I think most people have an unjustifiably fluid concept of what money really is and can be in a free market. Money is necessarily something very specific, and its definition derives from a praxeological analysis of self-interested human action. Whatever money is, it must be a present commodity good and the most highly marketable good. The particular commodity chosen as an outcropping of barter markets, is a function of consumer preference, but aside from this, this definition of money is not subject to consumer preference or to the imagination of the economist. So all of these distorted ideas of what might pass for money in a free market are really mere artifacts of the fact that we have been living in an extremely hampered and corrupted market in money for the last 100 years.
The term ‘money substitute’ for bank issued money is really a misnomer for ‘coin substitute’.
A claim on a bank does not represent coined money, instead it is a claim on a bank to pay coin. So a banknote is neither a ‘money substitute’ nor ‘representative money’ – it is money, a substitute form of money for coin.
Money is pretty much what people accept money as being.
What you’re saying is all fine and good on a theoretical level but what I put in my wallet is what is universially accepted as a medium of exchange in the society I live in – debt backed USD to be specific.
So even if the value of money must derive from the non-money commodity value of whatever passes for money there is nothing to say that what passes for money can’t be completely separated from the commodity…as governments and banking cartels gleefully discovered.
Both coined and bank issued money, in a free market would be competitive, thus would not resolve to a single specific form.
What would ‘hold the system together’ as it were, would be the metallic content of coins being a standard of value, both commercially and legally. For example if two manufacturers manufactured coins, say Smith’s 5 gram coins, containing 5 fine grams gold, and Black’s 6 gram coins, containing 6 grams fine gold. Legally and commercially, a unified standard of value would make Black’s coins worth 20% more than Smith’s coins. Of course if multiple manufacturers made coins with the same fine mass of metal, they would be legally and commercially interchangeable and equivalent.
Of course in a free market with competition between manufacturers it can never be as simple as this: rules are needed (both legal and commercial) for dealing with worn or under mass coins (e.g. should they be legal tender for their reduced mass or valued only as scrap?), and at the wholesale level and at various points in the market, some participants will discriminate on the basis of brand and/or fine mass (excess or deficiency) while elsewhere coins would be accepted by tale.
Competitively issued banknotes and cheque accounts will necessarily normally be issued and redeemed at par, subject to exceptional situations where acceptance is subject to discount or premium, e.g. foreign or out of town banknotes were sometimes in England and Scotland not accepted at par, and brokers would buy them at a 0.6% discount. Even today many banks charge commercial customers fees for receiving deposits of significant amounts of coin & notes. Nevertheless, historical cases of competitive issue of banknotes resulted in widespread acceptance of banknotes at other banks at par, and organised interbank presentation of banknotes for payment through note exchanges. i.e. a unified monetary and payment system emerges spontaneously, notwithstanding competitive issue of banknotes.
In the case of cheque accounts, the inter-bank cheque clearance system always tends towards a unified system whereby cheques are presented, paid and given credit for at par, with transaction fees being fixed amounts rather than discounts. And the same applies with respect to modern payer initiated direct credit payments.
So, experience has shown that plurality of issuers and manufactures is consistent with a unified standard of payment and unit of account.
You know, I love Austrian economics. However, one thing I’ve found in arguing with other Austrians on the few points of disagreement is that many Austrians seem to think that my disagreement with a particular position is evidence of not being aware of it. I think this happens because, most of the time, Austrians engage in debates with people who have never seen the Austrian arguments before, so responding “read a book and understand it before you comment” is reasonable. We need to be careful, though, not to use this on people who are familiar with the literature, well-versed with both sides, and yet have come to a different conclusion.
Now that I’ve got that off my chest…it takes work to withdraw your money from the bank. Even a demand deposit account balance is different from money in your wallet. It is a future good, since you can’t spend it without first getting it. That’s why your balance sheet has separate accounts for cash and a/r. Let’s take a dollar example: I loan you $10. You now have a cash asset of $10, offset by a liability of $10 a/p. So your asset and liability columns have now both increased by $10. I, on the other hand, have had no change in the bottom line of my balance sheet: my cash asset declined $10, but this was offset by a $10 increase in my a/r. My liabilities are unchanged. So, across the economy, total assets have increased by $10. Notice that this does not cause calculation problems for other firms, even though they now see an increase in total assets of $10. So now there’s two people claiming this $10 as an asset, and nothing at all goes wrong with it.
So Scottish banks that operated on approximately a 3% metallic reserve ratio’s banknotes were typically accepted at a 97% discount to face value? Nope, they have always been issued, redeemed and accepted at par, except when the issuer has failed. Even in those cases, the notes maintained their value, since under the companies laws of those times shareholder liability wasn’t limited, and the banknotes were given seniority, the notes were eventually paid in full, most of the time when the bank failed.
Sure there are. Two people can agree that one will give the other a square circle, which establishes existence alright. Now, I take it from your first sentence that you are taking issue with my claim that there can be an an-cap world where a court allows theft. If I open such a court, though, what are you going to do about it? Certainly you’re not going to outlaw it, so you must have an argument that it will go bankrupt. If I allow all theft, I tend to think you’re right. But that is ultimately an empirical question, and I don’t think there’s an a priori correct answer.
Very true. Other prominent Austrians have argued for a free banking system with no restrictions put in from outside. Now, the second argument is more interesting - that a free market in banking would eliminate fractional reserves. I wouldn’t mind that - let’s have a free banking system and see what happens! Walter Block, though, has provided at least some reason to think that a fractional reserve could exist on the market through his fairy tale of private inflation.
Anything people acccept as a money substitute is a money substitute. But please - what paper are you referring to? I described a person depositing money in a savings account, and the bank then loaning out the gold that was deposited. The person can then come in and withdraw his gold - the coverage comes from the fact that there are multiple accounts, and it’s unlikely that everyone will withdraw at once.
Don’t know about Scotland…
In the US the ‘wildcat’ banks’ notes didn’t trade on par or the same for out of state banks that tended to inflate at a non-standard rate. Or greenbacks, etc…
Maybe there’s an economic rule hidden in here somewhere, people pay for the convience of not having to carry around a bag of coins (or the ability to issue a bank backed IOU) and inflation is the accepted fee for this service. Banks keep it conservative and everyone benefits but if banks get too crazy then you have runs and their notes traded at less than par.
When looking at the historic fractional reserve systems people do tend to ignore that governments would quite often suspend the banks’ requirements to pay back their notes in specie to avert a crisis.
That’s a reasonable comment however I merely pointed you towards the article because it deals you with you argument in greater depth than I did.
Before I respond to this could you clarify what you mean by a/p and a/r. I’m not familiar with this usage and can’t quite grasp what they are referring to precisely.
I think this is confused. In a free market, the commodity in coin form is the money. The paper is merely and can only be title to the real money, and therefore, as Mises puts it, a money substitute. Your formulation is definitely not Misesian, and is not correct, in my opinion.
What i am saying is that in a free market there are praxeological constraints on what people will accept as money. People will not accept garbage as being money, unless they are forced to, i’m sure we can all agree. They also will not accept future claims to money as money. If they want money, they will want “here and now” commodity money, as this is what money simply must be.
This analysis is based on the empirical fact that under a hampered and hamstrung market, you accept worthless fiat paper as money because the state has conned and coerced the nation into doing so. This is not a praxeological free market analysis of how free market money would function.
But we are interested in understanding what forms money can take on a free market unhampered by the state. Only force and fraud can separate a commodity money from its status as money.
A banknote is not a title to physical property, it is a claim on and liability of the bank, to pay to the bearer, on demand, the sum of money specified in the note.
How it works is this. The non-financial wealth of society exists primarily in the form of titles to land, land improvements and movable goods such as vehicles, applicances and consumer goods. Such non-financial assets have owners, who finance their assets by debt and equity. The debt is typically secured over the non-financial assets being financed. Thus financial assets such as debt and equity securities are supported by, if not secured by, the underlying non-financial assets.
Credit institutions such as banks borrow and lend on their own account, by issuing debt securities such as bills, bonds, certificates of term deposit, demand deposits and banknotes, and equity securities such as shares, and by investing the proceeds in reserves, liquid assets (marketable debt securities) and illiquid assets (net loans and advances). Thus a demand deposit or banknote is a form of wealth that is a substitute to, for example, mortgage secured loans or bills. The advantage of demand deposits and banknotes is that they are more liquid and more marketable and more safe. Because they are redeemable on demand, easily, they are also a substitute to coin.
Paper documents of title such as bills of lading are different from banknotes and bills of exchange, the former are documents of title (that may be negotiable), the latter are financial securities, i.e. claims on a debtor.
There are two questions: what is justified, and what would happen in anarchy. For now i am interested in what is justified. I think we can create a better anarchy, the more anarchists there are who understand correct political and economic theory.
But for fun, what if i ask, what if a state allows and imposes theft and slavery on you? What are you going to do about it - certainly you are not going to outlaw it. And maybe it will go bankrupt. But in the meantime, what questions we really are interested in is what is a just system.
Finally, i would reiterate: a free market presupposes justice and respect for property. To ask for anarchy and not justice is futile and pointless.
So things like store credit would go away?
Quite true. But, just to be difficult, people accepting ‘worthless fiat paper as money’ makes it money.
If people were to accept worthless paper issued by banks under a free banking system as money then it too becomes money. Or debt backed bills as the Real Bills Doctrine folks advocate.
All I’m saying is that money is a human invention and doesn’t have to be commodity based even on a free market. Chances are that would never happen but it could.
Neither store credit, nor milk and eggs will go away. But none of these things are money even today. Credit is not invalid; it merely cannot serve as money. This is even more certain than that uncooked eggs would not likely serve as money ever, when there is such a commodity as gold to compete with them for this purpose. It is more certain because it is in fact of necessity the case that credit cannot serve as money. The reason we can know this is because of the discount inherent in time preference. What ever commodity in the present that serves as money will always be more marketable than the same commodity withheld till a later time. The time discount is proof that the present commodity is more valued than the same commodity later in time.
The dollar and all fiat currencies are money today, but only because of aggressive state intervention in the market. This state of affairs would be impossible in a free market in money. And i think that is the question we are addressing.
Again, i am saying there are immovable constraints due to the fact that actors are self-interested, such that people simply cannot and will not accept worthless paper as money unless duped or coerced into it.
I get that this is what you are saying, but what i am countering with is that this view, while very common, is in contradiction to Mises’s position on money and banking, and also, in my opinion, in contradiction to accurate praxeological reasoning.
Banknotes and cheque account balances are redeemable on demand, and therefore bear no discount. They are freely issued and redeemed at par, and valued by holders at par. They serve as money, as a substitute to coin, and freely redeemable for coin.
Of course worthless paper won’t be freely accepted or used as money. However banknotes and cheque account balances are not worthless: they are valued at par, since they are easily payable on demand.
Quality competition between issuers makes the highest credit quality and lowest transaction cost instruments displaces lower quality instruments (price competition generally doesn’t apply to bearer instruments (i.e. banknotes) because they don’t bear explicit interest – in the case of cheque account balances price competition also applies, since explicit interest is normally paid).
However the technology and institution of paper money and cheque account money is also in competition with coin, which pays no interest, and finances no interest bearing assets. The transaction costs of dealing in coin are often more than those applicable to dealing in paper or bank book entries, thus the combination of coin, paper and book entries enables people to optimise their portfolios and transactions by using each where the net benefits are greatest.
Banking theory, however, has taken a very bad turn with free banking. We have to show that this is the currency and banking school argument rehashed. They have adopted the banking school doctrine, that the needs of business require an expansion of the money supply and credit. Moreover, the free banking people violate the basic Ricardian doctrine that every supply of money is optimal. Once a market in a money is established, there is no longer a need for more money. That is really the key point.
This is a nice interview… Rothbard’s Law
AEN: What about the argument that 100% reserves requires government intervention?
MNR: I regard fractional-reserve banking as an intervention in the free market, just as any crime against person and property is intervention. In the case of banking, the government is allowing the crime to be committed.
But how do we address the needs of trade argument, those who say that business has a demand for credit? Well, there are many things demanded on the market that are also crimes. There may be a demand for killing redheads. And there is certainly a demand for government loot. What’s so great about market demand? if it is not within a framework of non-aggression, there will always be a demand for fraud and theft.
The free bankers accept a kind of David Friedmanite anarchism, where there is no law, only people engaging in exchange and buying people out. If you have a group that wants to kill redheads, the redheads will have to buy them off if they value their hair. I think this is monstrous, the kind of anarchism would indeed be chaos. Just because there is a demand for something doesn’t mean it should be fulfilled.
His law didn’t apply to him either.
Sorry, a/p and a/r are accounting notations.
A/p = accounts payable, which is treated as a liability
A/r = accounts receivable, which is treated as an asset
Ok, so what you’re really engaged in is trying to design a particular private court, which would exist on a market in an an-cap, aren’t you? It seems to me that most descriptions of an-cap make reference to the idea of competing legal structures. There also seems to be an idea that the just law will prevail in that competition, but that’s a separate point. Do I correctly characterize what you’re trying to do?
Certainly, I’m not going to outlaw it. I’m going to do just what I do now - engage in educational efforts and attempts at persuasion. Ultimately, it is ideas that rule the world, and a state can impose theft and slavery only because most this is compatible with accepted ideas. And yes, maybe it will go bankrupt, although this isn’t likely since the state prints money. What’s your point? From my reading, it seems that most an-cap thinkers hold that competing legal structures are a positive good - that there are at least some questions of law best answered precisely by market competition. The debate usually is about what questions there are. Also, consider that a private court might very well be ruled by judges who agree that theft is bad, yet are not willing to dedicate the funds to outlaw shoplifting. There might be worse crimes going on, or they might have to raise premiums too high. Do you regard this decision as unjust?
What do you mean by presupposes? What about this - a free market, a truly free market, for every good and every service, will of necessity deliver justice and respect for property. If this suggestion is true, then there is no need to ask for justice, and the free market doesn’t require a background of justice and respect for property to operate, it can produce those things.
Wouldn’t a 100% reserve system eliminate interest from banking? How could you make money on your deposit if the bank wasn’t allowed to make loans with your money? Wouldn’t this eliminate the incentive to put your money in a bank? If banks cannot pay you interest, why not just keep your money in a safe under your bed?
Either the gold standard is flawed or my understanding of it is flawed. The way I see it, if banks were not allowed to lend out your money they could not pay you interest so there would be no incentive to put your money in a bank when you could just put it in a safe. Is that the goal of gold-standard advocates? To eliminate banking entirely?