August 26, 2014 Reading Time: 4 minutes


Despite the approval and respect central banks receive around the world, it is questionable that even the best of them managed to outperform previous monetary institutions (see, for instance, here). It is not uncommon to see free market advocates to call for a return to the gold standard. The intention is no other than a return to a market with sound money that would offer more stability than fiat currencies around the world. There are is an important shortcoming for this to occur. Gold is not money anymore (it is not a common medium of exchange, even if it’s mean to store value), and therefore the benefits of plugging-in to a gold standard regime are not there anymore. The point of the gold standard is not to have national currencies, but to have an international currency. This, however, does not mean that reforms towards a more free market regime are not possible.

The fact that is very unlikely that major central banks (The Federal Reserve, The Bank of England, the European Central Bank, etc.) would cease operations in any foreseeable future does not eliminate domestic reforms in emerging countries with central banks that have, to put it mildly, a poor track record. Take, for instance, the case of Argentina. Since its foundation in 1935, the yearly equivalent inflation rate between 1935 and 2014 equals 52%. No wonder that Argentina and other countries with a poor monetary performance have difficulties to grow and have such a dependency of foreign savings. Countries like Argentina don’t need a central bank with better management, they need a reform of their monetary institutions. Using the case of Argentina, with Adrian Ravier we developed a proposal of a monetary reform. The principles can easily be extended to other countries.

An important feature of the gold standard is its separation between outside money (gold) and inside money (convertible banknotes.) While gold performs the role of the international means of exchange (and unit of account, meaning that prices are nominated in certain units of gold, like ounces), banks located in different countries issue banknotes convertible into gold that are actually used for everyday exchange. An emerging country (Argentina or otherwise) does not have the power to change what currency is being used internationally, but it does have the power to plug into whatever currency is being used internationally.

Therefore, even if a country cannot plug-in into the gold standard network, it can plug-in into the USD (or EUR, etc.) currency that plays a similar role to the one gold played during gold standard. There are two ways that this can be done: (1) force the central bank to issue convertible banknotes into USD (or other international currency.) (2) shut-down the central bank and allow banks to issue their own private convertible banknotes. To shut-down the central bank has two benefits over convertibility of central bank notes. First, it avoids the easy temptations politicians see in declaring inconvertibility. Second, it allows commercial banks (namely, the market) to choose which currency to have their banknotes converted. This brings flexibility and competition to the money market. Take the case of Argentina again. Residents save in dollars, durable goods like houses are prices in dollars (even if the exchange is done in the equivalent in pesos), etc. It is likely that a reform like this one would find the country using the USD (as its doing now in many markets.) But nothing stops the market to move to another currency that might bring better benefits given, for instance, its international trade partners. Maybe, to plug into the EUR network is better than doing so to the USD network if more trade is done with Europe. Other possibilities emerge, like banks offering convertible banknotes in more than one currency. This flexibility to move away from worst to better currencies is likely to be absent if a central banks with monopoly of issuance remains in operation. The central bank should issue banknotes convertible into different currencies. If so, why not let other commercial banks do the same? And if so, why keep the central bank if it’s not issuing inside money (the national fiat currency) anymore?

This reform can be thought as flexible dollarization with free banking. By flexible dollarization it is meant the country “dollarizes” its economy but does not tie itself to such currency. Other way to describe this is that the country performs a unilateral dollarization, rather than a bilateral agreement with the central bank of another country. And the “free banking” aspect is to allow commercial banks to compete with each other on convertible banknotes (note that, for instance, under this scheme, seignorage benefits fall into the emerging country, not into the US).

Is issuing private banknotes a strange thing? Not at all. Not only was a common thing in history, previous to the emergence of central banks due to fiscal imbalances and wars that required funding to the government, is still a practice in places like Ireland, Scotland, and Hong Kong (see this essay by Thomas Hogan.)

A more detailed discussion (and rejoinders to critics to this type of proposal) can be found in our paper. But there are two other short points I want to make. First, even if the USD or any other international currency has a worst performance than the gold standard did, countries with weak monetary institutions can still reach a second best when what they consider the first best option is not feasible. Second, even though most criticisms of the gold standard are usually misplaced or based on misinterpretations, a reform like this one keeps the benefits of it while doing away with the focus of concern of most of its critics.

Nicolás Cachanosky

Dr. Cachanosky is Associate Professor of Economics and Director of the Center for Free Enterprise at The University of Texas at El Paso Woody L. Hunt College of Business. He is also Fellow of the UCEMA Friedman-Hayek Center for the Study of a Free Society. He served as President of the Association of Private Enterprise Education (APEE, 2021-2022) and in the Board of Directors at the Mont Pelerin Society (MPS, 2018-2022).

He earned a Licentiate in Economics from the Pontificia Universidad Católica Argentina, a M.A. in Economics and Political Sciences from the Escuela Superior de Economía y Administración de Empresas (ESEADE), and his Ph.D. in Economics from Suffolk University, Boston, MA.

Dr. Cachanosky is author of Reflexiones Sobre la Economía Argentina (Instituto Acton Argentina, 2017), Monetary Equilibrium and Nominal Income Targeting (Routledge, 2019), and co-author of Austrian Capital Theory: A Modern Survey of the Essentials (Cambridge University Press, 2019), Capital and Finance: Theory and History (Routledge, 2020), and Dolarización: Una Solución para la Argentina (Editorial Claridad, 2022).

Dr. Cachanosky’s research has been published in outlets such as Journal of Economic Behavior & Organization, Public Choice, Journal of Institutional Economics, Quarterly Review of Economics and Finance, and Journal of the History of Economic Thought among other outlets.

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