During the Q&A after a talk I gave at the LA Conference last Sunday (video, I believe, to follow), a discussion arose on legal tender laws. This is important to me because I advocated a repeal of legal tender laws as one of the three pillars of financial liberalisation in my recent Guardian Unlimited article. One of the commentators then raised a point on this that I didn't fully get, and the same issue arose last weekend - how important are legal tender laws.
My reason stems from a reading of Hayek's Denationalisation of Money - if legal privilege is associated with one particular currency then people don't have a choice. This inability to opt out means that there's no competitive pressure on the supplier of that currency, and all else equal they'll over inflate. Hayek therefore saw the legal tender laws as crucial: if you get rid of them and allow choice amongst different currencies, even if they're issued by governments, there is some competitive pressure to maintain the value of the currency. But there seems to be three separate stages of legal tender:
- Currency that both buyers and sellers are obligated to use
- Currency that sellers are obligated to accept, but buyers are not obligated to offer
- No obligations regarding currency
What has been pointed out to me is that the UK at the moment (possibly in contrast to the US and the EU) is type 2 legal tender - whilst shopkeepers are obliged to accept sterling if it is offered, they can accept other currencies. I was aware of this - I believe Marks and Spencer are the most famous example of a company that routinely accepts non-sterling currency (in this case Euros) - and I'm sure many shops on the South Coast do likewise. I don't know if the same is true elsewhere in Europe.
So technically the UK can have parallel currencies, and perhaps I've under estimated the amount of currency competition that does exist. Underpinning all of this is the fact that the use of Euros to settle bills is not widespread, and Euros are subject to the same politicised problems as sterling, but from a Hayekian position maybe the repeal of legal tender laws isn't the panacea I thought it was.
Finally, whilst I was aware that the UK had type 2 legal tender laws, my bigger concern was the degree to which "obligation" is fluid. If companies are mandated to use sterling for tax returns, for example, this gives a massive "nudge" in the direction of the nationalised currency. Some people have argued that this will always be the case, but I'm not so sure. Many businesses use dual pricing, so why can't government accept different currency units?
To sum up, I need to give this a bit more thought, and I'm hoping others can jump in. I still feel though that there's a very simpe piece of legislation that would lead to where I want to be - private institutions being legally able to supply their own currency, and we the people having freedom to choose which to use.