S-Space Graduate School of International Studies (국제대학원) Dept. of International Studies (국제학과) 국제지역연구 국제지역연구 vol.01 (1992)
서유럽 통화통합과 자유은행제도
Monetary Integration in EC and the Free Banking System
- Issue Date
- 서울대학교 지역종합연구소
- 지역연구, Vol.01 No.1, pp. 1-24
- Monetary integration has been pursued as an essential element in building an integrated
Europe by the end of this century. The goal is to build a European Central Banking system.
In this system the central bank would issue a single currency which will replace all the
exsisting national currencies. The central bank would also have monopoly rights to control
the supply of the single currency in the region. In order this system to be workable, each
member country should give up its sovereign power concerning monetary matters.
The efforts, however, have not produced any visible results except for the maintanence
of the exchange rate mechanism. Even this is confronted with a serious challenge as the
necessary policy coordination among member nations has become difficult. It is evident
that each country is very reluctant to give up its monetary sovereign power.
These problems then suggest that the approach toward monetary integration through
centralization of the money issuing business may not be the optimal solution. In this paper
I propose an alternative system. In this system instead of establishing a new central bank,
all the existing national central banks will be allowed to issue their own currencies.
However, citizens are allowed to use any currency they want. Therefore, central banks
should compete among themselves as competitive money issuers. It is called the free banking
In a free banking system each participant competes for market shares. A currency that
is most convenient to use and is best able to maintaine its value would fetch the largest
market share. Thus each national bank has an incentive to carefully regulate the supply
of money so that its value be maintained at the stable level. As a result in a free banking
system the supply of money is self-regulated by the market system and the value of money
is also automatically maintained at a stable level. Therefore, the free banking system may
be a better alternative to the monopoly central banking system.