Sunday, March 03, 2013

The Great Debate: Mount Chapter 3




So...  a trap unsprung...   well...  if you recall there was another word in that title.  The word was mostly.  The fact is I knew that by choosing misean ground to fight on, I would be forced to deal with Chapter 3.   I hate Chapter 3.

Oh... I'm sorry.  I'm talking about Mises' Theory of Money and Credit.  Its in Chapter 3 of that epic work that he lays out four different types of money and describes them in detail.   Commodity money...  that's gold or silver or platinum coins.  Its money literally made out of a commercial commodity.  Its not paper money based on gold.  It is gold.  Fiat money is money that gets its subjective value from some legal standing or another.  In terms of descriptions... Credit money is where things get dicey.    You know they are going to get dicey... because apparently I have to start using terms like...fiduciary media.

Before things get dicey... I want to remind you of subjective value theory... and I want to clarify something.  Just because a given value is subjective... does not mean that there is no reason for it.   Subjective value can be manipulated via monopoly... marketing... shortage...  all kinds of things.  The point is... subjective... does not mean... "without cause".  We clear on that?  Subjective reasons are still reasons.

Well ok now lets get back to what Mises actually did say about Credit Money.  Page 61...  He writes...
" A third category may be called credit money, this being that sort of money which constitutes a claim against any physical or legal person. But these claims must not be both payable on demand and absolutely secure; if they were, there could be no difference between their value and that of the sum of money to which they referred, and they could not be subjected to an independent process of valuation on the part of those who dealt with them. In some way or other the maturity of these claims must be postponed to some future time."

Holy crap.  Looks like Mises just said debt is money. Hell... He created a whole category and set out specific terms and everything.

That's actually not true.  What  Mises is doing here is talking about money that is created through leverage.  In Human Action Mises calls money that is backed up by 100% reserves as a money certificate.  Here he deliberately makes the distinction that credit money is not a money certificate.  Money certificates are payable on demand... and secure.  Credit money is not backed up 100%... so if everyone wants to make their claims all at once... there will not be enough to go around.

Now...  pay attention because this is important.  Credit money... still being classified as money... must therefore meet all of the criteria for being money in the first place.

A dollar bill you have in your hand may have been created by leverage... but its still a dollar bill and it will still function as money and meet all of the qualifications Vox and I have hither to agreed on.

This is what I meant when, a few days ago, even an IOU can be money.  But a debt of IOUs... is not money.

Money is payment.  Money is not a promise to pay.

I am going to say that again.

Money is payment.  Money is NOT a promise to pay.

Money is defined by characteristics and behavior.  It is, first and foremost, a commodity.  Always money is a commodity   The question with the types of money is...  how did it become the dominant commodity in a given economic zone?  Because again...  that is a characteristic of money.

Are we gonna have to back up again?  y'all got that?   Jesus we're gonna have to back up again.

Ok where does money come from?  Government? Kings?  No.  Money comes from the market and exists either inside, or outside, any system created by men.  In any economic zone a group of commodities will compete... and the one that is the absolute dominant commodity... will be the money.  It will be the thing that everyone will accept to aid in exchanges and everyone wants.  Rather than letting the market pick its own money... governments monopolize the matter universally.  There is just to much power to be had.  They have to.  This is where we get into trouble.

OK so what is with the 4 categories?  I think the best way to explain it is to show that there are circumstances in each case that either aid their subjective value, or account for it almost entirely... and explain how they became the dominant commodity in a given economic zone.

Commodity Money: Coins made from commercial commodities.  Gold and Silver coins... platinum coins..  Their subjective value comes from the fact that they are freakin' gold and silver and people subjectively value the shit out of some gold and silver... because of that historically these two have battled it out for top spot on the commodity food chain.

Fiat Money: Useless paper that has subjective value only because some government said, "this is legal tender and you will use it as such."  This creates the monopoly that makes the fiat money the dominant commodity.  This is never a permanent solution.  Its a bad.. bad idea...

Money Certificates:  Mises covers this in Human Action... this is money that backed up by 100% reserve deposits.  So...  fiat money... exchangeable to some commodity with a direct 1 to 1 ratio... payable on demand.  So a government may have a bunch of paper certificates backed up by gold coins...  as long as the ratio is 1 to 1... and they are immediately exchangeable... this isn't to bad.

Credit Money:  Lets start with a quote from the man himself.  "If the money reserve kept by the debtor against the money-substitute issued is less than the total amount of such substitutes, we call the amount of substitutes which exceeds the reserve fiduciary media. As a rule it is not possible to ascertain whether a concrete specimen of money-substitutes is a money-certificate or a fiduciary medium."  Got that? Money that gets its subjective value from a promise to pay... but the ability to pay is extremely conditional.  That is to say... it may be redeemable for.. 1 gold coin... but they printed up 2 billion certificates and only have about 100 million gold coins.  For this I like to use the technical economic term "shenanigans".  They do things like.. move gold coins around from place to place to hide the fact that they don't actually have enough to redeem all the certificates.  But... people think they are redeemable.  That is what matters.

So... the point is the different categories can be described by the different sources of their subjective value, and or the mechanism that allowed them to become the dominant commodity in a given region... and therefore... the money of that economic region.

It is critical to keep in mind though... all four of these types of money... regardless of their type still function as money.  Gold coins? money.  dollar bills? money. Euros? money.  Because of their nature some are more subject to manipulation than others.  In fact... one may say they are outright insane.  Blame Law.  He had the bad idea first.

So... now here we sit happily atop Mount Chapter Three.  Ain't the view grand?  Now... with all of this as a basis of monetary understanding... we can address Vox's traps... I mean... questions.

1. Are gold and silver commodity money?  All gold and silver?  Money is a condition that can be deferentially diagnosed by behavior.  Are they functioning like money?  Then they are money.  Its the behavior that makes them money.  It is the commercial commodity that lends subjective value and thus allows us to categorize them in LVM's terms.

2. Are the Federal Reserve Notes, in both cash and deposit form, commodity money or fiat money?  The standard answer is fiat.  But in reality FRN's have characteristics of both credit money and fiat money.

3.Does TMS2 represent your definition of the money supply? No.  like M2  it is only a useful tool for estimation.  It is flawed... but it serves for watching trends.  I am agnostic on the claim that money supply can even be measured  accurately.  But I lean toward it being a pure impossibility.  Its like watching ants at a huge ant mound.  You have no idea how many ants are actually there...  guessing is pointless... but you can stand back and watch them and tell if the swarm is growing or shrinking.

4. What are the various components of TMS2, commodity money, fiat money, or some combination therein?  Given the nature of my explanation of Chapter 3's 4 types of money... its abundantly clear that all categories in TMS2 are fiat money.  Many are credit money as well... but its impossible to parse in our banking system due to the various banking shenanigans... AND...

 if you listen to Ludwig... well...

"As a rule it is not possible to ascertain whether a concrete specimen of money-substitutes is a money-certificate or a fiduciary medium" - Human Action( p. 433)


With apologies to Vox, he has taken a large list of money substitutes and asked me to literally do what Mises says cannot be done.

See what I am dealing with here?


 I will say that this is the reason I do not believe it is possible to get an accurate measure on the money supply... and instead why we must look at only broad picture trends.

But why am I bothering? Why does this all matter?

 I assert that the mechanism by which the money of an economic zone became the dominant commodity is critical to understanding how that money will behave...  and I want to make clear that money is not the product of any economic system.  The Fed may tell the Treasury how much money to print... but I stand here today telling you if that monopoly didn't exist... you would still have money to use in some form.  .22 long rifle ammo is a good option for example.  It could easily meet all of our criteria for money, and behave as money.  For the record... it would be commodity money.

And much sounder than what we have today.

 I know the tactically smart thing to do would be to pepper Vox with questions and put him on the defensive rather than allowing him to sit back and take shots at the monetary theory dump I just dropped.  I'm not going to do that though.  I am fairly fond of what I've just done and I want to see how Vox goes about dismantling it... assuming he decides its necessary to even do so.  Its entirely possible that I have just made his case significantly easier to explain.  Never the less...   I want to make it clear that I am not just regurgitating Mises.  Much of this is monetary theory according to Nate.  Or if you are less charitable... at the minimum... its Nate's take on Mises.   I am asking you to accept it, not on the authority of Mises... but on the merits of the argument itself.  This wasn't written to score points in the debate.  It was written to make some monetary theory more accessible.

39 comments:

foxmarks said...

Well played!
And, well-done!

Nate said...

Glad ya like it.

Jack Amok said...

Indeed I mostly agree with the post. I still don't think the details of defining money do much for the inflation/deflation argument, but that little line about ...the mechanism by which the money of an economic zone became the dominant commodity....

Well now, that does show some promise.

Toby Temple said...

Money is payment. Money is NOT a promise to pay.

This would have solved all the confusion brought about by "completes a transaction."

Took you long enough, Nate.

But I did try to come up with that to no avail...

Peter Garstig said...

Well Explained.

For Clarification, let me ask the following:

Would you agree in principle that the quantitative difference between money substitudes and credit money is debt?

Or has all credit money an equivalent debt counterpart?

Nate said...

"Would you agree in principle that the quantitative difference between money substitudes and credit money is debt?"

Do you mean money certificates?

Money certificates... means 100% deposits... credit money... is the money created through leverage above that 100% reserve. Since both involve at least some obligation... debt is not the primary difference, other than to say that lending is the justification for the leverage.

Peter Garstig said...

Yes, I meant money certificates (your 3rd definition).

If I understand correctly, credit money necessarily creates debt, but not all debt has its origin in credit money.

If debt created by credit money is defaulted upon, what happens to the credit money? I know, same question as days ago. But I'll try.

Nate said...

Peter... vox is going to go there. I am going to try to make him go there. your questions will be answered.

John Regan said...

If "money" cannot be a promise to pay but only payment itself, then FRN's, which are notes - that is, promises to pay - are not money.

So I think you might have to recalibrate a little there.

Nate said...

John..

did you actually read this post?

Peter Garstig said...

People really have trouble understanding the concept of 'completing a transaction'.

A transaction/exchange is complete if there is no binding obligation left for any future transaction/exchange; for any party involved.

Peter Garstig said...

People really have trouble understanding the concept of 'completing a transaction'.

A transaction/exchange is complete if there is no binding obligation left for any future transaction/exchange; for any party involved.

Peter Garstig said...

People really have trouble understanding the concept of 'completing a transaction'.

A transaction/exchange is complete if there is no binding obligation left for any future transaction/exchange; for any party involved.

Peter Garstig said...

Nate, sorry for the mess.

John Regan said...

Nate, yes, I read the post. I'm quoting you:

"Money is payment. Money is not a promise to pay.

I am going to say that again.

Money is payment. Money is NOT a promise to pay."

Have I gone wrong somewhere?

Nate said...

Yes.

Yes John you have it badly... badly... wrong.

but don't take my word for it. If you suspect you have seen such an obvious hole... then have faith that Vox will employ it to blow this position to Hell and gone.

If he does NOT do that... consider that there may be a reason.

Josh said...

A much better way to understand the "completed transaction" bit that so many are hung up on is this.

A completed transaction does not create any additional accounting entries.

So...John buys a pink glock and a Mac from Nate...John gives Nate a thousand dollars in cash...

So to account for it, Nate gets $1000 in his asset column.

Scenario 2:
John uses a visa card...

$1000 goes to Nate...

Also, accounting entries are created for visa and John.

John: $1000 liability payable to visa
Visa: $1000 asset receivable from John

John Regan said...

I don't know that it's an "obvious" hole, but it does seem to me that promises to pay are often money, or at least they function as money. Which kind of undermines the whole "completer of transactions" thesis.

In any case I'll be interested to see how this all leads into the inflation v. deflation thing.

Porky said...

Nate, the only problem I see is where you say Kings don't create money, the market creates money.

I think you'll have a hard time defending that.

Nate said...

"I think you'll have a hard time defending that."

No mate.

That is the single strongest part of the argument.

Josh said...

Porky, what do you find wrong about that argument?

Stilicho said...

Nate, good response. I do not say that lightly.

Jack Amok said...

But Peter, what you don't see about your "completed transaction" is that it's an abstraction. Fine, fine, but once you've moved into that territory, there's no concrete place to draw the line - everything becomes definition of convention.

Money is all about convention. I called it a "fiction." It's a shared fiction, we all agree to believe that scrap of paper or metal disk is worth something. Or maybe another way to put it is we share a suspension of disbelief - we agree not to notice that we're trading real goods and services for trinkets. We agree not to laugh at ourselves for selling Manhattan for glass beads.

Nate's trying to get at the origins of that suspension of disbelief, which is very interesting ground to consider. Because the thing about suspensions of disbelief is they can go away, go poof.

And then where are you?

Nate said...

Jack...

Vox doesn't need your help.

Porky said...

"That is the single strongest part of the argument."

Could you then clarify why you say that markets decide what is money, and then in the same paragraph say that "governments monopolize the matter" of deciding what is money?







Jack Amok said...

Nate,

But I'm not trying to help Vox, merely registering my encouragement for the direction you've gone.

Anyway, I don't particularly care who wins. Frankly I think it's a coin toss whether we'll have inflation or deflation, but the process of trying to show one or the other more likely should be interesting.

Joe Doakes said...

Everything I know about money, I learned from Heinlein, in "Stranger in a Strange Land" explaining the shared-fiction concept and "Time Enough For Love" explaining how the Banker helped the colony by making his banknotes redeemable in commodities.

I hate to ask, but can you bring the discussion down to my level?
.

NorthernHamlet said...

Hello Nate,

This post was very helpful. Thank you.


Questions for you or anyone who'll answer:

Why isn't fiat money worth the paper it's printed on and the time it took to "extract" that design and send it to the printers? I assume it still has some level of commodity value, is this correct? Can books function as commodity money?

Thank you.

Nate said...

Joe
Right now I am drilling these things down as much as I can. I am eliminating as much of the linguistic fireworks as I can as well. When we're done... I'll re cover as much as I can in the postmortem and maybe then I can help you out.

Josh said...

Why isn't fiat money worth the paper it's printed on and the time it took to "extract" that design and send it to the printers? I assume it still has some level of commodity value, is this correct? Can books function as commodity money?

That's a variation of the labor theory of value, the cost theory of value.

So your answer is no.

Nate said...

"Could you then clarify why you say that markets decide what is money, and then in the same paragraph say that "governments monopolize the matter" of deciding what is money? "

Ever heard the military saying... "never give an order your men will not follow... and always order your men to do something they are going to do anyway."?

Its like that. There is a horse race. The government can throw its weight behind one horse or another and help it win and therefore control the horse in the future. Never the less... the government did not create the race. The race happens on its one with government or without it.

Peter Garstig said...

Money is all about convention

Of course. Just like our legal system, where the bounding part im my post comes into play.

Abstraction doesn't change my argument.

Peter Garstig said...

Nate's trying to get at the origins of that suspension of disbelief, which is very interesting ground to consider. Because the thing about suspensions of disbelief is they can go away, go poof.

And then where are you?


Jack, don't dispair. A suspension of disbelief will be replaced by another. Both you and the people around you hava a vivid interest that this will happen. That's how the money fiction came alive in the first place.

and it's very real.

Jack Amok said...

Oh but Peter. The people around me are the source of my despair, for they think money is real and fubar everything because of it.

Res Ipsa said...

"So...John buys a pink glock and a Mac from Nate...John gives Nate a thousand dollars in cash..."

I see a problem. Nate ain't ever gonna give up his pink glock or his fuzzy bunny slippers, or foo foo drinks with umbrellas.

Wait, that might be Vox. It can be hard to tell them apart.

Porky said...

"Its like that. There is a horse race. The government can throw its weight behind one horse or another and help it win and therefore control the horse in the future. Never the less... the government did not create the race. The race happens on its one with government or without it."

Hmm. To me it's obvious that the government does not simply support winning horses but actually puts horses in the race and bets on 'em too.

But hey, I've got plenty of popcorn and beef jerky. On with the show!

Peter Garstig said...

Jack, just don't honor your last name.

MPAI is true, if you despair or not..

Nate said...

Porky
Yes.. governments can create horses and enter them into the race as well.

Never the less... the race happens either way. The government doesn't cause the race.

Clear?

Porky. said...

"Clear?"

Nope.

You said governments don't create money.

You offered an analogy wherein the horse race was the free market and horses were money.

Then you said: "Yes.. governments can create horses and enter them into the race as well."

Confusing.