WEBVTT NOTE Money Proper and Money Substitutes in Mises’s Thought 1 00:00:00.000 --> 00:00:06.400 Good morning everybody. The title of my paper on the program says Money Proper and Money 2 00:00:06.400 --> 00:00:11.640 Substitutes in Mises' Thought. It's actually a little more specific than that, my paper. 3 00:00:11.640 --> 00:00:20.480 It's more specifically a critique of Professor Selgen's paper, his paper that is titled 100% 4 00:00:20.480 --> 00:00:25.000 Reserve Money, the Small Chain Challenge, published in the quarterly journal of Austrian 5 00:00:25.000 --> 00:00:31.840 and Economics, and so it's more specifically a critique of his, and then I do go into some 6 00:00:31.840 --> 00:00:37.880 more general issues with Mises' distinction between money and money substitutes. 7 00:00:37.880 --> 00:00:43.340 So I will first recreate his argument that he has in that paper of his, and then I will 8 00:00:43.340 --> 00:00:45.860 put forth my argument. 9 00:00:45.860 --> 00:00:52.020 So his paper is 100% reserve money, the small chain challenge, and it is more largely based 10 00:00:52.020 --> 00:00:59.100 on his work in his book, which is titled Good Money, and in that book, he shows this historical 11 00:00:59.100 --> 00:01:05.460 instance of privately issued coins or privately issued small change. 12 00:01:05.460 --> 00:01:11.180 And what it was, was there was this shortage of small change, royal small change in England 13 00:01:11.180 --> 00:01:18.140 in the 18th century, and these private producers or private actually copper mine owners, they 14 00:01:18.140 --> 00:01:24.860 They started to mint their own coins and mint them and put their own, you know, stamps on 15 00:01:24.860 --> 00:01:29.420 them and pay them out as wages because there was the shortage of small change to pay as 16 00:01:29.420 --> 00:01:31.540 wages to these workers. 17 00:01:31.540 --> 00:01:34.980 So they started to produce their own coins with their own copper and paying them out 18 00:01:34.980 --> 00:01:35.980 as wages. 19 00:01:35.980 --> 00:01:41.340 So what he is arguing in the paper is that, so this was privately produced money and it 20 00:01:41.340 --> 00:01:42.340 worked very well. 21 00:01:42.340 --> 00:01:45.860 You know, they went into circulation at, you know, it filled this need of small change 22 00:01:45.860 --> 00:01:46.860 in the country. 23 00:01:46.860 --> 00:01:53.580 But it was also, in the paper he says, that this was an instance of fiduciary media, 24 00:01:53.580 --> 00:02:00.700 meaning that they were unbacked coins and that this was a case of privately produced fiduciary media 25 00:02:00.700 --> 00:02:06.140 and that if it had not been issued on a fiduciary basis, that it would not have been profitable. 26 00:02:06.140 --> 00:02:10.460 It could not have arisen unless it was fiduciary. 27 00:02:10.460 --> 00:02:19.460 Okay, so there's a few technical aspects of the issue which I will go over. 28 00:02:19.460 --> 00:02:26.060 The first one is that these coins, they were privately produced, they were produced by copper mine owners, 29 00:02:26.060 --> 00:02:32.260 but they were coming into circulation as wages, so there was no prior deposit contract. 30 00:02:32.260 --> 00:02:35.660 So when we usually talk about fractional reserves and fiduciary media, 31 00:02:35.660 --> 00:02:42.020 We're talking about claims issued on the basis of a prior contract, usually at a bank. 32 00:02:42.020 --> 00:02:44.060 So this is not connected to that. 33 00:02:44.060 --> 00:02:45.340 This is completely separate. 34 00:02:45.340 --> 00:02:48.300 This is coins which are coming into circulation. 35 00:02:48.300 --> 00:02:49.500 So somebody works for you. 36 00:02:49.500 --> 00:02:50.220 They work for you. 37 00:02:50.220 --> 00:02:54.660 And as wages, you pay them these new coins that you have produced yourself. 38 00:02:54.660 --> 00:02:57.100 So the exchange is one of work for wages. 39 00:02:57.100 --> 00:02:58.380 There's no deposit. 40 00:02:58.380 --> 00:02:59.620 There's none of that. 41 00:02:59.620 --> 00:03:06.020 The second one is that we take it that it's a completely voluntary arrangement. 42 00:03:06.020 --> 00:03:09.500 He goes into his book, it's completely private, it's a completely voluntary arrangement. 43 00:03:09.500 --> 00:03:15.700 Nobody was forced to take these coins, there was nobody supporting the circulation of these coins, 44 00:03:15.700 --> 00:03:19.580 yet they did come into circulation, it was completely voluntary. 45 00:03:19.580 --> 00:03:25.660 And the important aspect is that these coins also bore redemption pledges. 46 00:03:25.660 --> 00:03:33.100 So a redemption pledge saying that if anybody holding this coin came back to the producer, right, 47 00:03:33.100 --> 00:03:39.540 that the producer would pay equivalent amount of royal pennies to the person. 48 00:03:39.540 --> 00:03:43.940 So it was this thing which says redeemable on demand on the coin. 49 00:03:43.940 --> 00:03:47.060 So in a sense, it made it into a claim. 50 00:03:47.060 --> 00:03:53.580 If you held this coin, it was sort of like holding a claim to money because you could go back then to the producer. 51 00:03:53.580 --> 00:03:59.220 and he would, it said he would pay you back an equivalent amount of royal copper pennies. 52 00:03:59.220 --> 00:04:15.940 So what Professor Selgin is arguing is that, so what he is arguing is that suppose somebody 53 00:04:15.940 --> 00:04:20.660 is producing one penny and the cost of producing the penny, so the, you know, the mining and 54 00:04:20.660 --> 00:04:29.060 and the production cost is half a penny, and this penny costs half a penny to produce, 55 00:04:29.060 --> 00:04:35.900 but it also bears this redemption pledge saying that it will pay you back money on demand. 56 00:04:35.900 --> 00:04:36.900 It's a claim. 57 00:04:36.900 --> 00:04:43.220 So now if you require these producers to keep a hundred percent reserves in equivalent money 58 00:04:43.220 --> 00:04:49.540 to meet redemption demand, that means you are requiring them to keep an extra penny 59 00:04:49.540 --> 00:04:54.420 on reserve, right, to pay back in case people come to redeem these coins. 60 00:04:54.420 --> 00:05:00.820 So in effect, you're creating this system where the cost of producing one penny is actually 61 00:05:00.820 --> 00:05:01.860 greater than one penny. 62 00:05:01.860 --> 00:05:04.120 It becomes 1.5. 63 00:05:04.120 --> 00:05:06.600 So his argument is that this is too high. 64 00:05:06.600 --> 00:05:11.580 This cost is too high for any sort of, you know, in an economy and especially in this 65 00:05:11.580 --> 00:05:12.580 case. 66 00:05:12.580 --> 00:05:18.640 So the producers of those coins would not, it would not be profitable for them to produce 67 00:05:18.640 --> 00:05:38.640 So he used those coins if they kept 100% reserves, so they would have to keep less than 100% reserves, right, and then it would be profitable, but that also means in his system that these coins were then fiduciary media or they were not fully backed, so if everybody went back to redeem them, the people would not have 100% reserves, so that is his argument. 68 00:05:38.640 --> 00:05:51.000 So, this is where my argument comes in. I use Mises' typology of money, which is what 69 00:05:51.000 --> 00:05:57.280 Professor Selgen is using as well, fiduciary media and fully backed substitutes of money, 70 00:05:57.280 --> 00:06:09.440 To show that one could also argue in a different way, so I'm going to put this... 71 00:06:09.440 --> 00:06:15.760 So this is Mises' typology of money and taken from The Theory of Money and Credit. 72 00:06:15.760 --> 00:06:21.400 And if you look at it, so there's money in the narrower sense and then there's money 73 00:06:21.400 --> 00:06:23.080 substitutes, right? 74 00:06:23.080 --> 00:06:25.960 Money substitutes which are claims to money. 75 00:06:25.960 --> 00:06:32.880 And just straight looking at this, it just follows logically that only money substitutes 76 00:06:32.880 --> 00:06:38.240 can possibly be either fiduciary media or money certificates. 77 00:06:38.240 --> 00:06:42.240 Money certificates are fully backed money substitutes, right? 78 00:06:42.240 --> 00:06:47.280 Only money substitutes can be fiduciary media, not money itself. 79 00:06:47.280 --> 00:06:53.080 It doesn't make sense to say that money on its own is not fully backed. 80 00:06:53.080 --> 00:06:54.080 Fully backed by what? 81 00:06:54.080 --> 00:06:55.520 It's not a claim to anything. 82 00:06:55.520 --> 00:06:56.520 It's valued for itself. 83 00:06:56.520 --> 00:06:58.360 It's money on its own. 84 00:06:58.360 --> 00:07:06.040 Only something that is a substitute for money, which is a claim for money, can then be fiduciary 85 00:07:06.040 --> 00:07:07.040 media. 86 00:07:07.040 --> 00:07:13.360 So what I argue in the paper is that there is an equally good interpretation to be made 87 00:07:13.360 --> 00:07:19.680 of these coins as just money, as new money that was valued for itself, that came into 88 00:07:19.680 --> 00:07:20.680 circulation. 89 00:07:20.680 --> 00:07:21.680 It was a new private money. 90 00:07:21.680 --> 00:07:28.240 And yes, it did bear these redemption pledges saying that, you know, that we will pay you 91 00:07:28.240 --> 00:07:34.800 money, you know, in return for these coins, but I interpret that as just like a regular 92 00:07:34.800 --> 00:07:38.240 buyback guarantee that you have on many goods. 93 00:07:38.240 --> 00:08:08.240 So an analogy to my argument would be any good that you would buy in the store, right, that you would value anyway, you would exchange for, you would exchange money for that good, but suppose that good now bears a redemption guarantee saying that, you know, we will pay you money on demand for that, right, but that does not make that good now, it does not make it into a fiduciary media, it's just a buyback guarantee, that that good on its own is valued for itself, so what I argue is that 94 00:08:08.240 --> 00:08:20.240 for those coins, they had a certain metallic content, which was actually pretty high, and that they were actually primarily first valued for the copper content. 95 00:08:20.240 --> 00:08:30.240 And yes, that, you know, having the redemption pledge on there did add to its value, but that was not the only thing that people valued it for. 96 00:08:30.240 --> 00:08:37.840 My paper has, actually I use evidence from Professor Sulgen's book, Good Money itself, 97 00:08:37.840 --> 00:08:43.600 which there are many places, it's a very detailed historical work and there's many places which 98 00:08:43.600 --> 00:08:49.480 suggest that these coins were just being valued for their copper content. 99 00:08:49.480 --> 00:09:02.620 So I have a quote here, this is from his book, and he's talking about these workers who refused 100 00:09:02.620 --> 00:09:10.320 to take these coins from their master because they were too lightweight, they did not have 101 00:09:10.320 --> 00:09:14.520 enough copper in them, and the denomination that the master put on them was too high for 102 00:09:14.520 --> 00:09:22.520 I'm reading this. It's talking of this master who produced these coins. He says, 103 00:09:22.520 --> 00:09:29.520 instead he originally assigned his coins, which bore no express denomination, a value of one penny, 104 00:09:29.520 --> 00:09:33.520 despite the fact that they only weighed half as much as Druid pennies. 105 00:09:33.520 --> 00:09:37.520 So Druid pennies are a competing private penny. 106 00:09:37.520 --> 00:09:41.520 Wilkinson, this is Wilkinson, is the master we're talking about. 107 00:09:41.520 --> 00:09:45.640 Hanson's workers and tradesmen, where his works were located, refused to accept the 108 00:09:45.640 --> 00:09:50.680 great iron master's tokens at the rate he assigned to them, forcing him to cry them down, 109 00:09:50.680 --> 00:09:54.240 as it were, to half their originally intended value. 110 00:09:54.240 --> 00:09:59.040 Considered as half pennies, the Wiley's were as good as their druid counterparts, and only 111 00:09:59.040 --> 00:10:03.520 at this rating did they first gain widespread acceptance. 112 00:10:03.520 --> 00:10:10.040 So this is, you know, it's telling you that, you know, the copper content of those pennies, 113 00:10:10.040 --> 00:10:15.840 It was part of the valuation of those coins, you know, it was an important part of that valuation. 114 00:10:15.840 --> 00:10:21.720 And another thing which points to it is the amount of metallic content in these coins. 115 00:10:21.720 --> 00:10:28.320 When you talk of token coins, a token coin is usually meant to be something whose face value 116 00:10:28.320 --> 00:10:33.840 or redemption value is very much higher than its metallic value. 117 00:10:33.840 --> 00:10:38.120 It's the metallic value or, you know, if you were to just sell it as metal, 118 00:10:38.120 --> 00:10:43.200 It should be worth much less than what you could redeem it for, if you were to redeem it for. 119 00:10:43.200 --> 00:10:51.920 But here, in this case, the pennies, there was, I think it was nine pence to a shilling was the metallic value. 120 00:10:51.920 --> 00:10:58.040 So a shilling has 12 pennies and the metallic value was nine pence of that. 121 00:10:58.040 --> 00:11:01.600 That's 75%. That's, you know, it's much higher. 122 00:11:01.600 --> 00:11:07.520 It's, you know, it's again telling you that people actually did value these for their copper content. 123 00:11:07.520 --> 00:11:12.520 And so it's not as clear cut as Professor Selgen is claiming. 124 00:11:14.280 --> 00:11:19.280 And this is where the important distinction from Mises comes in 125 00:11:19.320 --> 00:11:24.320 where he talks about claims and money substitutes. 126 00:11:25.960 --> 00:11:30.800 So the question is, does any good which circulates as money, 127 00:11:30.800 --> 00:11:32.960 if it bears a claim which says, 128 00:11:32.960 --> 00:11:34.600 I will pay you back money on demand, 129 00:11:34.600 --> 00:11:36.720 does that make it a money substitute? 130 00:11:36.720 --> 00:11:42.760 Because that would make a lot of things money substituted and it would make a lot of things fiduciary media. 131 00:11:42.760 --> 00:11:48.000 So you can imagine goods which we buy, we would buy them for themselves, we would value them for themselves, 132 00:11:48.000 --> 00:11:52.880 but they also bear these guarantees saying I will pay you money back in return for them. 133 00:11:52.880 --> 00:12:02.600 Now, let's suppose you have this little, I use this example, it's a miniature car model and people value them for themselves, 134 00:12:02.600 --> 00:12:06.160 but they also bear these guarantees saying that I will pay you back money on demand. 135 00:12:06.160 --> 00:12:13.280 and now let's say there's hyperinflation in our economy and these little things start circulating as media of exchange. 136 00:12:13.280 --> 00:12:33.840 Now does that mean those things are fiduciary media because just because the producers of those goods did not back it up a hundred percent, keep a hundred percent reserves or keep all the money that you paid for them under lock and key just in case you wanted to buy them or sell them back and redeem that money, you know, so there's a problem there. 137 00:12:33.840 --> 00:12:40.400 And so this is where I use Mises and Mises even says this when he's talking, when he's defining money substitutes. 138 00:12:40.400 --> 00:12:47.560 He says, you know, money substitutes are claims to money payable on demand, but he says claims are not goods. 139 00:12:47.560 --> 00:12:50.320 They are means of obtaining disposal over goods. 140 00:12:50.320 --> 00:12:54.360 This determines their whole nature and economic significance. 141 00:12:54.360 --> 00:12:58.720 They themselves are not valued directly, but indirectly. 142 00:12:58.720 --> 00:13:03.360 Their value is derived from that of the economic goods to which they refer. 143 00:13:03.360 --> 00:13:16.000 So, it's clear, even in Mises, that a money substitute can only be something which is valued only as a claim, not something which is valued for itself and as a claim. 144 00:13:16.000 --> 00:13:19.600 In that case, he even says somewhere, in that case, it would just be money. 145 00:13:19.600 --> 00:13:26.720 And that is basically what I am arguing, is that those coins, which were, you know, it's pretty clear that they were valued for their metallic content, 146 00:13:26.720 --> 00:13:56.720 and that they were just money and they bought these redemption guarantees but that doesn't mean that the producers now have to keep you know all the money on reserve just in case people came back it's just a regular business decision it it boils down to a business decision it's one which a lot of businessmen you know need to make it has nothing to do it's not relevant at all to this question of a hundred percent reserves fraction reserves none of that even applies here it's just a regular business decision so I would yeah I would 147 00:13:56.720 --> 00:14:26.720 I would just like to end by saying that because one of the arguments made in favor of fractional reserves is that it's a business decision for a bank, right, it's just, you know, it's just a business decision, and I'm not arguing that that's right or that's wrong, I'm not arguing about that, but in this case, this is something which was just, it was actually a business decision, it's actually a business decision, if you produce a good, you sell it on the market, you put a guarantee saying I'll buy it back, right, 148 00:14:26.720 --> 00:14:56.050 or I'll, you know, I'll pay you your money back in return for it, then the amount of inventory you must keep on reserve to meet that demand is a business decision, it's a legitimate business decision, but that does not mean that, you know, it's a case of fractional reserves working well, it's, it doesn't apply here, it's just a separate business decision. Yeah, thank you.