ANTHONY M. ENDRES Currency Competition: A Hayekian Perspective on International Monetary Integration Currency internationalization is examined from the vantage point of Friedrich Hayek’s contributions in the 1970s. Compared with received com- mentaries in which only an idealized case for private money is attributed to Hayek, this paper underscores other dimensions of Hayek’s work on money and currency. Hayek’s case for “choice in currency” draws on his theory of competition, anticipates competition between government suppliers of fiat money, accommodates many aspects of international monetary integration, and embodies a distinctive approach to monetary independence, choice of exchange rate regime, and the transnationalization of currency. Hayekian predictions are outlined for future developments in currency competition. JEL codes: B31, F02, F33, F36 Keywords: currency competition, currency internationalization and transnationalization, Hayek, international financial order, monetary independence. IN THIS PAPER, we revisit Friedrich Hayek’s classic work in the 1970s on monetary denationalization, “choice in currency” and currency compe- tition. The international use of currencies has evolved in a manner that no prominent economist predicted during or at the end of the Bretton Woods era (Solomon 1999, Endres 2005). We establish a Hayekian perspective on the present process of inter- national monetary integration. A different process of “currency denationalization” is now underway than envisaged by expositors and critics of Hayek’s (1978a, 1978b) case for denationalization. We find that the essence of a modern process of cur- rency transnationalization is anticipated by Hayek’s monetary work in the 1970s. As well, a Hayekian perspective on recent international financial integration does A longer version of this paper was presented at the Colloquium on Market Institutions and Economic Processes, Department of Economics, New York University, February 2008. I am obliged to Colloquium participants for their comments and to the referee’s helpful remarks. ANTHONY M. ENDRES is an Associate Professor, Department of Economics, University of Auckland, Auckland, New Zealand (E-mail: [email protected]). Received April 2, 2007; and accepted in revised form December 29, 2008. Journal of Money, Credit and Banking, Vol. 41, No. 6 (September 2009) C 2009 The Ohio State University 1252 : MONEY, CREDIT AND BANKING not recommend detailed, planned reform of the international monetary system; it encapsulates many aspects of modern currency markets, explains the emergence of the present international financial architecture, and suggests some possible future developments.1 1. COMPETITION AND CURRENCY The ongoing competition in the international use of national monies is a salient feature of the present international monetary system. By the 1980s, it was largely taken for granted that some national monies were more commonly used than others in financial intermediation in currency markets, international trade, and settlements (Chrystal 1984). A new terminology developed in which national monies were var- iously referred to as investment currencies, intervention, or reserve currencies, and vehicle currencies for cross-border trade and payments (Hartmann 1999). Moreover, free capital mobility, diminishing cross-border information and transaction costs and the associated decline in home investment bias rendered national currencies much less independent and therefore more “competitive” than at the end of the Bretton Woods era (Greenspan 2005). Altogether the present system incorporates two im- portant notions that Hayek defined carefully in the 1970s: competition and currency. Hayek’s contribution on these matters is relevant to understanding salient aspects of the present international financial system that is characterized by competition and substitution between currencies, the emergence of new currencies such as the euro, the consolidation of currencies, and the use of parallel currencies in some regions. First, in the treatment of competition, Hayek (1948, pp. 94, 97) points out that it “is in large measure competition for reputation or goodwill.” Hayekian competition is all about credibility. Thus, the nature of the commodity called “money” is that it offers services to its users who confer a reputation on it consistent with their previ- ous experience. Hayek also indicates that markets are always in a state of “constant experimentation” in which various “improvements” are being offered to consumers of commodities and services (p. 99). Competition is also a discovery process. Always the process of competition is to some extent “a voyage of exploration into the un- known”; often “unforeseen changes ...require adaptation” in the manner in which a commodity or service is valued. Hayek concludes that competition is “a process of the formation of opinion” depending on the availability and dissemination of information (p. 100–01). Hayek preferred to use the verb “to compete,” thereby emphasizing the fact that competition was a serial process involving what he later termed “rivalry” (Hayek 1978c, p. 208). The particular circumstances of time and place are continually discovered; included in the circumstances are the effects of competitive behavior and the actual and potential actions of competitors. His conception of competition 1. Benjamin Klein (1974, p. 444–45) anticipates Hayek and though his discussion of “international monetary arrangements” refers to conditions in the late Bretton Woods Era, that is, as at 1970. ANTHONY M. ENDRES : 1253 emphasizes the following factors: process or activity, reputation and opinion for- mation, knowledge dispersion, and discovery including discovery of the forces of potential competition and market orders resulting from discovery procedures rather than deliberate planning. Second, in the treatment of currency it is rarely if ever acknowledged that Hayek’s general insights on competition were implicit in his work on monetary issues in the 1970s.2 His fundamental proposition is that competition will produce “good money” (Hayek 1978b, p. 209). Money is initially defined as “the generally acceptable medium of exchange” (1978b, p. 160). On further examination, however, Hayek abstracts from any particular geographic domain and proposes that money must be under- stood as a many-dimensional, differentiated phenomenon that may have substitutes along some perceived dimensions. In theory, different kinds of money may exist and can “differ widely in degrees of acceptability (or liquidity, i.e., in the very quality that makes them money), or the groups of people that readily accept them” (1978b, p. 161). Obviously the “ready acceptance” condition for money parallels his discussion in 1946 on competition; for in that treatment, “opinions” of market participants deter- mines what are accepted as goods or services. Of necessity, market opinions are quite changeable. There may be no point therefore in drawing a sharp distinction between “what is money and what is not”; it all depends on the formation of opinion conferring the quality of moneyness in the market for money. Since, in principle, products can be differentiated along various dimensions there need not be only one kind of money. Drawing sharp distinctions between money, near money, and nonmoney does not accord with complex interconnections evident in real life. As a result, for example, “individuals may use different kinds of money to hold (as liquidity reserves), to make contracts for deferred payments, or to keep their accounts in” (p. 161). The term “money” is better used as an adjective rather than a noun, “describing a property which different things could possess to varying degrees” (1978b, pp. 162–63, italics in original). Hayek concludes that a broader, all inclusive term “currency” rather than money is more appropriate because it refers to an exhaustive “continuum in which objects of various degrees of liquidity, or with values that can fluctuate independently of each other, shade into each other in the degree to which they function as money” (1978b, p. 162). The general attributes of “currency” can be re-expressed: they are liquidity services varying in respect of users’ requirements. Competition takes the form of rivalry over reputation between service providers offering various objects that “have currency.” The services rendered would of course vary in terms of the functions demanded by currency users. Currency service providers compete, and both currency users and providers are involved in a discovery process. The expected variability of a currency’s value in a real time, competitive market process is a crucial differentiating feature in the minds of users. The other major 2. Kevin Dowd and David Greenaway (1993, p. 1184) cite Hayek when discussing competition in the context of currency questions but they take the meaning of competition for granted. 1254 : MONEY, CREDIT AND BANKING service provided by currency is that it may satisfy the demand for liquidity before it is used as a medium of exchange. Like Carl Menger ([1871] 1976, p. 262) before him, Hayek accepts the fundamental proposition that no one invents currency in a manner that determines its properties and use for all times and places. Moreover, the liquidity service of currency is not simply inherent in an existing legal tender, fiat money (Hayek 1978b, p. 144). The demand for currency reflects the willingness of individuals to hold it in the light of the credibility of the issuer who must main- tain appropriate