Within the free banking literature, there is a large contingent that suggests fiat money is completely illegitimate, and that only commodity money is seen as genuinely freeing the banking system from the will of government. However, nearly every historical banking system has relied on a commodity standard, with government backing maintaining bullion reserves through resource extraction from colonial interests. If we look to the conquests of the Conquistadors in the Inca Empire, we see the desire for wealth in the form of gold as a major impetus for expanding and exploring. Graeber has suggested in his book Debt that bullion-based economies led to the development of war, as trade competition in gold led to hoarding and protectionist measures. However fiat, or pure credit, money as used today has hardly reduced war, with debt monetisation and the offsetting of war debts through inflation meaning war can be much more easily dealt with financially. Nixon’s ending of the gold-reserve standard represented the beginning of this trend, as it was easier to build-up debt for buying up corporate surplus and maintaining the American empire. Thus the problem is not credit or commodity money, but state agency in its use of either. That is why free banking is important. It separates the creation and use of money from the agency of the state. And the real question then becomes would fiat currencies and alternate monetary arrangements be a feature of free banking systems?

The simple answer is yes. So long as the information for depositors is spelled out and genuine conceptions of choice are available, which in a truly free market with fluid economic relations and voluntary arrangements should be the case. We have to remember that credit money doesn’t need the backing of the state to make it viable, but rather it’s the institutional arrangements involved that allow for such a system to work. The real problem in free banking is that the Rothbardians seem to believe that free banking equals 100% gold reserves. However, what power relations develop in this? For example, interest rates could become monopolised by gold-backed banks, maintaining the credit restriction present in the current statist system. How accessible is gold to the average individual? Cartelised interest rates and their subsequent credit restrictions mean that micro-entrepreneurs become reliant on the banking system and wage labour structures, limiting choice and creating a private coercive system. This isn’t an alternative to the state, but simply changing the dichotomy of coercive relations away from statism. Fundamentally, the Rothbardians were wrong as they failed to recognise things like this. They saw money as a development of commodity and barter exchange, but in fact there is no proof for this. Anthropological evidence actually shows that money was preceded by credit and debt systems with a degree of social relations influencing the economic decision-making. Thus, as Felix Martin has shown, money is a social technology.

This then means that money is not a simple economic commodity, but rather a social relation. Thus things like gold, labour and paper currency are representations of the relation of debt. It further means that money is wrapped up and dependent on institutions. Now how we define institutions becomes important. The likes of Ingham, the Chartalists and the MMT school see the state as the monetary institution. However, what is a state? It is more evidently a collection of institutions, which themselves have expropriated power from local communities and their service and welfare arrangements. It is in line more with the interests of capital and rent-seekers. Thus the state uses monetary power to serve those interests. That’s why we see restricted access to credit instruments in the current banking system, as well as a huge increase in debt, as it serves the interests of capital to have indebted labourers, as they accept lower wages and worse working conditions. Further we see the creation of moral hazard within the banking system through central bank instruments such as controlled interest rates, quantitative easing and deposit insurance. The first two simply serve to redistribute wealth to the wealthiest, mainly bankers and investors, as the inflated money supply reaches them first, while price increases then hit the poorest, with wage increases coming through in drips and not keeping up with productivity or price increases. The latter allows for banks to make risky investments and loans, and expand credit to any foolhardy idea. The bad investments that occurred up to the 2008 crash show this, as moral hazard increased and a cycle of riskier and riskier investments was encouraged through easy credit mechanisms for banks. Thus the state as an institution is not really viable to decide monetary arrangements, as the current system shows.

Other institutional concepts are needed. Keynes in his Treatise on Money understood this, seeing money as defined by nation or community. Community is the important word here. For it is community and its institutions that have historically defined money. The Fei on Yapp were informed by community relations so as to determine transactions and exchanges. Such arrangements were seen in the credit-clearing systems of free towns and villages in the Middle Ages, where finance was much more networked and horizontal. Thus if we understand community as an institution, we see that currency can be developed by decentralised, ground up systems and not simply by private banks with gold reserves or the coercive state (this being a false dichotomy). The NEF has made such proposals with community banking systems that produce their own currencies to circulate locally, keeping the money produced from local business activity in the community. Local currencies act in a similar sort of way, however at the moment they do serve as a tool of middle class consumers and more bourgeois interests. Despite this, there are other systems of this kind that distribute money better and disconnect money from labour. Mutual credit systems, such as LETS and time banks, serve community wealth creation and allow for payment in local market structures. Thus microenterprises and entrepreneurs benefit and profits aren’t put on the back of labour and rentierism. Examples are being seen in Greece with the development of barter networks and alternative currencies, attempting to end their reliance on the Euro. These arrangements limit or reconceptualise the role of banks in an economy, making credit unions and local institutions more important. We have even seen monetary organisation that involves no tangible institution, but instead relies purely on the social relation of trust. In Ireland, the banks shut down for a period of 8 months during 1970. For this period, most people used cheques as a concrete form of money, marking when they’d been transacted and whom they belonged to and how much they were worth. In effect, this system could have gone on in perpetuity, as trust was the foundational institution that allowed such a system to work. If it had of continued, we’d of most likely seen more networked community banks acting as ledgers and record keepers of these cheques, so as tangibly institutionalising the trust found in this form of monetary organisation.

However, as banks do exist, if we are to transfer over to a genuine free banking system, they will have a part to play. Thus how can they be reformed, and what role would they play. Well to understand banks, we have to understand the wider economy in a stateless society, where economic transactions have political and social dimensions, and are fluid in their organisation and ownership regimes. For example, with the elimination of transport subsidies to large firms and multinational corporations, markets would become more local and more dependent on production systems that rely on supply and demand. Currently, much of the stock market and exchanges that banks play a role in work to move corporate debt and monetise overproduced assets and capital, finding new markets and investors. However, with the government not propping this up, banks would take on a role of community financiers, networking with other community banks to create their own currency/currencies tailored to the needs of their clients. Each bank would serve as a node between networked communities and business relations, connecting consumers to businesses and communities to each other. Work by the New Economics Foundation has proposed a similar vision of interlinked community banks financing local services and businesses, with a social remit rather than purely profit-based remit. This is similar to the AliBaba business model, which connects businesses to other businesses, as well as to other consumers on an international field. Banks could play a similar function, connecting people locally and globally, and allowing for networked relations in markets rather than the hierarchalised producer-consumer dichotomy that characterises modern economic relations. Further, if a bank falls foul of the remit it is given, other banks can step in providing similar functions and even a different currency that fulfils more criteria than the previous model. These networked banks could also provide their own central banking services, pooling capital to maintain liquidity throughout the system, yet without the hand of government, moral hazard and easy credit wouldn’t be so hegemonic, as safe money and transactions with an actual economic or social purpose would become more important to the users of those banks. Within this situation central banks can become private clearing houses for banks printing/creating currency, preventing over-issuance as well as acting as an institution that can determine exchange rates between alternative currencies and record inflows and outflows of currency on the markets and to community projects.

At the end of the day, this system prevents governments from printing money, inflating the economy and maintaining a monopoly on credit which restricts access to the wealthiest and best connected, creating a misdistribution of wealth. These relations become phenomena related to social needs in the community and to genuine demand of credit on the market. This puts pressure on government to significantly reduce its power and reach. This also ends the commodification of money and debt, and re-entrenches them in their social origins. As a result, money reaffirms itself as a social technology, with the choice of how it is used being left to communities and individuals and their use of it in institutional or market settings. It ends the wealth creation process created by banks and government, which serves the interests of capital as it maintains the wage labour monopoly and financialises the economy, squashing real economic relations under its boot. By ending the rentierism of artificially high interest rates and the subsequent limited access to credit, anyone can become an entrepreneur or community builder. It ends the neoliberal consensus of largesse and corporate dominance, as genuinely competitive, local, networked markets and social relations are developed and maintained independent of the banking cartel. Thus economic relations are re-embedded into the community, with economic activity serving the demands of consumers and collective bodies.