We’ve heard many excuses from the Venezuelan state: “private property can not be protected under such a system,” and “schools of economics will close because we won’t need economists to control monetary policy,” and “we tried that in the past,” and “our currency is a national symbol,” and “it destroys jobs!” Many have been the sophisms spread by Venezuelan “intellectuals” and politicians over decades to demonize what should be one of the most natural market processes of a society: monetary freedom, otherwise known as “currency competition.”
The selection of one particular medium of exchange (money) or various media of exchange as a market process, and not as a governmental imposition, is explained in a masterful way by Murray Rothbard in his essay What Has Government Done to Our Money? and by Friedrich von Hayek in his essay Denationalisation of Money, just to mention two outstanding examples. Detractors and criticisms based upon the most ridiculous and selfish fallacies are particularly abundant in Venezuela to justify the intervention of the state through “legal tender” laws and other laws designed to force citizens to use only the money approved by the Venezuelan state.
Why It’s Important
In my personal case, I first heard the concept of monetary freedom while I was studying in a master’s course in 2011. It was the first time I heard names such as Mises, Friedman, Hayek, and Rothbard, and then I became aware of the essence of their work in defense of liberty. It was in that class where Dr. Hugo J. Faría showed us that there is an efficient way to protect the fruit of people’s work that has been overlooked — on purpose — by our intellectuals and “leaders” for decades. The benefits of currency competition are ignored because it would empower individuals while curtailing the power of the state and other state-favored elites.
Of course, in Venezuela at this point in history, denationalizing the money should also be accompanied by an effective and profound institutional reform focused on the protection of natural rights, the empowerment of citizens — and not of government, and the establishment of a free market economy.
How It Works
In the simplest form of the system, the US dollar, the euro, and the Venezuelan bolivar — for example — could coexist within the country, allowing people to have options to better protect their savings and negotiate with their employers the currency in which they would like to receive their salaries. The scheme can even embrace currencies issued by private organizations as well. In other words, the local bolivar would have to compete against other counterparts for the preference of all Venezuelans. It would eventually become clear that just the most useful money would be accepted and exchanged while the others would be displaced.
Although I do not believe in central banks — because they represent a terrible source of moral hazard for the economies — in a scenario of free monetary competition the political cost of eliminating the central bank at once or by decree could be avoided because currency competition would induce the central bank to behave in a more ethical way. If it indiscriminately increased the money supply — for example — the local bolivar would lose its purchasing power and people would easily migrate to other currencies.
The implementation of its simplest form necessarily goes through the elimination of the legal tender in our constitution. Panama is a clear example of a nation which, from its constitution on, does not force people to use a specific currency. There, just for practical and historical reasons, the US dollar is used as a primary medium of exchange but not because it is legally mandated. Not having a central bank and legal tender has resulted in an average annual inflation rate of around 3% in Panama over the last century.
It is not necessary to be an expert in economics to understand the evil results caused by the fractional reserve scheme, enabled by governments and central banks. But, providing citizens with options to better protect the fruit of their work is one of the most important policies that should be carried out nowadays in Venezuela, a country with the highest annual inflation rate on the planet, according to The Troubled Currencies Project led by professor Steve Hanke. Venezuela also now has the lowest level of economic freedom in the world, according to the Economic Freedom of the World report of the Fraser Institute, and where 82% of the population is in poverty, of which 50% is in critical poverty, according to a recent survey conducted by three renowned Venezuelan universities (Universidad Central de Venezuela, Universidad Simón Bolívar, and Universidad Católica Andrés Bello).
“People will not understand the model” is another typical excuse political “leaders” use to push the idea that monetary freedom’s implementation is not possible. Our experience at Econintech conferences, however, is that people do understand it and, moreover, would be willing to accept it.
Venezuela is Desperate for Reform
In July 2017, Dr. Rafael Acevedo and I were truly honored by the Mises Institute when we were allowed to present the reality of the Venezuelan crisis and its historical causes at the 2017 Mises University. To us, it was a very rewarding experience for which we will always be thankful, but we could not imagine how the crisis would be explained now: just some months later, the inflation, scarcity, insecurity, and corruption levels are even higher than those we showed last July. The cause, as imagined, is always the same: there is no political will to change, from its roots, the central planning and mercantilist model imposed since 1959 and exacerbated since 1998, just — perhaps — to relax it.
I always tell my students to think about the following fundamental questions: Why is a monetary system with so evident benefits for the citizens of our country always demonized by intellectuals and politicians? Why is it surrounded by ridiculous technical jargon to make it look complicated when barely mentioned? Why is monetary freedom purposely confused with not having monetary exchange controls? Could it be possible that some elites are profiting from preventing common people from enjoying the benefits of monetary freedom?
For answers to these questions, I direct the students to Dr. Faría’s papers: