Choice in currency is being recognized as a fundamental right around the world. It is a human right on a par with the right to choose an employer and the right to choose a place to live because money, salary and geographical location are essential for (economic) survival. Today there are three concrete initiatives on three different continents to establish gold and silver coins as complements to existing national currencies:
1. Utah was the first State to make gold and silver coins legal tender alongside the U.S. dollar on March 25th, 2011. Utah now needs to work out how to overcome practical hurdles and start circulating gold and silver coins.
2. The State of Kelantan in the Federation of Malaysia was the first to mint gold and silver coins for the purpose of circulation on August 12th, 2010. Unlike Utah, Kelantan did not make gold and silver coins legal tender, but the Kelantan government sells 8,000 gold dinars and 30,000 silver dirhams to its citizens every month (see Pictures 1-2), and thousands of local businesses accept these coins as payment (see Picture 3).
3. In Switzerland, parliamentary initiative 11.407 was deposited on March 9th, 2011 to allow private entities to issue a “Gold Franc” as complementary currency alongside the Swiss Franc. While the Swiss initiative has not been approved yet, and while Gold Franc coins do not circulate yet, it is unique because it is at the federal level, because Switzerland is a major financial center, and because it involves a popular referendum which would raise awareness about choice in currency among all Swiss citizens and beyond.
Of these three initiatives, the Swiss one faces the stiffest hurdles and might take at least 3 years to take effect. The Kelantan initiative is singular in being the most advanced in concrete terms, and it demonstrates the power of a “grass-roots” movement and the widespread acceptance of gold and silver coins once they are made available. And Utah sent the message that this is a political question worthy of serious consideration at the highest levels of government.
All of these developments beg the question: What is the view of mainstream economic theory on choice in currency? The most celebrated development of the past few decades in Monetary Economics is the so-called “search model” of Kiyotaki and Wright (1989). It was published in the Journal of Political Economy, one of the oldest and most prestigious academic peer-reviewed research journals in the field. This model was so successful that it spawned hundreds of follow-up articles, most of which were published in similar-level journals or in more specialized journals. Several tenured academics at top-ranked Economics Departments in the U.S. have built their careers on “search models”.
Search models are very simple. Agent A wants to sell a pair of shoes to buy a chair. She is randomly matched with other agents who have different goods to sell, and she is “searching” for the agent willing to sell a chair – call him Agent B. The difficulty is that Agent B may not need a new pair of shoes. This is the well-known problem of “double coincidence of wants”. In the course of her random meetings with other agents, Agent A will first exchange her shoes against another good which she does not want to consume, but which she expects Agent B will accept in exchange for his chair. This good is called “money”. The search model of Kiyotaki and Wright (1989) explains how money arises endogenously in an economy as the good which everybody expect everybody else will accept as payment.
In a University of Zurich Economics working paper entitled “On the Coexistence of Commodity Money with Fiat Money”, we reviewed the literature on search models from the point of view of choice in currency (see Appendix). The four main results are summarized below.
1) If commodity money coexists in a country with fiat money, will one of them eventually oust the other, or can they both survive in the long run? The answer is that they can coexist. It is unlikely that precious-metal coins will ever become as widespread as banknotes, due to higher storage costs, but neither type of money will drive out the other, and they can coexist peacefully in equilibrium ad infinitum.
2) Is it in the best interest of society (welfare-enhancing) to monetize gold and/or silver? Yes: the monetization of precious-metal coins is Pareto-improving, meaning that it does not make any agent worse off, and it makes some agents better off.
3) How to solve the so-called “big problem of small change”, meaning that the cost of minting gold coins in small denominations is prohibitively expensive? This can be solved by advances in financial and electronic technology. For example, a coin depository can accept physical gold and silver coins, and issue debit and/or credit cards against them to enable the purchase of small-ticket items.
4) Will the monetization of gold and silver restrict the margin of maneuver for the Central Bank to conduct monetary policy as it sees fit? No, as long as the Central Bank abides by its mandate to maintain price stability. Only a Central Bank desirous of emulating the monetary policy of Zimbabwe circa 2008 would see its freedom of action curtailed by the existence of gold and silver coins.
The conclusion of this review is that mainstream Economics is strongly supportive of choice in currency. The same could not be said of a straight return to the Gold Standard, which does have some proponents, but is generally frowned upon in mainstream academic circles. Thus, the current scientific consensus is that the reintroduction of gold and silver coins is feasible, desirable and largely uncontroversial, as long as it is done alongside national fiat currency.