Currency Competition: A Hayekian Perspective on International Monetary Integration
Endres, Anthony M., Journal of Money, Credit & Banking
IN THIS PAPER, we revisit Friedrich Hayek's classic work in the 1970s on monetary denationalization, "choice in currency" and currency competition. 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 international 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 currency transnationalization is anticipated by Hayek's monetary work in the 1970s. As well, a Hayekian perspective on recent international financial integration does 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 variously 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 important 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 previous 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 unknown"; 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 emphasizes the following factors: process or activity, reputation and opinion formation, knowledge dispersion, and discovery including discovery of the forces of potential competition and market orders resulting from discovery procedures rather than deliberate planning. …