Paul Simon once wrote a song entitled 50 Ways To Leave Your Lover. I imagine there are at least 50 ways in which the Bank of Canada could be abolished. Let’s start with the most implausible method:
1. Monetary nihilism: The Bank of Canada (BoC) could suddenly announce it was closing up shop, washing its hands of any role in the monetary system. It could tell Canadians that they are free to construct any system they like. Counterfeiting would be legalized.
The legalization of counterfeiting would almost immediately reduce the value of Canadian currency and Canadian bonds to roughly zero. This option would be extremely unpopular and obviously will not happen. So let’s consider some more measured approaches to getting the Canadian government out of the monetary system.
2. Auction the BoC: The BoC could be auctioned to the highest bidder. Counterfeiting would remain illegal. Banking would be deregulated so that competing entities could offer competing currencies.
I’m not quite certain what would happen in that case, but here’s my best guess. The BoC would be bought by a consortium of large Canadian banks. Perhaps there would be a board that determined the BoC’s monetary policy, and each commercial bank in the consortium could have one voting member. But lots of other options are possible. Perhaps the BoC would be bought by a large US firm or a large Chinese firm. I just don’t know.
Due to network effects, I would expect that the Canadian dollar would remain dominant in Canada. The biggest question mark is inflation. Many studies have been done estimating the profit-maximizing rate of inflation (aka seignorage), and all the estimates are extremely high figures. (I don’t recall the exact estimates, but it’s on the order of 100%/year, not merely high in the sense that our current 8% inflation is high.)
On the other hand, with complete laissez-faire perhaps the profit-maximizing rate of inflation would be lower for the new BoC than for monopolistic central banks. Nonetheless, I’m almost certain it would be a relatively high figure. Network effects in currency are extremely powerful, and it’s hard to competing currencies to gain much traction until the dominant currency is very badly mismanaged–like Zimbabwe or Venezuela bad. Perhaps the following thought experiment would make it easier to see my point:
Consider a central bank deciding between two options:
A. Increase the monetary base at 4%/year.
B. Increase the monetary base at 20%/year.
Option B will provide more seignorage unless it reduces base demand by more than 80% as a share of GDP. That would be a huge reduction in base demand. Is the amount of money you typically carry in your wallet highly sensitive to the inflation rate? Probably not. Studies show that people carry less cash as a share of GDP at higher inflation rates, but not dramatically less. That’s why the profit maximizing inflation rate is so high. (This is true for many products—the revenue maximizing tax rate for cigarettes is also very high.)
Of course the Canadian government could auction off the BoC with a legal restriction on how fast the monetary base could be increased. But if the government has such specific macro goals, then why auction the BoC in the first place?
3. A fresh start: Let’s say you buy my “network effects” argument, and wish to make a fresh start in Canada with a level playing field. You want to abolish the Canadian dollar and give each alternative system an equal chance of success. In that case, Canadian dollars could all be redeemed for assets of roughly equal value. This is how individual European countries got rid of their national currencies. But instead of being paid off with a new money (euros), Canadians could be paid off with some existing asset, such as silver bullion, Bitcoin, or equities in a global stock index fund.
In that case, I’d expect the Canadian public to spontaneously adopt the US dollar. I cannot be certain—perhaps they’d adopt the gold standard—I just think the US dollar is the most likely winner in an open contest for the Canadian public to pick a new monetary regime. If this transition occurred in Denmark or Sweden, their public would probably adopt the euro.
This is just 3 of the 50 ways that Canada could get rid of the BoC. I have no doubt that there are at least 47 others. And note that these are not three outcomes that might occur spontaneously. The Canadian government would have to decide how it plans to fold up shop. I get annoyed with libertarians who seem to think it’s possible to just wave a magic wand and move from a government fiat monopoly to a laissez-faire regime. Hard decisions about what to do with the existing monetary base and the existing stock of Can$ denominated debt are unavoidable.
Some commenters tell me I’m wrong because free banking regimes have worked. They don’t seem to read my posts very carefully, as multiple occasions I’ve said I favor 100% free banking. Some commenters advocate a national gold standard, and cite evidence that an international gold standard once worked. They seem to have no idea that the success of an international gold standard has no bearing on the question of whether a national gold standard would work. (Hint, it would not work very well.) Others seem to think that a gold standard with an official price of gold is laissez-faire. It isn’t, under laissez-faire the market would decide whether it preferred to use gold as money.
The fact that commenters seem unable or unwilling to describe in detail how the government will extricate itself from the existing monetary system makes me think they underestimate the complexity of what they are asking for. Removing the government from money is far more complex than removing the government from something like passenger rail. Amtrak could simply be auctioned off—dozens of countries have done something similar. It’s far less clear as to what it would mean to remove the government from money. The US has more than $20 trillion in debt, which involves promises to pay a very specific type of money as far as 30 years out in the future. It’s often said that, “You may not be interested in war, but war is interested in you.” The same is true of the US dollar.
Some might argue that this post shows three ways that the Canadians could achieve monetary laissez-faire. I see it as showing one implausible option, and two others that are either fairly similar to what they have now, or even worse.
PS. You might think that I am too pessimistic about outcomes that move us away from fiat currencies. And yet most of the libertarians that advise real world governments–even those who view me as insufficiently libertarian—recommend reforms linked to a fiat currency. This might recommend that El Salvador dollarize or that Argentina adopt a currency board. None of these options get us out from under the yoke of a government fiat money central bank.
READER COMMENTS
Andrew_FL
Aug 23 2022 at 4:03pm
The real disagreement here is not over practicality or consequences. The real disagreement here is between utilitarianism (“we should not get the government out of money because the consequences would be bad”) and non-utilitarianism (“the government, a priori, should not be involved in money”)
robc
Aug 23 2022 at 6:07pm
This.
Scott has a blind spot to deontology.
The number of his recent comments saying “I don’t understand what you are saying” makes that clear.
Scott Sumner
Aug 23 2022 at 6:28pm
Deontology will provide the specifics on the best way to unwind the BoC? Good luck with that!
When people aren’t able to address specific points in a post, and instead focus on completely unrelated issues like “utilitarianism”, I’ll draw the appropriate inference.
robc
Aug 23 2022 at 7:33pm
No, deontology says Canada should have a free market in banking. Of your options, I think 3 is the best, but 2 works too. Deontology doesnt care that much about how to unwind other than counterfeiting is fraud so not sure why 1 would be considered at all.
Scott Sumner
Aug 24 2022 at 3:16pm
So if Ohio and Ontario both use the US dollar, Canada has a free market and Ohio has monetary totalitarianism?
robc
Aug 24 2022 at 4:40pm
If Canadians voluntarily choose to use the US dollar but have the option to issue other currencies, while Ohio banks would get shut down if they issued an alternative currency, then yes.
Scott Sumner
Aug 25 2022 at 12:46pm
So “totalitarianism” doesn’t have bad consequences? OK, then it’s a trivial issue, right? The governmental abuse equivalent of jaywalking?
Eric Charles
Aug 24 2022 at 9:45am
I think it’s too much to expect non experts in these forums to have a detailed plan to unwind. You, Selgin, White and perhaps another handful of other libertarians are in a unique position knowing how difficult it would be considering your knowledge of monetary theory and institutional mechanisms.
Among libertarians who believe government should have a role in money but favor something like the gold standard, I can’t image there are many that exist and many thoroughly knowledgeable except perhaps Selgin and White.
Among libertarians who don’t think government should have a role, they don’t care about transitional issues as much since it’s unlikely to occur anytime soon and unwinding the current regime will be no more difficult than unwinding other massive statist institutions deemed illegitimate. If you’re an anarchist libertarian, this means everything and that could take a very LONG time.
I’m sure you’re not a fan of Rand or Rothard but maybe someone like Nozick. A somewhat recent book that you might enjoy on libertarian deontology is “The Problem of Political Authority: An Examination of the Right to Coerce and Duty to Obey” by Michael Huemer (philosophy professor and University of Colorado). Join the anarcho-capitalist camp, why don’t ya? 😉
Scott Sumner
Aug 24 2022 at 3:20pm
I’ve yet to see a persuasive argument for deontology—especially in the field of economic policymaking. The arguments I have seen are really weak, offering me no reason at all to accept their claims.
Scott Sumner
Aug 23 2022 at 6:32pm
“The number of his recent comments saying “I don’t understand what you are saying” makes that clear.”
If you go back and look at when I wrote that, you’ll see I was responding to comments that were mostly gibberish. People need to work harder at clearly explaining their views.
robc
Aug 23 2022 at 7:34pm
Some were gibberish, but I understood at least half of them. One was mine, so that gave me a head start.
Eric Charles
Aug 24 2022 at 4:42pm
I would think you would have views on rights that conflict with your views as an economist.
Take speech, drugs, abortion, and capital punishment for example. Applying economic reasoning vs deontological reasoning will almost certainly lead to different conclusions (not to mention deontologists disagree on these).
How do you evaluate such issues? I think it’s plausible that some “hate speech” restrictions would be supported as an economist. I think Steven Landsburg has argued abortion should be permitted because it lowers crime overall so that would allow for 3rd trimester terminations that many consider murder. Drug prohibition has worked in many countries (or it may work in some better than others based on the culture and compliance tendencies of the population). Torture may deter crime. Etc.
Pierre Lemieux
Aug 25 2022 at 11:30am
Eric: You write:
The distinction would be unimpeachable if we assumed that economic reasoning is necessarily utilitarian. That it is not so is illustrated by the theories of James Buchanan, Friedrich Hayek, or even Anthony de Jasay. That these Buchanan’s and Hayek’s theorists are explicitly consistent with Kant’s suggests that economic reasoning has foundations that are more deontological that utilitarian. (Could one argue that economic reasoning is necessarily consequentialist, although not utilitarian? But couldn’t we say the same about deontology?)
Eric Charles
Aug 25 2022 at 1:33pm
Interesting considering De Jasay was an anarchist while the other two were minarchists so they disagreed on something fundamentally about the nature/validity of government.
robc
Aug 23 2022 at 6:09pm
Question: In option 3, Canada adopting the US dollar makes total sense.
But if the US did it instead, what do you think would be the default adoption? Is it possible there isn’t an obvious choice and it would take years to settle out?
Scott Sumner
Aug 23 2022 at 6:30pm
I’d expect the big commercial banks to work together to recreate some sort of “US dollar”. It would probably not be gold backed. But I don’t know exactly what it would look like.
robc
Aug 23 2022 at 6:10pm
Or they* don’t give a damn.
*myself included
Scott Sumner
Aug 23 2022 at 6:59pm
Andrew, You said:
“The real disagreement here is between utilitarianism (“we should not get the government out of money because the consequences would be bad”) and non-utilitarianism (“the government, a priori, should not be involved in money”)”
So the universe has something akin to natural laws, and one of those natural laws is that the government should not be involved in money, regardless of the consequences? Do you have any theory of where these natural laws come from?
I could sort of understand someone thinking that government coercion violates natural laws, but suppose the government’s involvement were limited to offering one currency, and having no barriers at all to competing currencies? What specific natural law would that violate?
I ask that because I’m opposed to all government coercion in money, and the tone of your comments suggests you don’t agree with my views. But exactly which of my views violate deontological principles?
Are there natural laws hard-wired into the universe that demand no government involvement in money at all, even if the consequences were hugely negative?
And how would a person ascertain these laws regarding government and money?
Philo
Aug 23 2022 at 9:39pm
You should oppose not just libertarians, but anyone who thinks it’s possible to just wave a magic wand and move from a government fiat monopoly to a laissez-faire regime. But there’s no need to get annoyed; lots of people labor under lots of misconceptions—that’s how it is and always will be.
Arqiduka
Aug 24 2022 at 8:24am
Yes, so between the network effect and externalities, the value of a country with a well-managed currency is far higher than the sum of the inflation taxa nd normal taxes drawn from a country under a 100pc inflation rate, but private actors can’t capture this since they cant tax.
But what is the optimal currency area? Does it just so happen to coincide with the borders of Canada as it does with those of the Czech republic?
Maybe allowing competition (enforce contracts in whichever currency denominated, draw VAT in whichever currency the sale is made, etc) and devolving the BoC to the provinces would set a fair start. Could end up with the USD again though if the optimal areas are just half a dozen in the whole world.
Scott Sumner
Aug 24 2022 at 3:23pm
I think Canadians should be allowed to transact in foreign currencies. I’d even allow them to pay taxes in foreign currencies that were convertible.
Pierre Lemieux
Aug 25 2022 at 11:52am
Scott (and Arkiduka): At least when I got interested in this topic about two decades ago, nothing forbade Canadians to transact in foreign currencies nor in gold for that matter. In fact, Canadians were much freer than Americans in that area–as they had always been in financial and banking matters. Many Canadian multinational corporations used the U.S. dollar as a unit of account; at least one, Alcan (based in Montreal), published its financial statements in U.S. dollars. Some 12% of the outstanding commercial paper issued by Canadian corporations was in USD. About 10% of outstanding deposits in, and business loans made by, Canadian chartered banks were denominated in foreign currencies (mainly the U.S. dollar). The U.S. dollar was used as a medium of exchange and store of value by many Canadians, including individuals: opening a USD bank account at your local branch was as easy as opening one in CAD. The main reason most Canadians did not hold USD checking accounts was simply because of what money is: it is what is generally accepted as a means of payment, and your grocer would have been puzzled if you had paid him with a check in US dollars.
David Henderson
Aug 25 2022 at 12:11pm
Pierre, I think you meant “cheque.” A little Canadian humor, or humour.
Pierre Lemieux
Aug 25 2022 at 2:45pm
Davis: Yes, I meant “chèque,” like in “chèques and balances”!
Pierre Lemieux
Aug 25 2022 at 3:58pm
Sorry, “David”!
Scott Sumner
Aug 25 2022 at 12:49pm
Yes, and I believe Americans are allowed to transact in Canadian dollars. But I do believe that taxes must be paid in the local currency, right?
Pierre Lemieux
Aug 25 2022 at 3:01pm
Scott: Leviathan doesn’t dislike money. In the US, federal taxpayers are “advised” to pay in dollars, but they will not refuse foreign currencies (see https://www.irs.gov/irm/part5/irm_05-021-004), at least if it is convertible, but perhaps they don’t go out of their way to give you a good rate! I think it was the same in Canada, although I never checked federal law. State/provincial laws or practices may be different. GO TO: first sentence above!
Scott Sumner
Aug 26 2022 at 10:37am
Thanks Pierre, The link you provide says:
This IRM provides international revenue officers information on different methods of payment available to international taxpayers that reside overseas, especially for those taxpayers who do not have a U.S. bank account.”
Can domestic residents also pay in foreign currency?
Pierre Lemieux
Aug 25 2022 at 3:03pm
Sorry, “David”!
Kurt Schuler
Aug 25 2022 at 11:07pm
Option 1 would create unnecessary and easily avoidable disruption in the Canadian economy, hurting tax revenues, so it hard to see why the Canadian government would choose it. However, were the government simply to repudiate Bank of Canada notes, it is unlikely that their value would drop to zero. Banks would have an incentive to issue notes, as they did in Canada until 1945, and to gain market share by exchanging Bank of Canada notes for their own notes, which might continue the Canadian dollar unit of account or be denominated in U.S. dollars. A less likely possibility is that Bank of Canada notes, having a frozen supply, would continue to circulate the way that old Iraqi “Swiss dinar” notes did in Kurdistan and old Congolese notes continued to circulate in Katanga after being repudiated by their central governments. Iraq and the Congo (Kinshasa) issued new notes that quickly depreciated against the old ones, which had a frozen supply. Canadian notes have a lot of security features, so even not prosecuting counterfeits doesn’t mean it would be easy to make them.
Scott Sumner
Aug 26 2022 at 10:35am
“Canadian notes have a lot of security features, so even not prosecuting counterfeits doesn’t mean it would be easy to make them.”
I think you missed the point. Obviously there’d be no prosecution, as it would be completely legal. So what if the counterfeits are poor quality copies? Why would anyone care about the quality of the reproductions?
But I agree that option 1 would not happen, so it’s a moot point.
Matthias
Sep 4 2022 at 10:06am
Between the first and second approach, they could also just close shop, but leave counterfeiting illegal.
I don’t really understand why your first approach would be to make counterfeiting legal?
Just close shop, and leave existing Canadian dollars etc in circulation.
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