Can Free Cities Establish a Monetary Moat?

1. Can Free Cities Establish a Monetary Moat?

We live in a world of increasingly tyrannical governments implementing horrific monetary policies that lead to booms and busts which benefit those close to the monetary injection at the expense of those further away. In short, a world in which Wall Street benefits at the expense of Main Street. Making the situation worse, our politics is controlled by special interests and generally takes guidance from well-organized minorities. In the world of monetary policy, this is quite evident with the revolving door between Wall Street, The Federal Reserve, and the US Department of Treasury. Wall Street banks get a vastly disproportionate say in the monetary policy of the US. A prominent example includes Citi Group executive Michael Froman providing a list of ‘suggested’ cabinet picks to soon-to-be elected President Obama through longtime associate and chairman of Obama’s transition team, John Podesta. A similar phenomenon exists in other countries as well. In compensation, officials get paid millions to give speeches proclaiming next to nothing insightful and get placed on prestigious boards of directors. Famous examples include Janet Yellen (Egan, 2021) and Hillary Clinton Wall Street firm speech logs (Jilani, 2016). 

While this paper does not focus on electoral politics, it is important to note the rather futile situation advocates of sound money find themselves in. It seems highly unlikely a bottom-up, grassroots effort can be organized to change the landscape. Monetary policy is simply too hard to genuinely understand. The Occupy Wallstreet protests ended with further bailouts, increased monetary expansion, an eventual lowering of the reserve requirement, and an increasingly financialized economy rendering the protest utterly ineffective at solving anything. This may have many reasons but at least one of them includes the lack of knowledge on macroeconomics and monetary policy. Most protestors were leftists, ranging from neo-Keynesian to outright Marxists. Most of these people were not Ron Paul followers, audit the Fed supporters, and sound money and Austrian Economics scholars. The few that were often found themselves on the other side of the protest like Peter Schiff who tried to explain to the protesters that the problem was not the rich bankers but the politicians behind the scenes. Of course, this was entirely ineffective.  

Although an increase in sound money policy seems to be growing at the grassroots level largely through the innovation and creation of Bitcoin, it remains too far in its infancy to be sure not only that Bitcoin will obtain wide adoption but also that it will lead to an overall change in central banking and other government macroeconomic practices. Additionally, while Bitcoin does cap the creation of new Bitcoins at 21 million, a number of fractional-reserve Bitcoin lending programs do exist which renders the hard cap of Bitcoin much less authoritative. This author encourages the experiment in El Salvador and the Central African Republic to adopt Bitcoin as one of its national currencies but remains skeptical that larger geopolitical countries will make this change.  

As one example, Russian banks were recently sanctioned from interacting with SWIFT (Kowsmann et al, 2022) and other international payment mechanisms and reserves of the Russian government held in foreign jurisdictions have been frozen and, in some cases, seized (Hersher, 2022). This is immensely harmful to all countries and provides a very strong incentive to adopt an unconfiscatable, censorship-resistant currency in which the US and other major European countries control in any way. Unsurprisingly, however, Russia did not adopt Bitcoin. While it remains to be seen what happens in the long term, given the relative size and dire situation Russia found itself it shows Bitcoin’s infancy that it was not more seriously considered. Further, Russia didn’t even move towards a gold standard, despite some reporting to the contrary. If this is true for Russia it must be even more true for the USA, whose currency benefits from being the world reserve currency and a foreign policy willing to intervene to maintain that status. Moving to gold or bitcoin – which the USA does not control – is simply giving up too much power.  

Given that it seems unlikely that electoral politics will lead to more sound monetary policy, particularly in larger geopolitically important nation-states in the near future, we suggest looking at alternative jurisdictions which can implement better governance practices overall and in particular monetary policy. One such idea comes from Dr. Titus Gebel’s concept of Free Cities. 

Free Cities exist along a spectrum of autonomy. In their most pure form, they exist independently of a host nation-state as a form of a micronation – think Liechtenstein or Monaco. In practice, it is unlikely entrepreneurs will convince existing governments to cede territory to be completely autonomous. The result is frequently zones created in host nations that obtain significant levels of autonomy to implement various tax, trade, and regulatory policies – think special economic zones. A new, extended form of these zones, which lie in between the two extremes (complete autonomy and special economic zones) are Special Administrative Regions (SARs). SARs must adhere to a host nation’s constitution, international treaties, and likely criminal law but are free to create business and personal regulatory and legal frameworks.  

The most innovative and far-reaching examples of SARs are developed and operated entirely without host government involvement, by an entrepreneur under whatever framework he finds suitable – typically a corporation. The developer and city operator is tasked with building infrastructure, housing, a regulatory framework, a tax scheme, security of internal affairs, and importantly a dispute resolution system. Unsurprisingly to Austrian Economists, entrepreneurs in this field are trending towards no taxation (if legally allowed), a very limited regulatory state that is easily navigable, both quickly and in one place, and a dispute resolution that is perceived as yielding unbiased results. Security is typically much more friendly and less militarized as well. Even if criminal law of the host nation must remain in place, the zone operator is charged with enforcement in the zone which leads towards a more market-based response to criminal law enforcement (i.e., more flexibility to enforce as most people would suggest is proper).  

While these changes stand to provide very significant benefits for those that chose to live in such a place, this paper aims to determine if and how a Free City or SAR might be able to insulate itself from crazed monetary policy in not just the host nation but essentially all countries around the world. In sum, to what extent could Monaco, Liechtenstein, or a SAR build a moat around their economy to insulate the city from the boom-and-bust cycle resulting from credit expansion around the world? 

2. Austrian Business Cycle Theory

Before we can analyze whether a small economy can insulate itself from credit expansion elsewhere, we should first understand the macroeconomy of what leads to the boom and bust. We start with an economy that does not result in a trade cycle. In this case, individuals produce goods; they then exchange those goods for money; and then finally they use the money partially on consumption and partially on savings. Consumers then use a portion of the money they have not spent in consumption and hold it in their cash balances and use the remaining amount to invest in hopes of earning a positive return in real money (Rothbard, 2009). This is the supply of loanable funds and when combined with the demand for loanable funds by entrepreneurs we can find the market rate of interest. At this market rate of interest, entrepreneurs have the correct pieces of information to calculate the business case for their attempted entrepreneurial endeavors.  We do not mean entrepreneurs do not make mistakes; just that the market rate of interest is not systematically biasing the calculations to be incorrect. Entrepreneurs then look to earn the highest return they can across the production structure.  

If time preference in society genuinely did decrease, the result would be a decrease in interest rate as consumption is deferred and loanable funds would increase. The reduction in consumption leads to losses and the resulting exit of lower-order production stages and the lower interest rate increases the length of the production structure by enabling higher-order, more interest rate-sensitive production stages. Initially, this leads to profits in higher-order capital goods stages until the input capital goods and labor from the lower-order stages transition to higher-order production. The overall result is a lengthening of the production structure. Interestingly, this is how the process works for any given level of technological sophistication. Lengthening the production structure does not imply innovation, it implies more capital goods that make labor more productive (Garrison, 2021).  

The increased productivity of the economic process from the investment in more and higher-order capital goods is how an economy grows over time and the coordinated level of investment across the production structure avoids the massive booms and busts we are so closely familiar with. Of course, we are not implying that humans are infallible, so small-scale misallocations can and do happen but massive, concurrent misallocations on a society-wide scale are infinitely improbable.  

The trade cycle sets in as a result of artificial credit expansion at the hands of a central bank. In this case, time preference is higher than the artificially lower interest rate. This results in consumers spending more on consumption than the interest rate would imply and systematically biases the profit and loss calculations entrepreneurs make in the market. At the lower interest rate, entrepreneurs can access new funds and thus find themselves lengthening the production structure via investment in earlier stages of a production process while consumers continue to consume as much as before given that they have not reduced their time preference. We have malinvestment via overinvestment in higher stages of production and simultaneously overconsumption.   

This is not sustainable growth as we have not built up all the capital goods and productive capacities across all stages of the structure of production. This leads to discoordination in the economy and the discoordination makes production from the earliest stages all the way through to consumption much more difficult to sustain until ultimately it cannot be maintained and the bust sets in. In order to lengthen the structure of production without leading to a later economic crash, we need adequate savings which can only come about from the time preference of individuals in society lowering, which lowers consumption, which increases the supply of loanable funds for investment. These loans then go towards a coordinated effort to lengthen the structure of production and build and maintain capital goods across all stages in the interest rate differential proportional amount. To the extent we throw off this coordination across the structure of production, we will find ourselves in a boom and bust.

3. The World-Wide Solution

It is evident from the above analysis about what creates the trade cycle that the only way to avoid the chaos and crashes is to not participate in a manipulation of the interest rate at all. As Jesus Huerta de Soto writes in his magnum opus Money, Bank Credit and Economic Cycles:

“a policy of credit expansion unbacked by real saving must inevitably set in motion all of the processes leading to the eruption of the economic crisis and recession, even when expansion coincides with an increase in the system’s productivity and nominal prices of consumer goods and services do not rise. Indeed, the issue is not the absolute changes in the general price level of consumer goods, but how these changes evolve in relative terms with respect to the prices of the intermediate products from the stages furthest from consumption and of the original means of production.”
(Huerto de Soto, 2006)

The only solution to the boom-and-bust cycle is not to artificially reduce interest rates and create artificial bank credit in the economy.

4. If Not the World, Maybe Us?

Unfortunately for any individual country and in particular a city-state, Free City or SAR, the economic activity of that particular region is only a very small subset of economic activity and the overall structure of production across the globe. The economic activity outside of the jurisdiction of the Free City dwarfs the economic activity within the jurisdiction of the Free City. As such, the world structure of production must necessarily have the unfortunate effect of the global economy necessarily over-consuming and investing in more distant structures of production that are discoordinated with consumers’ time preference. Will the monetary expansion the world over spill into and permeate the “walls” of a Free City?  

We now turn to explicitly considering the various mechanisms of transmission of business cycles from one monetary regime to another. Following the work of Block, Engelhardt, and Herbener, 2018, we will consider 1.) interest rates, 2.) currency exchange rates 3.) asset prices and 4.) credit channels. In completing our analysis, we must make two assumptions that we believe are both realistic and rather obvious and consistent with extensive Austrian Economics literature. First production takes place over time. Second, capital and production are distributed throughout space unevenly. Certain places are more conducive to growing orange trees and others are more conducive to tourism, for example.  

First, the Free City or SAR must adopt a commodity money standard. Further, since it is theoretically possible to expand credit artificially under a commodity money standard, this must not be allowed. Much analysis has been provided to suggest that under a free-banking standard, fractional reserve lending would be limited. Unlike a commodity standard, our current world of purely fiat currencies has very limited constrictions on fractional reserve banking and typically even endorses it up to a certain point (i.e. the reserve requirement). In this situation we find ourselves, it is no wonder we have experienced such massive gyrations in the economy worldwide. 

5. The Crux

If a Free City (“Economy A”) moved to adopt a commodity standard, for example gold or bitcoin (“Money A”), with no fractional reserve banking, how would the effects of credit expansion in other countries (“Economy B”) under a fiat money standard (“Money B”) affect Economy A?  

6. Transmission Mechanism Analysis

First, a lowering of interest rates in Economy B would lead to additional investment spending. This lower interest rate relative to the interest rate in Economy A would be arbitraged away as entrepreneurs in A look to borrow, at least to some extent, via international capital markets. This is the interest rate transmission mechanism. Next, as inflation devalues the currency in Economy B relative to Economy A, entrepreneurs and consumers in Economy A find it, ceteris paribus, cheaper to import goods and services from Economy B and relatively more expensive to export. This leads to more imports and reduced exports all else being equal. This is the exchange rate transmission mechanism. Thirdly, the creation of new money in Economy B will raise asset prices in Economy B. This increase in asset prices results in a wealth effect due to which individuals in Economy B purchase financial assets in Economy A. This is the asset price transmission mechanism. Finally, the expansion of fiduciary media via central bank asset purchases in Economy B, increases investment in both A and B increase. This is the credit expansion transmission mechanism. The distinction between the interest rate and credit mechanisms is very subtle. While the interest rate mechanism is more focused on the investment decisions of entrepreneurs, the credit transmission mechanism highlights the impact of the availability of credit in Economy A in the first place (Block et al., 2018).  

We now turn to the specific case of a Free City operating on a commodity money standard while the rest of the world operates on a fractional reserve, fiat money standard. First, if Economy B creates additional money, it does not directly affect the stock of Money A. Printing more dollars, yen, rubles, euros, etc does not create more gold or bitcoin. Monetary inflation in B would lead to an appreciation of Money A. Even if the appreciation of Money A does lead to expansion of money production (possible in the case of gold, geography permitting, but not in the case of bitcoin) this new creation of money is subject to the profit and loss system of the market rather than government bureaucrats. Miners will not mine gold or bitcoin unless they expect they can mine it profitably. Given the constraints of profit and loss calculations, Economy A credit expansion is necessarily minimal.  

The next transmission mechanism we will consider is the exchange rate. Considering that international trade does still take place, and we would have no reason to assume otherwise, consumers in Economy A will have some levels of exposure to Money B. The positive exposure, to the extent it exists, makes profit and loss calculations of entrepreneurs in Economy A that much harder, but still significantly less difficult than for entrepreneurs in Economy B. Monetary inflation tends to lead to an overstatement of accounting profits but this is significantly more of an overstatement for an entrepreneur in Economy B with almost complete exposure to the Money B which is being debased. The commodity money that makes up the vast majority of the money in cash balances within Economy A is sound money which makes profit-and-loss calculations much more possible for the entrepreneur. Further, the clientele of this Free City are more likely to be aware of their sound money and its benefits and therefore continue to minimize exposure to the debased and debasing Money B. The end result seems to be that sound Money A is significantly able to moderate the destructive effect of monetary inflation through the exchange rate transmission mechanism, although not entirely.  

The result of the leakage resulting from poor monetary policy into the Free City is likely to result in a faster devaluation of Money B in a Free City than in Economy B. This is likely for at least two reasons. First, people who move to a Free City are likely more perceptive of monetary and economic issues and second, they have few nationalistic tendencies to ‘believe’ in the national currency of Economy B. As such, Money Bwill devalue in Economy A faster than it will devalue in Economy B domestically. This will make imports to Economy A cheaper and happen more often, on the margin. This effect would then reverse after Money B is devalued domestically. The effect of this monetary exchange rate change will result in resources being employed in Economy B towards more export-oriented production processes and in Economy A towards more import-oriented processes. More goods that would, absent the market intervention, be consumed domestically in B will now be sent abroad to Economy A. This is likely to cause significant misallocation of capital goods and other specific or semi-specific resources which will ultimately need to be deserted in both Economy A and B but, to a significantly larger extent in Economy B for the reason above – this misallocation is a much smaller piece of the economic picture of Economy A as opposed to Economy B.   

Now that we have analyzed two of the four transmission mechanisms let us turn our attention to interest rate movements and asset price transmission mechanisms. We know that the creation of fiduciary media via fractional reserve banking creates an artificially high supply of loanable funds which drives down the interest rate below the rate consistent with societal time preference. Even though it is the interest rate in Economy B that is lowered, international arbitrageurs would free up capital for entrepreneurs in Economy A who would then borrow at the effectively sub-marginal interest rate. This change in interest rate does not fundamentally change the division of labor entirely within the Economy and thus the increased access to loanable funds in Economy A occurs in specific industries in which Economy A is comparatively better at providing which can now access credit easier and likely in additional capacity. Increased money in certain industries raises the input capital asset prices in those industries. While in Economy B this is particularly bad, in Economy A, we do see a market intervention making the economy less robust but because Money A is sound money, the alterations are less severe. Within Economy A, when more money is put towards the capital assets in the particular industries that access loanable funds in the international capital markets, that money cannot be used elsewhere which drives down profits and creates losses that result in entrepreneurs ultimately exiting those industries, workers moving toward the industries receiving the credit and capital goods being reallocated towards the credit receiving industries over time. The overall production of Money B would change the structure of production to be tilted towards industries that can access international credit markets but would result in capital being taken away from other industries, keeping the coordination across the structure of production intact, at least relative to that of Economy B.  

Importantly, we note that the while the monetary inflation of Money B results in asset appreciation, it also results in the debasement of the Money B. To the extent that these two processes take place at the same time, they offset each other. To the extent they offset each other, capital allocation entrepreneurs (i.e. investors) will adjust the expected profit calculation and not over-allocate to certain industries. We of course do not have any certainty that these counteracting forces will occur at the same time and, as a result, cannot make any definitive statements about the outcomes of such a monetary inflation in Economy B and its resulting effects in Economy A. Nonetheless, we have seen from these four mechanisms that an economy on a sound money standard, meaning being commodities-backed and having full-reserve banking, can significantly insulate itself from almost all transmission of the unsound money into its economy.  

To extend our analysis to the case of a Free City, we must note that we are specifically considering the case of business cycle transmission from an entire world economy, Economy B, to a very comparatively small economy, Economy A. It is therefore imperative to understand the relative ability of transmission based on the size of the relative economies.  

Off the bat, we can say that the credit channel does not allow transmission regardless of the relative size of the economy. This leaves us with the other three transmission mechanisms.  

To summarize these effects, Block et al explain:

“The malinvestment of capital and misallocation of resources in B will be driven by suppressed interest rates and asset price inflation in B and devaluation of its currency against that of A. Investors in B, who wish to earn the now higher interest rates in A, may do so by purchasing assets and claims to assets in A, which further suppresses the value of B’s currency in comparison to A’s. Although the asset price inflation in B can have a wealth effect, resulting in further malinvestment and misallocation in B, since the purchasing power of money changes very little in A, only a minimal wealth effect occurs there from the asset price inflation in A. The virus cannot spread significantly through the asset price channel. To the extent that devaluation occurs synchronously with the lowering of the domestic purchasing power of B’s currency, the balance of trade between A and B will not change and the asset price inflation infecting A will be limited to the difference between the asset price inflation in B and the decline in purchasing power of B’s currency. In the typical case, in which devaluation occurs prior to the lowering of the domestic purchasing power of B’s currency and synchronously with asset price inflation in B, net exports (imports) in region B (A) will rise along with the increased demand for assets in area A by investors in B. These effects would then be reversed as the purchasing power of B’s currency domestically fell into line with its devalued purchasing power internationally. On net, then, the exchange rate and interest rate channels have offsetting effects on A.”
(Block et al, 2018)

These transmission mechanisms do have a relative size component. Given our example of Economy A operating on a gold or bitcoin standard its relative size means that it does not represent more than a small piece of the total market for either commodity. Bitcoin could easily drop significantly in price on any given day, week, or month relative to the US dollar, for example, even though the monetary inflation of bitcoin is provably lower than that of the dollar. We see this is true even with a country of several million, El Salvador, moving to adopt bitcoin – the price continues to fluctuate significantly. More buying power for bitcoin, and therefore the potential ability to move the price exists in the USA than in El Salvador and the Central African Republic combined. Thus, a debasement of the US dollar does not necessarily result in an increase in value of bitcoin or gold. 

A Free City is likely smaller or no bigger than El Salvador in population terms and thus the exchange rate effect of a Free City will necessarily be imperfect. This is even more true with gold as the commodity money of Economy A as it is roughly a 10x larger market than Bitcoin. On the other hand, if we were interested in what might happen if China or Russia adopted a gold standard while the USA remained on a fiat standard, it is plausible that these countries are large enough and, perhaps more importantly, own enough of the gold market that gold would appreciate relative to the dollar under dollar debasement regimes. 

In the relatively likely case of the devaluation of fiat currency occurring roughly concurrent with asset price inflation in Economy B and followed by the decline in purchasing power of Money B, as explained above, net exports from B and imports to A rise. This too has a size component. In their paper, Block et al suggest that these genuine misallocations can and do occur but:

“just as entrepreneurs in those particular lines of production can anticipate other types of cyclical variations in demand for their products, they may be able to keep malinvestments of capital and misallocations of resources within manageable limits. Although the exchange rate channel is not entirely closed, its flow can be mitigated by entrepreneurship exercised in a free market economy”
(Block et al, 2018)

Far be it from me to claim these writers are incorrect, but I would suggest this analysis is lacking nuance on the relative size of economies. 

If the net exports in B, even if relatively marginal, give the offsetting exchange rate effect, this could be massive on an absolute scale relative to the size of Economy A. By way of example, consider if the Dominican Republic adopted a gold standard  and the USA continued with its current monetary regime. Currently, the USA exports $10.5 billion worth of goods to the Dominican Republic while the GDP of the Dominican Republic in 2021 was $79 billion. Obviously, imports from the USA are a significant piece of the economic activity of this country. Following our transmission mechanisms above, exports from the USA to the Dominican Republic increase in the short term by, say, 10% due to the asset price effect, exports to this country would increase to $11.6 billion. While not a dominant piece of the economic picture in the USA, this is more than a 1% change in the GDP of the Dominican Republic. What is more, we are only considering the USA. If we looked at all imports from foreign countries marginally increasing, we can quickly see how the overall economic landscape in the Dominican Republic would be massively altered, changing the division of labor and making it very difficult for entrepreneurs to withstand these systematic capital price distortions in their profit and loss calculations.  

We cannot say definitively how this would play out without much more quantitative analysis and even then, we cannot be certain in a praxeological manner, but for our purposes here it is worth noting that, ceteris paribus, the relatively small economy that moves to a commodity money standard will be relatively more affected by the transmission of business cycles. Another corollary also follows: the relatively larger reliance on imports from foreign countries necessarily opens the transmission mechanism wider. This is not an argument for autarky but an important consideration nonetheless.   

Block et al have suggested that private entrepreneurs in Economy A may offer private protection of the trade cycle by working to persuade others to join them in more sustainable lines of business, therefore avoiding the asset price distortion and discoordination of the production structure. Certainly, to some extent this is possible and more likely in an economy with a populace foresightful enough to adopt a sound monetary policy such as is more likely in a Free City. At the same time, this analysis would also hold in intentional communities within the USA that have privately adopted quasi-sound monetary policies such as only transacting in and using Bitcoin. The entrepreneurs have thus far been unsuccessful in ‘opting out’ of the trade cycle completely. This may be easier for an entire jurisdiction but, again, the relative size of the economy is an important factor to include in this analysis, and the more the asset price transmission occurs the further distorted the production structure becomes and the harder the entrepreneurs’ job is to convince others to not take the short-term gains in order to avoid the necessary resulting crash.  

The final mechanism that a Free City might employ to limit the effects of the trade cycle is the maximum flexibility of the economy. This does not eliminate the trade cycle once set in motion but it can reduce the length and severity of the crash. Given that credit expansion has occurred, a bust must necessarily follow, but the swiftness with which the bust can liquidate poor investment and reset the economy is largely determined by the flexibility within the economy for factor prices, importantly including labor, to adjust to the approximately market clearing level as determined by entrepreneurs in the market. As Jesus Huerta de Soto says,

“the only possible and advisable policy in the case of a crisis consists in making the economy as flexible as possible, particularly the different factor markets, and especially the labor market, so the adjustment can take place as quickly and with as little pain as possible.”
(Huerta de Soto, 2006) 

Given the analysis above, it is clear that while business cycles can be transmitted and the level of transmission is not possible to determine a priori, we can know that the transmission will be very significantly reduced by adopting a hard money standard. Given that any reduction in the trade cycle leads to less pain and misery during the necessary bust phase of the business cycle, it is unequivocally a positive move for a Free City, micronation, SAR, or any other monetary regime to convert immediately to a sound commodity money standard. Like most things in life, doing the right thing because it is the right thing should be enough, but as an extra incentive, the right thing usually pays off in the long term. While the actions of others can impact you, be it interpersonal relationships or international business cycles, controlling what you can control and doing things the right way will accrue benefits. The same is true for monetary policy.

7. Where Do We Go from Here?

It seems rather clear at this point that any movement towards a commodity money standard will necessarily improve the market forces and entrepreneurial profit-and-loss calculations in the economy that decides to move in this direction. It is also highly likely that incentives to move towards a commodity money standard will not outweigh various geopolitical, control, and other special interest forces in modern democracies and authoritarian forms of government. While we encourage any and all governments to consider the change, we don’t expect a mad dash to the gold or bitcoin standard anytime soon. It may occur in small countries, like El Salvador and more recently the Central African Republic, but politicians in Russia, China, India, and the USA, amongst others, are likely to continue to utilize the control they have over their respective fiat currencies to benefit themselves at the expense of humans all over the world.  

This leaves us with Free Cities, micronations, and Special Administrative Regions as one of the very few plausible ways for both the movement to a sound money policy and the resulting protection it provides to the residents of this jurisdiction. While El Salvador has adopted Bitcoin, it will also need to ensure fractional reserve banking is not possible before it will truly benefit from a better monetary policy completely. It remains to be seen but is plausible that the success of a Free City throughout the length of a business cycle in which the relative bust is much weaker may entice the world to learn why the city has seen such success. While we may not be able to catalyze the sound monetary policy to be employed all over the world, we might be able to get additional jurisdictions on a better track, and to the extent we can, the lower the gyrations of the business cycle will be. As a result of lower gyrations, any given jurisdiction can further insulate itself from these negative effects. Additionally, as more jurisdictions adopt a sound money policy, it becomes relatively easier for those individuals that do understand the mechanisms of macroeconomics and the business cycle to move to a new jurisdiction. As this happens more and more economic activity is taking place within sound monetary policy jurisdictions lowering the gyrations of the world economy trade cycle. This is not a panacea but could serve as a catalyst for a movement for sound money.

8. Conclusion

The only way to stop the business cycle is for every country in the world to adopt a sound monetary policy, which means a commodity money standard and a strict avoidance of all fractional reserve banking. Unfortunately, it appears we will not get the world to do this in the near term. Further, it is unlikely we will even get a single major economy to do this voluntarily in the short term. One mechanism that might work is a form of special jurisdiction that has authority over, amongst other things, monetary policy. Free Cities, Special Administrative Regions, and the like are such an opportunity. They are run by for-profit companies motivated to make life in the city prosperous. One component of prosperity would likely be the avoidance of the business cycle. By implementing sound policy, a Free City can reduce exposure to the malinvestment that will necessarily be liquidated in an economic crash down the road. The Free City will not be able to eliminate all its exposures but by significantly reducing exposure to the trade cycle, ceteris paribus, it improves the lives of the citizenry and as a result, can and should be implemented. Finally, it is possible the Free City will serve as a catalyst or example for other jurisdictions to follow suit in due time; but this is unknowable. We hope and wish for a successful case study soon and a competitive playing field in the market for good governance.

References

• Arakie, R., & Fisher, I. (1933). Booms and depressions: Some first principles. Economica, 42, 484. https://doi.org/10.2307/2548911  
• Berg, A., Vlcek, J., Charry, L., & Portillo, R. A. (2018). The monetary transmission mechanism. Oxford University Press. http://dx.doi.org/10.1093/oso/9780198785811.003.0005  
• Bismans, F., & Mougeot, C. (2009). Austrian business cycle theory: Empirical evidence. The Review of Austrian Economics, 22(3), 241–257. https://doi.org/10.1007/s11138-009-0084-6  
• Block, W., Herbener, J., & Engelhardt, L. (n.d.). Is the Virus of International Macroeconomic Interventionism Infectious? An ABCT Analysis. The Quarterly Journal of Austrian Economics, 21(4).  
• Bordo, M., & Schwartz, A. (1988). Transmission of Real and Monetary Disturbances under Fixed and Floating Exchange Rates. Cato Journal, 8(2).  
• Cachanosky, N. (2012). The Mises-hayek business cycle theory, fiat currencies and open economies. SSRN Electronic Journal, 27(3). https://doi.org/10.2139/ssrn.2015456  
• Citigroup chose Obama’s 2008 cabinet, WikiLeaks document reveals. (n.d.). World Socialist Web Site. Retrieved May 1, 2022, from https://www.wsws.org/en/articles/2016/10/15/wiki-o15.html  
• Dimand, R. W. (Robert W. (2003). Irving Fisher on the international transmission of booms and depressions through monetary standards. Journal of Money, Credit, and Banking, 35(1), 49–90. https://doi.org/10.1353/mcb.2003.0002  
• Dominican Republic GDP – 2021 data – 2022 forecast – 1960-2020 historical – Chart. (n.d.). TRADING ECONOMICS. Retrieved May 1, 2022, from https://tradingeconomics.com/dominican-republic/gdp  
• Egan, M. (2021, January 4). Janet Yellen made millions giving speeches to Wall Street banks she’ll soon regulate. CNN. https://www.cnn.com/2021/01/04/investing/janet-yellen-wall-street-speeches/index.html  
• Engelhardt, L. (2012). Expansionary Monetary Policy and Decreasing Entrepreneurial Quality. Quarterly Journal of Austrian Economics, 15(2).  
• Gebel, T. (2018). Free private cities: Making governments compete for you. Createspace Independent Publishing Platform.  
• Genberg, H. (1985). The international transmission of inflation. Michael R. Darby , James R. Lothian , Arthur E. Gandolfi , Anna J. Schwartz , Alan C. Stockman. Journal of Political Economy, 93(5), 1035–1043. https://doi.org/10.1086/261350  
• Harris, S. E. (1940). International monetary economics. Michael A. Heilperin. Journal of Political Economy, 48(5), 761–762. https://doi.org/10.1086/255622  
• Hayek, F. A. (1964). Monetary nationalism and international stability. Augustus m Kelley Pubs.  
• Hersher, M., & Murphy, J. (2022, March 17). Russia stored large amounts of money with many countries. Hundreds of billions of it are now frozen. NBC News. https://www.nbcnews.com/data-graphics/russian-bank-foreign-reserve-billions-frozen-sanctions-n1292153  
• Huerto de Soto, J. (2006). Money, bank credit, and economic cycles. Ludwig von Mises Institute.  
• Huffman, W. (1984). The Gold Standard and the Transmission of Business Cycles. National Bureau of Economic Research.  
• Jilani, Z. (2016, January 8). Hillary Clinton made more in 12 speeches to big banks than most of us earn in a lifetime. The Intercept. https://theintercept.com/2016/01/08/hillary-clinton-earned-more-from-12-speeches-to-big-banks-than-most-americans-earn-in-their-lifetime/  
• Kowsmann, P., Norman, L., & Talley, I. (2022, March 1). The Russia-Ukraine War: Latest news and live updates. WSJ. https://www.wsj.com/livecoverage/russia-ukraine-latest-news-2022-03-01/card/west-orders-seven-russian-banks-off-swift-but-leaves-others-on-OMv9TCsZMQqlze9dQQRm  
• Meredith, G. (2002). Uncovered interest parity and the monetary transmission mechanism. In Monetary Transmission in Diverse Economies (pp. 208–236). Cambridge University Press. http://dx.doi.org/10.1017/cbo9780511492488.012  
• misesmedia. (2021). The Austrian theory of the business cycle [Video]. In YouTube. https://www.youtube.com/watch?v=bPRRGE35_X4  
• Mulligan, R. F. (2006). An empirical examination of Austrian business cycle theory. The Quarterly Journal of Austrian Economics, 9(2), 69–93. https://doi.org/10.1007/s12113-006-1009-x  
• Norman, L., Kowsmann, P., & Talley, I. (2022, March 1). The russia-ukraine war: Latest news and live updates. WSJ. https://www.wsj.com/livecoverage/russia-ukraine-latest-news-2022-03-01/card/west-orders-seven-russian-banks-off-swift-but-leaves-others-on-OMv9TCsZMQqlze9dQQRm  
• Rothbard, M. N. (1974). The case for a 100 percent gold dollar.  
• Rothbard, M. N. (2005). What has government done to our money?: And, the case for a 100 percent gold dollar. Ingram.  
• Rothbard, M. N. (2009). Man, economy, and state with power and market, scholar’s edition. Ludwig von Mises Institute.  
• Rothbard, M. N. (2021). America’s great depression. Ludwig von Mises Institute.  
• Saidi, N. H. (1980). Fluctuating exchange rates and the international transmission of economic disturbances. Journal of Money, Credit and Banking, 12(4), 575. https://doi.org/10.2307/1991883  
• Scheiblecker, M. (2008). The Austrian business cycle in the European context. Peter Lang D. http://dx.doi.org/10.3726/b13975  
• Schnabl, G., & Hoffmann, A. (2011). National monetary policy, international economic instability and feedback effects – An overinvestment view. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.1826064  
• Skousen, M. (2015). The structure of production: New revised edition. NYU Press.  
• United States exports by country. (n.d.). TRADING ECONOMICS. Retrieved May 1, 2022, from https://tradingeconomics.com/united-states/exports-by-country  
• von Mises, L. (1998). Human Action, The Scholar’s Edition. Ludwig von Mises Institute.  
• Westaway, P. (2002). Modelling the transmission mechanism of monetary policy. In Monetary Transmission in Diverse Economies (pp. 156–166). Cambridge University Press. http://dx.doi.org/10.1017/cbo9780511492488.009