Last week Mark Carney gave a speech to the Canadian Auto Workers union; the Bank of Canada has posted Carney's speech on their website. There's a line that I'd like to address:
We must address, once and for all, the unfairness of a system that privatises gains and socialises losses. By restoring capitalism to the capitalists, discipline in the system will increase and, with time, systemic risks will be reduced.
Instead of bailouts, Mark Carney suggests "bail-ins." All I hear is more of the same. If Mark Carney is serious about restoring capitalism to the capitalists, then he needs to announce his resignation and advise Finance Minister Jim Flaherty to dissolve the Bank of Canada.
Privatizing gains and socializing losses is not something that happens in a free market. Prior to the bailouts of '08 and '09, it's not something that happened on a regular basis. Yet bailouts and the notion that some firms are "too-big-to-fail" are prevalent in mainstream circles. But without the state's monopoly on money, the idea that a private firm's losses can be passed onto taxpayers is ludicrous. Therefore, the first step toward "restoring capitalism to the capitalists" is returning the production of money to the market.
The only way to determine whether the production of something is in society's best interest is to show that the resources involved have greater value when used to produce a instead of b or c. The only way to convey this information is by the profit-and-loss structure of the market economy. There are billions of individuals on this planet, each with his or her own unique preferences that can't be objectively measured. Yet the emergence of the price system is an objective expression that allows for coordination among individuals and indicates the costs of each action. The concepts of profit-and-loss apply equally to the production of money.
Competition among entrepreneurs would immediately render paper or 'fiat' money as impractical. While it's presumable that paper bills would still float around and be used as money, they would merely act as receipts for the commodity that is accepted as money. Historically, gold and silver have emerged as money but any commodity that functions as a useful medium of exchange can be used. The acceptance of what is and what isn't money is ultimately determined by voluntary exchange among individuals and not by legal tender laws. Without any legal tender laws, private mints and voluntary accreditation agencies (to protect against fraud, and etc.) would arise to serve consumers interests.
Like the production of all other goods, the private production of money would be subject to profit-and-loss. If the demand for money increased, the value of the money would rise. Mining companies would increase their production to capture the profit, but as more money floods the market, its price would decline and so would any gains. Inputs for mining would rise. In this way, gold and silver minting (assuming these metals emerge as money) are subject to market disciplines.
The profit-and-loss test applies to the production of money certificates as well. Money certificates act as "receipts" of ownership to money issued by banks. For obvious reasons, most people wouldn't like walking around with silver coins in their wallet or gold bullion in their purses. Banks that produce and maintain checking accounts would charge fees for this service. If demand for these accounts increased, banks would expand their services for profit. As the supply increased, the price of these checking accounts would fall. But as demand increases, the resources required for management would increase as well, causing the price to rise. Consequently, profit would dissipate and an optimal point would be reached.
Profit-and-loss also works in the credit markets. Banks borrow from savers and lend to investors. They pool the savings, check the creditworthiness of investors, bear the risk of defaults and if consumers find these services valuable - they accept lower interest rates for lending to banks than investors would be willing to pay banks to borrow. Banks would provide financial intermediation services if the revenues earned from the interest rate differential are large enough to cover the costs of producing the services. If demand for these services increased, banks would increase the production of them. Their increased demand to borrow from savers and supply to investors would reduce the interest-rate differential but the increased demand for the resources would raise their prices. Profit would wean and an optimal point would be reached.
The production of money is no different from other goods and services in the economy. If Mark Carney is serious about "reducing systematic risks" and "restoring capitalism to the capitalists", then money needs to be privatized. For the only way society's best interests can be met is through the profit-and-loss test. As Jeffrey M. Herbener* brilliantly sums up,
No one can describe today the configuration of commodity money and money certificates that entrepreneurs would bring about if permitted to operate private enterprises in their production any more than one could have predicted in 1900 the development of the 21st-century automobile industry or predicted in 1950 the 21st-century consumer-electronics industry. What we do know is that their production would be regulated by profit and loss and therefore would result in the satisfaction of people's preferences. The monetary inflation and credit expansion of our elastic currency system would be eliminated and with it the booms and busts that have plagued our history.
*Jeffrey's testimony was my guideline in writing this post. While I've done my best to put the topic in my own words, in some areas Jeffrey's clear prose left little room for alteration.