the privately issued currencies had an explicit or implicit bullion value, and their success was measured by how low the discounts on them were, relative to their stated metal value.
The origin of the more recent British debate lies with some proposals made by the veteran Austro-British economist Friedrich Hayek. In a prewar work, Monetary Nationalism and International Stability (1937), he had come out in favor of a fixed international standard, which he thought would probably be gold. During the Second World War he published in the Economic Journal for June 1943 a proposal for "A Commodity Reserve Currency" that would be convertible into a basketful of commodities on a predetermined basis, following on the lines of similar proposals earlier put forward by Benjamin Graham and Frank D. Graham. Such ideas faded from public view in the post-World War II period, as the Bretton Woods system developed on the basis of national currencies linked by fixed but adjustable exchange rates.
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