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.
Posted by Nate at 6:27 PM