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ble supply. The connection will be looser, admittedly, in the event of upward movements of money supply; central banks, it is said, find it difficult to "push with a string." But the connection will most certainly be tight with downward, contractionary movements. The key is the central bank's presumed monopoly over the reserves that back bank money. A territorial currency maximizes the practical impact of monetary policy (especially restrictive policy).
Implications of deterritorialization
Now consider the implications of deterritorialization. Quite obviously, once market agents gain a choice among currencies, the direct connection between nominal demand and the supply of national money is broken. The central bank may still be able to exercise a degree of influence over the stock of its own currency, however measured. But to the extent that transactors and investors have access to alternative currencies, variations of reserve supply will now have correspondingly less effect on the overall level of spending. The practical impact of monetary policy becomes attenuated, and the economy becomes more vulnerable to frequent bouts of inflation or recession (or perhaps both - stagflation).
It is important to stress where the root of the challenge lies. Analytically, we may distinguish between two key questions -- what we may refer to as the separate issues of control and autonomy. Control refers to the central bank's technical capacity to manage the money supply. Can officials generate increases or decreases in the stock of its own currency at will? Autonomy, by contrast, refers to the central bank's policy capacity to manage demand. Can officials generate increases or decreases in aggregate expenditures at will? The challenge of deterritorialization, clearly, is to central-bank autonomy rather than control. Deterritorialization infringes neither the link running from the instruments of monetary policy, open-market operations and discount rate, to bank reserves; nor the link from bank reserves to deposit creation. The central bank's ability to control monetary aggregates denominated in the nation's own monetary unit, therefore, is not directly affected. Rather, it is the link with expenditures that is infringed - the autonomy of monetary policy -- owing to the competitive threat posed by the availability of other monetary units within the country. Substitute currencies mean alternative circuits of spending, affecting prices and employment, and alternative settlement systems that are not directly affected by the traditional instruments of policy. As Friedman puts the point, "currency substitution opens the way for what amounts to competition among national clearing mechanisms, even if each is maintained by a different country's central bank in its own currency" (Friedman 1999: 335). The greater the intensity of competition from currencies originating abroad, the weaker will be the effectiveness of conventional monetary policy at home.
For some economists, inspired by the ideas of the late Nobel laureate Friedrich Hayek, a weakening of central-bank authority would not be at all undesirable. Quite the contrary, in fact, given past abuses of state monetary monopolies. Once having learned to appreciate how easy it was to finance public expenditures via money creation, governments have often succumbed to the temptation to extract more seigniorage than the economy could bear, resulting in price incr