SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

Abstract: The paper explores the question of whether markets under laissez-faire will be able to insulate an economy from bad government money. Some recent proposals favour freezing the monetary base, by abandoning central bank operations. This requires active participation by the monetary authorities, however. On the other hand, the network externality makes a switch from central-bank currency difficult. The paper investigates how the dilemma could be overcome and the monetary base be spontaneously frozen, by a process where commercial banks issue liabilities that are redeemable only into central bank notes issued before a certain date.

Keywords: Free banking; monetary evolution; currency competition

JEL-codes: E4; E5; G2

28 pages, March 1995

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