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Quasi-Commodity Money

Yeah, I know: it's been so long since I posted here that you'd have a right to wonder whether I decided to quit economics and enter a monastery, or had simply dropped dead.

In fact I've done neither, though I've had reason enough to be tempted by each of those alternative prospects. You see, we are hiring several new faculty here at UGA, and that has meant being almost constantly engaged in either interviewing or hearing presentations by prospective new faculty members, or attending meetings concerning the merits of various candidates. Add a full teaching load, a heavy travel schedule, and the fact that I am employed by one of those unenlightened econ departments that doesn't give a toss about blogging, but does insist on having its faculty publish articles in refereed journals that are so spectacularly famous that even some business school deans have heard of them, and you will perhaps be willing to forgive my absence from this forum.

So in my precious spare time between seminars and all that I've been working on some articles, which I am now pleased to share with my fellow free banking enthusiasts. The first is this article, prepared for an upcoming Liberty Fund colloquium revisiting In Search of A Monetary Constitution, a classic 1962 collection edited by Leland Yeager and including contributions by Rothbard, Buchanan, and Friedman, among other notables.

Here's the abstract:

"This paper considers reform possibilities posed by a type of base money that has heretofore been overlooked in the literature on monetary economics. I call this sort of money 'quasi-commodity money' because it shares features with both commodity money and fiat money, as these are usually defined, without fitting the conventional definition of either; examples of such money are Bitcoin and the 'Swiss dinars' that served as the currency of northern Iraq for over a decade. I argue that the attributes of quasi-commodity money are such as might supply the basis for a monetary regime that does not require oversight by any monetary authority, yet is capable of providing for all such changes in the money stock as may be needed to achieve a high degree of macroeconomic stability."

Comments and suggested improvements are, of course, very welcome.

Got to run: I hear the bell's chiming.


    1. Well, GoldMoney, just because "the folks at the Fed" claim that something can work, when it can't, doesn't mean that nothing can work, does it? In any event, I'm not pleading for any sort of central planning of the monetary base, as you may discover by actually reading the article, which you presumably cannot have done in the 5 seconds it took for you to comment on it!

  1. An interesting article on bitcoins was published by Nicolás Cachanosky in Atlas Sound Money Project ( Another, but in spanish, was published in Punto de Vista Económico (
    "It is difficult to foretell what will happen with the bitcoin in the future. How far can make it, if it will collapse or just smoothly go out of use. But the bitcoin case is an interesting example to analyze where a currency used in exchanges do not require a central bank."

  2. " … while it is possible to conceive of a government-sponsored quasi-commodity monetary regime, it is difficult to imagine a government actually embracing the idea …" (pg. 23)

    Agreed that no government would actually embrace such an idea, unless it was legally compelled to do so by depositors and its Constitution, which is why I think the U.S. system has a chance of sponsoring such a system (again, because of the precedent laid out in McCulloch v. Maryland (1819)).

  3. Other esteemed contributors to this blog review your posts, and they comment accordingly, and they indicate their approval electronically (with a Like). The administrative staff in your Econ department will get it eventually. Most academic journals will operate similarly in the near future, if they don't already. A union of typesetters might object. Redundant administrative staff at publishers of conventional academic journals might also object.

    According to legend, a high ranking executive at some corporation (think it was AT&T) once asked Alan Turing what sort of labor his computing machinery could most effectively automate. Turing responded, "People like you, I suppose." I don't remember where I heard this story, but it still rings true.

    More to the point, I doubt that Bitcoin would work well as a standard of value for extending credit. We've already seen a Bitcoin bubble. This sort of bubble could precipitate a run on banks issuing notes promising Bitcoins and drive people owing Bitcoins into default.

    But the possibility is interesting. I'll read your article later.

  4. Mervyn King's paper says that the Swiss Dinar was eventually redeemed by the new government, and that it was the expectation of redemption that drove the Swiss Dinar's value. The Swiss Dinar was thus only a little different from a conventional convertible bank note. The bank note becomes inconvertible every weekend when the bank is closed, but the expectation of a resumption of convertibility on Monday makes the bank note hold its value over the weekend. The Swiss Dinar does not fit the model of quasi-commodity money. Rather, it fits the model of currency that is backed but temporarily inconvertible.

    (My problem with SSRN is fixed. Temporary computer glitch on my end.)

    1. That's not my reading of King's arguments at all. It isn't easy to see how the eventuality to which you refer could have supported the Swiss dinars' value for a decade before the fact! It is much easier to see that value as having been no more based on such a prospect than that of the "official" dinars. The crucial difference was simply that the supply of Swiss dinars was slowly shrinking, while that of official ones grew rapidly.

      1. "After fluctuating in the early 1990’s, the
        Swiss dinar rose sharply against the U.S. dollar
        from the middle of 2002 as the prospect of an
        end to the Saddam regime increased. It rose
        from around 18 to the dollar in May 2002 to
        about 6 to the dollar by the beginning of May
        2003 when the war ended. That appreciation
        reflected expectations about (i) the durability of
        the political and military separation of Kurdish
        from Saddam-controlled Iraq and (ii) the likelihood
        that a new institution would be established
        governing monetary policy in Iraq as a whole
        that would retrospectively back the value of the
        Swiss dinar. The political complexion of Northern
        Iraq led to the assumption that the currency
        used there would have value once regime
        change had occurred." (Mervyn King, The Institutions of Monetary Policy)

        How can you read that in any other way than to say that the Swiss Dinar's value was driven by expectations of future convertibility? The value of every financial security I ever heard of is driven by expectations of future payoff, so it's pretty easy to see that the value of the Swiss Dinar could be driven by the same thing.

        1. Mike,

          The prospect of conversion explains the later appreciation of the Swiss dinar, but not the relatively stable value it maintained over several years before 2002. In any event, the value of fiat currencies generally doesn't reflect expectations of future payoff: that is what distinguishes fiat money from other securities. That a fiat money can be made convertible as a matter of policy (as when authorities institute a peg) doesn't contradict this fact.

          Think of it this way: prior to the invasion you had only a single, free floating (fiat) dinar. This then bifurcated into official and Swiss dinars, where the quantity of one was rigidly fixed, and that of the other expanded substantially while still under the control of the Iraqi central bank. A simple quantity theory explains why the Swiss dinars stayed stable in terms of the U.S. dollar while the official dinars lost about half their dollar value; this took place before 2002, hence before it was at all clear that Saddam's days were clearly numbered, much less that occupying powers would establish an official Swiss dinar-U.S. dollar peg. Of course it eventually made sense for the occupying powers to take steps to provide for a new official and uniform Iraqi currency, which they did by making both old Swiss dinars and "Saddam" dinars (as the former official currency came to be known) convertible at fixed dollar rates. But it hardly follows that anticipations of this arrangement were what propped up the value of Swiss dinars (or, for that matter, of Saddam dinars, for one might apply the same wrong reasoning w.r.t. those) all along.

          1. George:

            Stable value is explained by stable expectations of future payoff. Rising value is explained by rising expectations. The quasi-commodity theory requires us to believe the that the Dinar's value was determined on quantity theory principles before 2002, but on backing theory principles after 2002. Furthermore, the quasi-commodity theory requires us to believe that money is unique among financial securities in that its backing doesn't matter, while the backing theory says that money has value because of its backing, just like any other financial security. So far, Occam's razor would judge the backing theory as the winner.

            The backing theory also has a simple explanation for the difference between official and Swiss Dinars: Since the quantity of official Dinars exploded while the Swiss Dinars did not, people expected that when the new government finally redeemed them, it would pay out less per official Dinar. Suppose, for example, that GM had issued blue shares of stock and green shares. Then something happened to increase the quantity of blue shares without increasing the quantity of green shares. I'd expect the blues to be worth less than the greens.

            As for (so-called) fiat money: When do you decide that formerly convertible bank notes are 'fiat'? When convertibility is suspended for a weekend? for 30 days? for 30 years? What if the assets backing the notes are sitting in the bank's vault the whole time, publicly recognized as "collateral held against bank notes"? Do you call the notes fiat money, knowing that the bank could resume convertibility at any time?

          2. Mike, you write "Stable value is explained by stable expectations of future payoff," and then refer to "so called" fiat money, as if to imply that you just don't believe in the concept. You are free not to; but we can't have a conversation then, because you set yourself outside the boundaries for what I consider reasonable discussion of these matters. You may continue to insist that every in-convertible money today has value only because everyone who accepts it imagines that it will be made convertible (and hence "pay off") at some future date. But that is a hypothesis I consider too far fetched to be credible. It is, moreover, as I have insisted and will tediously continue to insist wherever necessary, quite unnecessary: we have perfectly good theories to explain why a genuine (and not merely "so called") fiat money can command value, so long as its nominal quantity is sufficiently restricted. Nor do I know of any competent monetary economist–not Mises, not Friedman, not Laidler or Yeager (and so on)–who doubted that there was such a thing as fiat money, as distinct from notes that were merely temporarily inconvertible. (Mises himself even had a distinct name for the latter sort of currency: he called it "credit" money.)

          3. George:

            500 years ago, you could have said the same thing about that crazy new theory about how the earth orbits the sun, instead of the other way around. It wasn't supported by a single competent astrologer, or by the church. And like you, I'm sure there were many people who simply refused to discuss it, and judged a theory to be true simply by whether or not a majority supported it.

            There are, however, a few rays of light, so I've attached a short list of studies that have supported the view that money is backed, rather than fiat.

            Bomberger, William A., and Makinen, Gail E. “The Hungarian Hyperinflation and Stabilization of 1945-1946.” Journal of Political Economy 91 (October, 1983): 801-824.

            Calomiris, Charles W. “Institutional Failure, Monetary Scarcity, and the Depreciation of the Continental.” Journal of Economic History 48, (1988a) pp. 47-68.

            Calomiris, Charles W. “The Depreciation of the Continental: A Reply.” Journal of Economic History 48, (1988b) pp. 693-699.

            Calomiris, Charles, “Prepared Testimony of Mr. Charles Calomiris”, Senate Banking, Housing, and Urban Affairs Committee, Subcommittee on Financial Institutions and Regulatory Relief, 10:00 AM, Thursday, March 20, 1997.

            Cunningham, Thomas J., "Some Real Evidence on the Real Bills Doctrine versus the Quantity Theory", Economic Inquiry, volume XXX, April 1992, p. 371.

            Imrohoroglu, Selahattin. “Some Historical Evidence from the Ottoman Empire and Turkey on the Finance-theoretic View of Government Currency Pricing.” Manuscript, University of Southern California, 1987.

            Makinen, Gail E.. “The Greek Stabilization of 1944-46.” American Economic Review 74 (December, 1984): 1067-74.

            Sargent, Thomas J., 1982. “The Ends of Four Big Inflations.” In Inflation: Causes and Effects ed. Robert E. Hall, pp. 41-97. Chicago: University of Chicago Press.

            Siklos, Pierre L., "The Link Between Money and Prices Under Different Policy Regimes: The Postwar Hungarian Experience." Explorations in Economic History, volume 27, 1990, p. 468.

            Smith, Bruce D. 1985a. “American Colonial Monetary Regimes: The Failure of the Quantity Theory and Some Evidence in Favour of an Alternative View.” Canadian Journal of Economics volume 18, (August 1985): pp. 531-65.

            Smith, Bruce D. 1985b. “Some Colonial Evidence on Two Theories of Money: Maryland and the Carolinas.” Journal of Political Economy 93 (December, 1985): 1178-1211.

          4. FRNs are convertible. The Fed routinely exchanges them for Treasury securities in open market operations, albeit at a variable rate. Treasury securities are claims on tax revenue, i.e. claims on produce routinely confiscated from U.S. citizens. The right to confiscate everyone else's produce is a valuable commodity. The "fiat" in "fiat money" describes debts imposed on subjects of the monetary authority.

            Quasi-commodity money differs from fiat money in this respect. The quasi-commodity has no intrinsic value, but using it as base money is voluntary.

          5. Martin:

            Excellent point. Bank notes are backed by their issuer's holdings of assets, and "assets" can include the ability to rob people of their wealth. Convertibility can also take many forms, and the fact that gold convertibility might be suspended can be made irrelevant by the maintenance of other forms of convertibility, like acceptance of notes for tax payments.

            You're right to say that the 'fiat' in fiat money consists of the government's imposition of debts, but that's not what most people mean by 'fiat'. Most people hold the (incorrect) view that so-called fiat money is valued only because it is limited in supply, while it is demanded because it provides liquidity. They deny the relevance of the money-issuer's assets.

          6. Yes, Martin, that's a good point. Our current income-tax-regulated debt-based money has value, albeit a negative one: "The right to confiscate everyone else's produce is a valuable commodity."

            So then I wonder if there are any real benefits that "positive money" has over this "negative money" we're using, and if so, what these benefits are and how "positive money" might improve the quality of life.

    1. The price of gold is in bubble territory, because demand for gold as an inflation hedge has risen, and the supply of gold is inelastic, i.e. the supply does not respond to the increase in demand enough to prevent a rise in the price. Most economists believe that gold is a poor monetary standard for this reason.

      In a free banking system, fear of "inflation" is the fear that your bank's capital is worth less than the face value of its notes. When you fear this inflation, you redeem the notes for whatever they promise, gold in the case of a gold standard. A race to redeem its notes forces the bank to sell its capital, thus placing downward pressure the price of the capital. As the price of a bank's capital falls, the bank's note holders have even more reason to distrust the face value of the notes, so it's a downward spiral.

      If demand for gold suddenly increase, and the supply of gold does not respond much to the increasing demand, the increased demand itself causes the value of a bank's capital to fall below the value of its circulating notes, even if the bank never "inflated" per se, i.e. even if the bank never lent more than the current value of collateral securing its loan.

  5. Good luck with the university stuff.

    I am reminded of W.H. Hutt's reply to the question "how did the Keynesians win the debate?"

    "There was no real debate, the Keynesians did not want to debate. They just took control of the setting and marking of examinations and the hiring of staff – and that was that".

    Academic politics (committee struggles and so on) matters – in fact it matters a lot more than the strength of arguments and evidence (which hardly matter at all).

    As for the paper. I had a problem getting to it – so I will have to judge by the abstract.

    Well "changes in the money stock" are not really needed anyway – not in a free market.

    It is not true (as Rothbard sometimes rather rashly implied – although when challenged he did row back on such implications, only to imply the same thing when he next got a bit careless with the words he was using) that ANY stock of money will do.

    For example, if there was just one coin in all the world it is hard to see how an economy could function.

    However, if the stock of money had not increased since 1913 (when the Federal Reserve was created) things would have been fine – in fact a lot better than they have been with the creation of the Fed.

    Over time prices would have fallen (as better ways of producing more goods and services were developed), but a gradual fall in prices (I am not talking about a sudden crash) is no bad thing.

    Of course there would still have been boom-bust events (the structure of banking estabished by the National Banking Acts was not a good one), but they would not have been as bad as the boom-bust events that have occured under the Fed. And with each "bust" the credit money of the banks would have shrunk down towards the commodity money base.

    So there is no real need for a "Quasi-Commodity" money – as commodity money will work (increasing the money supply NOT being a thing that needs doing).

    Of course I do not consider, in the above, the present credit bubble financial system (with its de facto zero Central Bank interest rate and endless complexity covering up the fact that the entire financial system is nonrational), however as the present system is going to collapase soon a long examination of it would be a waste of time.

    If things go relatively well the present system will be replaced by the use of commodities as money – gold, silver, perhaps copper. In various parts of the world.

    If things go badly then ammunition is most likely to be the leading money.

    Either way I do not see "Quasi" commodity money having much of a role.

    1. Paul, you have a syllogism here, to wit:

      Major Premise: An economy doesn't need to have a non-constant stock of base money;
      Conclusion: Therefore, there's no advantage to quasi-commodity money: plain old commodity money will do.

      Implicit is the minor premise that a regular commodity money (such as gold) won't involve any expansion of the monetary base, or at least will involve less expansion than a quasi-commodity money. The first assumption is false, whereas the second isn't generally true. So your argument fails.

      Now, if you want to argue that a fixed base is ideal, you can; but don't imagine that you can do so and pretend that that's the same as arguing for a gold standard. It just isn't: under any reasonable assumptions the monetary base tends to expand under a gold standard. So the question is, is that rate of expansion a better than what any conceivable quasi-commodity standard might achieve? The answer is no, for reasons my article explains clearly enough.

  6. According to the article Adrian links to a "bitcoin" is just a bit of computer code (not a coin at all), sounds like a scam (most likely because it is a scam). Although, I am told, that the currency used in "World of Warcraft" has been used to by goods and services in the "real world".

    However, the "Swiss dinar" (now I have looked it up on that font of all knowledge – Wikipedia) appares more interesting.

    Notes that are not legal tender, but are used as money – and which the government that accepts them (which sort of makes them legal tender – thus contradicting the first point, although it was the Kurdish government that accepted them which was not an official government……) does NOT have the plates for.

    This reminds me of a Civil War story.

    Both the Union and the Confederates practiced paper money inflation (indeed that is why they both introduced paper money in the first place – to increase the supply of it so they could cheat people and buy stuff).

    Anyway the Confederates inflated more (just as they also taxed and regulated more – although the Ludwig Von Mises Institute people do not like being told that the Confederates were MORE statist than the Union) – soon (inspite of savage legal tender laws – and I mean savage, the rule of law soon broke down in every Confederate State bar North Carolina) prices were going up into outer space.

    Yet suddenly near the very end of the war (when the Confederates were being defeated on the battlefield and the Confederacy was in ruins and soon to be destroyed) the vast price rises suddenly (for a time) stopped…..


    Well the Confederate printing presses had stopped operating (they had to be moved – to stop the Union capturing them) and that was enough….

    All the war and chaos and the prospect of defeat….

    None of this was as important as the printing presses stopping.

    Of course the "Swiss Dinar" had value becaue the Kurdish authorities accepted it (in payment of taxes and so on) – so other people did also.

    And (of course) the word "dinar" had once been used for a real coin in the area (long before).

    The old Carl Menger story (Principles of Economics …)

    First money is a commodity (say silver – the ancient money of the Middle East), then people start making coins out of the commodity.

    Then the coins are held to have value because the government will accept them in payment of taxes (not just because of the metal the coins contain).

    Then the government issues notes (that it will accept in payment of taxes and so on).

    Although the name of the coin (which, often, was the name for a certain WEIGHT of a commodity) will now be used for the note.

    Thus people associate the currency not just with government threats – but with the traditional money (via the name) i.e. with a MATERIAL (a commodity) that they valued.

    Till the government (or the banks) abuse this too much – by producing lots of …… using the old name as a sort of magic charm.

    Produce enough credit money and the Dollar and the Pound (and so on) will go the way of the Bitcoin (if, as I think likely, these bits of computer code do not prove to be as limited as is claimed).

  7. I am currently taking a course on "law & economics," taught by Professor Joe Sabia, who coincidentally was at UGA (department of consumer economics) between 2005 and 2008.

  8. You address my objections to Bitcoin in the article.

    If Bitcoin is one of many competing standards for extending credit, its inelastic supply is not a problem. Bitcoin is used less frequently as its supply plateaus, but Bitcoin2 appears to fill the gap, and a different, non-discretionary rule for generating Bitcoin2s could incorporate more elasticity.

    A bank's promissory notes themselves can be money, and the supply of these notes obviously respond elastically to the demand for credit. The supply of promissory notes is not obviously related to the supply of the promised standard, particularly if the standard has no non-monetary uses; however, the supply of the standard must be elastic enough to discourage hoarding; otherwise, a rising price creates a deflationary spiral as the circulating supply contracts and credit unwinds.

    I'm a diehard mutualist, so some sort of labor standard still seems the best bet to me. If I owe you a debt, you're entitled to employ me, or to have me employ someone else for you, to perform tasks requiring standard, common skills. After all, people themselves are the demand for credit, so the supply of this standard naturally grows with the demand.

    Fresh, Grade A whole milk also seems a better bet to me, even better than common bricks.

  9. If a note promises a standard with no non-monetary use (like Bitcoin), I redeem it if I distrust the note issuer and want to cash out, i.e. if I'm running on the bank.

    I distrust the note issuer, because I believe that his notes promise Bitcoins more valuable than his capital.

    The notes can over-promise for two reasons, 1) the issuer extends credit recklessly with too little collateral from the outset, or 2) the issuer's capital is sufficient when he extends credit, but Bitcoins then rise in value, relative to the issuer's capital, until the notes promise Bitcoins more valuable than the capital.

    Is there another reason to redeem a note promising Bitcoins?

  10. George if I have ever claimed that having gold as money (or having any commodity as money) would mean a static monetary base, I fully apologize – as that is not true.

    Clearly (for example) if a lot of new sources of gold are found and people use this as money (for example by minting into coins, as was legal up till the 1850s – or by issuing paper or computer documents on the basis of the new gold) the supply of money (the monetary base) would increase.

    Again, if I have ever given you cause to think I deny that, I apologize.

    What I am saying is that a system of commodity money (ideally where people get to choose what commodity they are using) is better than a system where a Central Bank (whether formally government or privately owne) can just print more money – or use credit bubble banking tricks to create de facto "money" from NOTHING (not even bits of paper).

    Bitcoins seem too much a World of Warcraft thing to be worth considering (not that I have anything against computer games – or even using computer "currencies" to buy things in the "real world" if that is what a few people really want to do).

    However, (as I said) the "Swiss Dinar" example is more interesting.

    They started off as fiat notes – but then the only government that would still accept them for taxes and so on (the government of the Kurdish area of Iraq) did NOT have the plates to print more. This meant that the supply was indeed "fixed".

    Indeed more fixed than gold – as more gold might be dug out of the ground, whereas (if the plates no longer existed) no more "Swiss Dinars" could be created.

    This wouod seem to be in accord with Milton Friedman's position near the end of his life – i.e. that the monetary base should be frozen (not "increased with the rise of general output" – the Fisher "stable price index" position that was associated with Friedman for most of his life).

    Sadly, unlike the pre World War II Chicago School, Milton Friedman never really concentrated his mind on the problems of banking (and how the monetary base could be abused to create a fairy castly of debt – a financial system that, in our time, has become little more than Moonbeams mixed with Magic Pixie Dust). However, Milton Friedman had a vast number of other matters to consider – and the growth of the "finance economy" has happened over many years (indeed many decades). Back in the 1950s and 1960s the workings of banks (and so on) did not seem so important as they do now – and the "financial services" proportion of the economy was vastly smaller than it is now (compared to the "real economy" of manufacturing and so on), both in the United States and Britain.

    The idea that an entire nation could be based on "financial services" (like a group of people shipwreaked on a desert island all "getting rich" by selling a hat to each other – ONE hat sold in a vast number of circles, with the rest of the "wealth" simply existing in their ledgers) would have seem far fetched – not worth considering.

    I must stress that the 1950s and 1960s were not some wonder time of sound finance and honest banking (far from it) – but the problems were not on the same SCALE as they now are.

    As for the history of fiat notes.

    The British Pound became fiat in 1931 (it had been at various other points in its history).

    The American Dollar in 1933 (ditto).

    However, overseas governments could still demand gold for Dollars – and Pounds (under the post World War II setup) could be exchanged into Dollars.

    So, very indirectly, some fig leaf of "non fiatness" remained.

    However, that ended in 1971.

    Since then (over 40 years now) the Dollar (like the Pound) has been entirely fiat.

    It has value partly because the government demands it in taxes (and so on) – but also partly out of habit, custom and tradition.

    Including folk memory of when money actually was a commodity.

    Sometimes this is a vague thing – but sometimes it is very specific.

    I remember some years ago a young university student (and by no means a "right wing" person) saying that "well if you went personally to the Bank of England they would still give you a set amount of gold for a Pound" – the young lady took quite a lot convincing that she was mistaken, that the "promise to pay" words on the notes were, basically, meaningless.

    Indeed even the Inland Revenue (the British version of the IRS) got caught up in this thinking – and only a few decades ago.

    An employer was paying his employees in Gold Sovereigns – and yet they were only paying income tax (and payroll tax) as if they were being paid "one Pound per week" (because the Sovereign coin was supposed to be "one Pound").

    Of course the tax regulations were quickly changed. And, regardless of the words upon it, a Sovereign was ruled not to be "one Pound".

  11. "I am a diehard mutualist", a monetary system based on a "labor standard".

    I had forgotten that about Martin – although, come to think of it, he has mentioned it before.

    1. Needless to say (I hope), American mutalists like Benjamin Tucker are the ideological forebears of anarcho-capitalists, according to Murray Rothbard who ought to know. I don't always agree with Rothbard, or with anyone else for that matter, but like him, I reject the labor theory of value in favor of marginalism. Unlike Rothbard, I still accept the "mutualist" label, but if you want to know precisely what I mean by it, you must ask me. Using a standardized labor as a standard of value for extending credit does not assume a labor theory of value, any more than using gold as a standard of value assumes that gold is the ultimate source of all value.

  12. "Money is backed not fiat".

    Perhaps Mike means that money SHOULD be "backed" (I do not even like the term "backed" – I would prefer that commodity actually WAS THE MONEY, but there we go…..).

    However, money is presently NOT "backed".

    This is NOT matter of therectical debate – as with the 16th century argument over whether the Sun goes round the Earth or the Earth goes round the Sun (and before we sneer too much as the followers of T. of Alexandria – what things look like had he been correct?). Of course even in Classical times there were some who argued that the Earth went round the Sun – but only much later was enough hard evidence available to really settle the matter.

    Whereas now the hard evidence is EASY TO FIND as to whether money is fiat or not.

    How much gold does a Dollar represent?

    Please tell me – both in weight and degree of purity, and then show me the statute by which if I go (with a paper Dollar) to either the Federal Reserve (New York branch – where there is some gold), or to the Treasury or to Fort Knox I will given this set amount of gold for this Dollar.

    Of course it does not have to be gold – show me the statute where ANY OTHER commodity is treated in this way.

    I.E. the Dollar defined as a set amount of commodity X – and the government store where I will be given this commodity in return for my paper Dollar.

    It is NOT a "matter of debate" it is a matter of FACT.

    And the FACT is that a Dollar (like a Pound and so on) is fiat.


    I HATE the fiat money system.

    However, it IS so.


    On a different matter………..

    Labour is not a good money – it is not an easy "store of value", and nor is labour a useful "medium of exchange".

    There is a basic confusion here.

    Labour is used to make notes and coins (yes – a thousand times yes), but the notes and coins are NOT made of labour.

    Nor is economic value measured in labour (economic value is subjective – it is not determined by calculating how much labour was used to make something).

    As labour can not (with ease) be used as a money, nor can it "back" a money – although the term "backing" is deeply unuseful anyway.

    If one issues 100 notes each "backed" by one ounce of silver that can be understood.

    It means (unless one is committing fraud – at least fraud as the ordinary human mind would understand the term) that one has 100 ounces of silver ready to be given to someone who comes with one of ones notes (a note that will, of course, be destoyed once the ounce of silver is given in exchange for it).

    But what does a note "backed by labour" mean?

    Does it mean that a note that says "one days work of a slave" written upon it, will mean that a person will be given a slave to work for one day when they hand in the note?

    It would (of course) have to be a SLAVE – as a free person (handed over for the note) would just sit about and not do much, if any, work (why would they do any work – they are not getting paid).

    Also what sort of slave?

    "Labour" is NOT an homogeneous thing (one reason it is NOT suitable to be money).

    No matter how much one might whip a slave they will vary in the amount of work they can do.

    A big strong man will be able to do more work than a small weak man.

    A skilled artist will be able to paint a picture (if whipped till he does) – I would not be able to paint a good picture no matter how much I was whipped (I would just die under the whip – because I do not have the ability to paint a good picture).

    An attractive (subjective of course) slave would be valued for sexual intercourse more than an ugly one – and so on.

    So – to have any hope at all, a "labour ticket" money would have to specify which INDIVIDUAL slave it entitled the owner of the paper note to have the use of for a day.

    A day of "labour" is useless (almost meaningless).

    WHOSE labour? Labout (I repeat) is NOT homogeneous.

    And, of course, a free whip would also be of use – as the person would not do as much work as they were capable of , without the use of the whip (or some other physical incentive of pain or the fear of it).

    1. Paul:

      I actually do mean that the dollar is really and truly backed, first of all by the Fed's assets (gold+bonds), but also by the government's ability to tax. If there were such a thing as a money without backing, then we should see lots of central banks around the world that held no assets. Instead we see that all central banks hold assets.

      I have belabored this example before, but think of a landlord whose land is worth 1000 oz. of silver. He buys his groceries by writing the grocer a slip of paper that the landlord will accept for 1 oz. worth of rent on his land. Those slips could circulate as money. The landlord could then declare that he will redeem each slip for 1 oz. of silver. As long as his land is worth enough, he is able to cover this promise. But what if he then suspended silver convertibility, while still accepting the slips for rent? The slips are still backed and still convertible (into rent, not silver), but the simple suspension of silver convertibility will leave some people thinking that the slips are no longer backed, and the false idea that the slips are fiat money will take hold.

      1. The landlord's notes would still be convertible into silver, only not by the landlord and not necessarily at face value. If the market value of a year on the land for which the landlord accepts a "1 oz." note is one ounce of silver, then the notes would trade at face value.

  13. Mike – I agree that the ability to tax is important, but I would argue that it is imporant for FIAT money.

    People have to pay the their taxes in Dollars (if they live in the United States), so they must get Dollars to pay their taxes (even if they are paid in gold – or whatever).

    After all the power to tax does not mean (and has not meant since 1933) the power to tax in gold.

    The government just gets in fiat money with its taxes – so that can not be "backing" for its fiat money.

    Fiat money can not "back" itself.

    By the way the assets of the Fed are rather limited gold reserves, and a lot of government IOUs (bonds that are essentially worthless – especially if one considers the longer term fiscal position of the United States Federal government). Of course American government debt (unlike say Greek government debt) is demominated in Dollars – so the government can simply produce more money to pay its debts (which is what is being done – the Federal Reserve produces money from NOTHING, which it then moves into the hands of Goldman Sachs, and so on, to buy government debt).


    If I print a note that says "one ounce of silver" upon it – this (to a normal person) is making the claim that I have an ounce of silver (so that anyone can had this note in for an ounce of silver – the note would then be destroyed).

    So if I issue one hundred such notes – I better have one hundred ounces of silver (unless I am playing a shell game).

    By the way, what has a "landlord" got to do with anything?

    Money "based on land" is (without exception – as far as I can remember) a scam.

    The classic example being the assignats of the French Revolution – although the Revolutionaries did try and reply to any questions about "what specific piece of land is this note a title deed to?" by removing the head of the person who asked the question.

    They also tried to keep prices down by law, executing anyone who increased prices – but prices went up anyway.

    Fiat money is fiat money – even if a government (dishonestly) pretends it is "backed" by something.

    In the United States the fiat money experiment was called "the Continental" – hense the old saying "not worth a Continental".

    Sadly the Dollar is going to go the same way.

  14. Martin – "many economists believe that gold is not good as money [or words to that effect] because its supply is relatively inelasic".

    That is actually one of the reasons why gold is very suitable indeed to be used as money.

    If its supply could be increased with ease (as with fiat money notes) then it would be UNsuitable for use as money.

    Remember prices going down over time (as better ways of producing goods and services are developed, I am NOT talking about a sudden crash in prices) is NOT a bad thing.

    In short "many economists" know little or nothing about basic economics.

    1. If its supply could be increased with ease (as with fiat money notes) then it would be UNsuitable for use as money.

      If not inhibited by force, the supply of money naturally expands to accommodate the desires of free people for indirect exchange. It has nothing to do with the supply of a commodity like gold.

      Remember prices going down over time (as better ways of producing goods and services are developed, I am NOT talking about a sudden crash in prices) is NOT a bad thing.

      Particular prices going down over time can be a good thing or a bad thing. If prices generally fall because a monetary authority forcibly constrains the supply of money, that's a bad thing.

  15. By the way – fiat money is NOT about "imposing debts". Other than in the sense that taxes are demanded in the fiat money.

  16. I have already explained why labor is not a good choice for money – and it has got nothing to do with the labor theory of value.

    Labor is (for example) nonhomogeneous – a "labor note" (or whatever) would have to specify WHOSE labor was being offered for the day (or however long the note offered the labor) and there would have to be some hard incentive for the person whose labor was being offered to do their best – if not a whip, then some other way.

    Also the same person could not work for two different masters (in different places) at the same time – the whole idea of labor money is deeply problematic (for these and other reasons).

    As for Rothbard in relation to Tucker and co.

    Rothbard was very clear that these people were deeply mistaken about both land, and banking.

    The near zero interest rate dreams sound like Keynes (when he was with his Cambridge chums – see Hunter-Lewis "Where Keynes Went Wrong").

    And some of the ideas on land sound a bit like Henry George.

    H.G. quite rightly noted that as a the population of newly settled land goes up, the price of land tends to go up to – so that poor people can no longer buy land.

    I repeat that H.G. was quite correct in his observations – but, of course, he was also totally wrong in thinking the state should react by imposing a tax.

    I suspect that a lot of this stuff goes back to the confuses of John Locke – and his "Lockian Proviso" of "as much and as good left for others".

    That was impossible in the Enland of his time – indeed virtually anywhere at any time. A possible exception is Icland when the Norse settlers first arrived.

    So why did Locke come out with a theory of land ownership which implied that owners have to justify their ownership by arguing that everyone else got higher living standards by them (the owners) owning land (or………)?

    My guess is that is the influence of the German theologian and legal thinker Samuel Pufendorf – and his interpretation of the first book of the Bible.

    Pufendorf (and others) seem to have interprepted God giving the world to people as God giving the world to people COLLECTIVELY – so that private owners have to "justify" their ownership in such-and-such a way.

    Whereas such theologians and legal thinkers as the Dutchman Hugo Grontius held that the world was just opened by God – and that land remained unowned till someone claimed it.

    1. Labor is (for example) nonhomogeneous …

      Labor generally cannot be a standard of value, but gold generally cannot be a standard of value either. Only 24k gold can be a standard of value. A labor standard must be sufficiently standardized. This point is not a controversy. Common law can judge the sufficiency of particular labor to meet the standard.

      Locke's opinion of the labor theory of value is irrelevant, but Locke espoused the propriety of labor rather than the classical labor theory of value.

  17. By the way – before anyone makes the mistake. John Locke did not believe in the L theory of value. Karan V. made that clear many years ago (I remember citing her work in 1989 – so it must be prior to that).

    However, Locke does come out with some really weird stuff.

    For example, he claims that a ship's captain who does not unload a cargo of food at a port where there are starving people, but sells at a port where prices are higher is "guilty of a crime". Not because he has a contract with the first people (no contract involved), but because the starving have a right to be fed.

    I had assumed that the "right to life" meant a right not to be murdered – but it seems (from the Venditto – spelling alert, and other such lesser known texts) that Locke meant a "right to life" litterally.

    This, of course, means that we are all criminals – as there are always starving people somewhere in the world (so when eat food we do not need – rather than giving it to them…..).

    To both Roman Law legal philosophy and Common Law legal philosophy this doctrine is crazy.

    1. Feeding a starving person on the other side of the world with the food in front of me now cannot be a virtue, because it is an impossibility; however, if I stuff my already well fed face while the starving person sits beside me, Locke calls this behavior "criminal", regardless of any contract, because he is a Christian. This Christian value does not imply state socialism, and it's neither weird nor crazy in my way of thinking.

  18. Gold does not determine value – true Martin. Economic value is subjective – gold only has value if people want it.

    However, gold can be used as money (if people want it) – labour is far harder to use as money, because (for example) labour is nonhomogeneous.

  19. On Locke.

    Christianity in general (and natural law scholastic thought in particular) make a distinction between sins and crimes. All crimes (natural law definition of "crime" – not whatever some government arbitrarily decides to punish people for) are sins – but all sins are NOT automatically crimes.

    Leftist establishment types (the sort of person who dominates the education system and the "mainstream" media) have a problem understanding the above (because they have a totalitarian mindset). For example, is someone says that homosexual acts or contraception are wrong then it is assumed (by the totalitarian minded) that this means that the person speaking wants to BAN homosexual acts or contraception (because that is what they, the totalitarians, do with anything they hold to be wrong). The idea that something can be wrong, but NOT criminal is hard for the leftist mindset to grasp.

    However, John Locke has no such excuse.

    A failure to show the virtue of charity (by, for example, not feeding a starving person – whether in front of you, or on television from thousands of miles away) is indeed a moral failing – but it is NOT criminal.

    Justice (to each their own) is the virtue in relation to crime and punishment – but it is NOT the only virtue.

    Charity is NOT about justice – it is about mercy.

    Actually the roots of Locke's (possible) confusion on the point of compulsory-charity (at least as much an error as thinking in terms of dry-water) may go to the same person as his confusion on the granting of the Earth (by God) to people (the idea that the world was granted collectively versus the idea that land is UNOWNED till a specific piece is specifically and actively claimed).

    Samual Pufendorf (the Germanic thinker I have mentioned before) may be the source of both confusions in the mind of Locke.

  20. On the use of the word "totaliatarian", I am using it the way the person who first spread its use did.

    Mussolini (once a leading Marxist in Italy – and even when he rejected strict Marxism he remained a socialist to his dying day) defined totalitarianism as nothing being outside the concern of the state (i.e. of the commands of the collective – which, as a legal positivist, he how he defined "law"). He held totalitarianism to be a good thing – and to be the opposite of the (classical) liberalism he despised.

    For what Mussolini meant by "liberalism" (which, I repeat, he detested), it is best to consider French 19th century liberal thought rather than British (as British liberal thought was much more confused – with peopel of all sorts of radically different opinions calling themselves "liberals").

    Especially the French school of liberal economics – from the Say family (and before) and Bastiat right up to thinkers in Mussolini's own time.

    However, there were also Italian thinkers he was pointing out (with hostility) – such as the 19th century Italian economist Ferrara (spelling alert).

    Mussolini was (of course) very popular with American Progressives till very late on.

    Hardly surprising as he both shared their (collectivist) political opinions, but also their cultural sense.

    Far from the clown he was presented as in later propaganda, the real Mussolini was highly cultured (could speak and read several languages, was very well read and so on) and thus appealed to "interlectuals".

    And his culture was real – he was, for example, far better read than other dictators of the period (such as Hitler and Stalin).

    As for his move from Marxist orthodoxy – I think this came from his stress on the importance of "myth".

    Marxism comes close to denying the existance of objective truth (all that "class ideology" stuff that Marxists stress so much) – but it never quite denies it.

    William James (and the American Pragmatists) did deny it (truth, like right, was just "the expedient in our way of thinking" to philosophers like William James – which is why the "Social Gospel" types liked his teachings so much).

    Mussolini both read this stuff direct – and also (and very importantly) via the interpretation of Sorel.

    To the "philospher of violence" truth (in the sense a "reactionary" would understand the word) did not matter at all – what mattered was the power of "myth", specfically the power of myth to make people FIGHT.

    For example, it does not matter (to this way of thinking) that (for example) that Norway never had a "Feudal mode of production" (i.e. serfdom) – if thinking that it did (i.e. that the Marxist stage theory of history is "true") can inspire people to fight and kill, then it is a useful myth, a "good" myth, a "noble lie" (as Plato might have put it).

  21. Martin "forceably restrains the supply of money".

    This seems to assume that an increase in the supply of money is a good thing. It is not – real economic progress is not based on their being more money (the Devil was not actually telling the truth to Faust in the play – it goes badly when Faust agress to the Devil's suggestion to increase prosperity by increasing the supply of money).

    However, who said that I believed that force should be used to limit the supply of money?

    If people choose gold as money and you find a gold mine – well knock yourself out, mine as much gold as you want and turn as much of it into coins as you want to.

    And if you wish to issue notes (as certificates of ownership for the gold in your vault) – go right ahead.

    Although forgive me for being cynical – as when bankers (and other such) have done that in the past ("we just want to stop you drowning if you fall in the river" and other such arguments) it has tended to be a cover for fraud (at least as a normal person would define "fraud").

    Nor does it have to be gold.

    If people (buyers and sellers) choose silver (or any other commodity) that is up to them.

    Just do not pretend to have money (whatever commodity people are using as money) when you do NOT have it.

    Being hostile to fraud is not a matter of "forceably limiting the supply of money", it is simply asking you to have the money you say you have.

    You can not lend out what you do not have.

    Any more than the same stuff (or the same person) can not be in two different places at the same time (if my savings have been lent out they are NOT "on deposit").

    Otherwise we are back to the Devil – he can be in two (or lots) of places at the same time (or so I am told).

    But I can not do that trick Martin – and neither can you.

    And nor can the bankers.

    Magic is (as far as I know) not real.

    Stuff (such as money) can not really be in two different places at the same time (in spite of all the shell games and smoke-and-mirror tricks).

    By the way…….

    Please people, do not throw QM physics at me (with particles, supposedly, being in different places at the same time and ……). That sort of defence of credit bubble finance is not convincing.

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