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Currency Competition and Consumer-Driven Unification
By Lawrence H. White
Introduction
What is meant by "currency competition?" In Northern Ireland today, most of the paper currency is privately issued. The banknote currency issued by the Ulster Bank competes against the currencies of three other commercial banks (the Northern Bank, the Bank of Ireland, and the First Trust Bank) and against Bank of England notes. All five brands of notes are denominated in pounds sterling. A similar system operates in Scotland. Northern Ireland and Scotland thus have "currency competition" in the same sense that most developed countries have checking-account competition. (England and Wales, by contrast, have "currency unification" in the sense that the Bank of England holds an exclusive legal monopoly of note-issue there.) Although not all economists have recognized it, the same arguments that economists use to defend competition among providers of checking accounts and traveler's checks apply equally to competition among providers of banknotes. As we all know, "when banks compete, you win!" (the phrase is a registered service mark of LendingTree.com®). Consumers benefit more from competitive than from monopolistic markets in all types of spendable bank liabilities: not only checking accounts and traveler's checks but also circulating currency.
The usual meaning of "currency competition" is of course something slightly different: rivalry between monetary standards (or "units of account"), such as the pound sterling versus the euro, the peso versus the dollar. The usual sense of "currency unification" is convergence to a single monetary standard, such as the replacement of the pound sterling by the euro, or of the peso by the dollar. The benefits of this type of currency competition are also underappreciated. Economists normally take it for granted that the ultimate goal of economic policy is to satisfy the preferences of market participants, and normally recognize that consumers benefit more from competition than from monopoly. Yet some object to allowing competition among monetary standards within a single country. They do not seem to recognize that when central banks compete, you win! (I am looking into registering this phrase as my own service mark.) I will consider their objections below.
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