Money Proper and Money Substitutes in Mises’s Thought

0:00Good morning everybody. The title of my paper on the program says Money Proper and Money Substitutes in Mises' Thought. It's actually a little more specific than that, my paper. It's more specifically a critique of Professor Selgen's paper, his paper that is titled 100% Reserve Money, the Small Chain Challenge, published in the quarterly journal of Austrian and Economics, and so it's more specifically a critique of his, and then I do go into some more general issues with Mises' distinction between money and money substitutes. So I will first recreate his argument that he has in that paper of his, and then I will put forth my argument.

0:45So his paper is 100% reserve money, the small chain challenge, and it is more largely based on his work in his book, which is titled Good Money, and in that book, he shows this historical instance of privately issued coins or privately issued small change. And what it was, was there was this shortage of small change, royal small change in England in the 18th century, and these private producers or private actually copper mine owners, they They started to mint their own coins and mint them and put their own, you know, stamps on them and pay them out as wages because there was the shortage of small change to pay as wages to these workers.

1:31So they started to produce their own coins with their own copper and paying them out as wages. So what he is arguing in the paper is that, so this was privately produced money and it worked very well. You know, they went into circulation at, you know, it filled this need of small change in the country. But it was also, in the paper he says, that this was an instance of fiduciary media, meaning that they were unbacked coins and that this was a case of privately produced fiduciary media and that if it had not been issued on a fiduciary basis, that it would not have been profitable. It could not have arisen unless it was fiduciary. Okay, so there's a few technical aspects of the issue which I will go over.

2:19The first one is that these coins, they were privately produced, they were produced by copper mine owners, but they were coming into circulation as wages, so there was no prior deposit contract. So when we usually talk about fractional reserves and fiduciary media, We're talking about claims issued on the basis of a prior contract, usually at a bank. So this is not connected to that. This is completely separate. This is coins which are coming into circulation. So somebody works for you. They work for you. And as wages, you pay them these new coins that you have produced yourself. So the exchange is one of work for wages. There's no deposit. There's none of that. The second one is that we take it that it's a completely voluntary arrangement.

3:06He goes into his book, it's completely private, it's a completely voluntary arrangement. Nobody was forced to take these coins, there was nobody supporting the circulation of these coins, yet they did come into circulation, it was completely voluntary. And the important aspect is that these coins also bore redemption pledges. So a redemption pledge saying that if anybody holding this coin came back to the producer, right, that the producer would pay equivalent amount of royal pennies to the person. So it was this thing which says redeemable on demand on the coin. So in a sense, it made it into a claim. If you held this coin, it was sort of like holding a claim to money because you could go back then to the producer.

3:53and he would, it said he would pay you back an equivalent amount of royal copper pennies. So what Professor Selgin is arguing is that, so what he is arguing is that suppose somebody is producing one penny and the cost of producing the penny, so the, you know, the mining and and the production cost is half a penny, and this penny costs half a penny to produce, but it also bears this redemption pledge saying that it will pay you back money on demand. It's a claim. So now if you require these producers to keep a hundred percent reserves in equivalent money to meet redemption demand, that means you are requiring them to keep an extra penny on reserve, right, to pay back in case people come to redeem these coins.

4:54So in effect, you're creating this system where the cost of producing one penny is actually greater than one penny. It becomes 1.5. So his argument is that this is too high. This cost is too high for any sort of, you know, in an economy and especially in this case. So the producers of those coins would not, it would not be profitable for them to produce 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. So, this is where my argument comes in. I use Mises' typology of money, which is what Professor Selgen is using as well, fiduciary media and fully backed substitutes of money, To show that one could also argue in a different way, so I'm going to put this...

6:09So this is Mises' typology of money and taken from The Theory of Money and Credit. And if you look at it, so there's money in the narrower sense and then there's money substitutes, right? Money substitutes which are claims to money. And just straight looking at this, it just follows logically that only money substitutes can possibly be either fiduciary media or money certificates. Money certificates are fully backed money substitutes, right? Only money substitutes can be fiduciary media, not money itself. It doesn't make sense to say that money on its own is not fully backed. Fully backed by what? It's not a claim to anything.

6:55It's valued for itself. It's money on its own. Only something that is a substitute for money, which is a claim for money, can then be fiduciary media. So what I argue in the paper is that there is an equally good interpretation to be made of these coins as just money, as new money that was valued for itself, that came into circulation. It was a new private money. And yes, it did bear these redemption pledges saying that, you know, that we will pay you money, you know, in return for these coins, but I interpret that as just like a regular buyback guarantee that you have on many goods. 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

8:08for 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. 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. My paper has, actually I use evidence from Professor Sulgen's book, Good Money itself, which there are many places, it's a very detailed historical work and there's many places which suggest that these coins were just being valued for their copper content. So I have a quote here, this is from his book, and he's talking about these workers who refused to take these coins from their master because they were too lightweight, they did not have enough copper in them, and the denomination that the master put on them was too high for I'm reading this. It's talking of this master who produced these coins. He says, instead he originally assigned his coins, which bore no express denomination, a value of one penny,

9:29despite the fact that they only weighed half as much as Druid pennies. So Druid pennies are a competing private penny. Wilkinson, this is Wilkinson, is the master we're talking about. Hanson's workers and tradesmen, where his works were located, refused to accept the great iron master's tokens at the rate he assigned to them, forcing him to cry them down, as it were, to half their originally intended value. Considered as half pennies, the Wiley's were as good as their druid counterparts, and only at this rating did they first gain widespread acceptance. So this is, you know, it's telling you that, you know, the copper content of those pennies, It was part of the valuation of those coins, you know, it was an important part of that valuation.

10:15And another thing which points to it is the amount of metallic content in these coins. When you talk of token coins, a token coin is usually meant to be something whose face value or redemption value is very much higher than its metallic value. It's the metallic value or, you know, if you were to just sell it as metal, It should be worth much less than what you could redeem it for, if you were to redeem it for. But here, in this case, the pennies, there was, I think it was nine pence to a shilling was the metallic value. So a shilling has 12 pennies and the metallic value was nine pence of that. That's 75%. That's, you know, it's much higher.

11:01It's, you know, it's again telling you that people actually did value these for their copper content. And so it's not as clear cut as Professor Selgen is claiming. And this is where the important distinction from Mises comes in where he talks about claims and money substitutes. So the question is, does any good which circulates as money, if it bears a claim which says, I will pay you back money on demand, does that make it a money substitute? Because that would make a lot of things money substituted and it would make a lot of things fiduciary media. So you can imagine goods which we buy, we would buy them for themselves, we would value them for themselves, but they also bear these guarantees saying I will pay you money back in return for them.

11:52Now, let's suppose you have this little, I use this example, it's a miniature car model and people value them for themselves, but they also bear these guarantees saying that I will pay you back money on demand. and now let's say there's hyperinflation in our economy and these little things start circulating as media of exchange. 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. And so this is where I use Mises and Mises even says this when he's talking, when he's defining money substitutes.

12:40He says, you know, money substitutes are claims to money payable on demand, but he says claims are not goods. They are means of obtaining disposal over goods. This determines their whole nature and economic significance. They themselves are not valued directly, but indirectly. Their value is derived from that of the economic goods to which they refer. 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. In that case, he even says somewhere, in that case, it would just be money. 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, 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

13:56I 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, 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.