I apologise, but I must drag you away from your argumentation path. The reason for this isn’t that I want to avoid answering your questions. The reason is that I see gaps in the assumptions you are making. It is possible that I just misinterpret the assumptions so please bear with me.

A central claim to RBD (and one which if proved wrong brings down the house) is that if you issue paper money that is “backed” (not my word) by claims on goods, then this is fine and the prices don’t go higher than they would have been otherwise when it goes into circulation (there are no “misvaluations” to use Sproul’s word) – there is no upward pressure at all on prices. This doesn’t make sense.

(emphasis added).

You are using only one of the two definitions of inflation you mention. Your argument is only valid if Mike uses the same one. However from reading Mike’s papers, I was not able to ascertain whether he uses the same, but there are indications that he uses the other one (change in price index).

IOUs cannot create any new G&S, they can only redistribute existing ones.

I need to think longer about this one, but I’ll admit now that you are at least partially right. If the issue of money only redistributed the supply rather than cause an increase in supply, obviously there would be pressure to increase the prices.

gold and IOUs are clearly different

Yes, but I was not referring to the difference between gold as commodity and IOU, rather to a difference between gold-backed notes and IOUs. Nevertheless, again I’ll admit that you are at least partially correct, if the issuance is not accompanied by a growth of supply, there is an obvious difference.

With IOUs, he just buys a jacket whenever he feels like so long as he gets someone to accept his IOU.

Yes, but there is also another option: the market price of the IOU would drop, it would be traded at a discount, or to put it into other words, inflation. But you get the same effect whenever there is an increase in supply of one good, all other things being equal. That’s why I don’t see a qualitative difference. Normally, a lower market price for a good is a good thing (no pun intended) for the consumers and bad for the producers. Why should it be suddenly the opposite with money? Isn’t it the legal tender laws that revert this phenomenon rather than the type of backing? I remember that Mises wrote in Human Action about international trade something in the sense that the difference between export of currency and export of goods is spurious, so why should it be any different with production thereof?

with IOUs, you tell me what the safeguard is to prevent everyone making promises to pay that are literally impossible?

The market, what else?

Thank you for your patience, I need to think about it. But I already have one answer now:

How does the market “know” how many IOUs have been issued?

If you look at the documentation to some of the alternative currency systems, they feature methods of providing this information, either in a centralised or decentralised fashion.

You don’t need to calculate anything. We have computers for that . It’s kind of like saying that in order to use gold as money, you have to keep up with the current developments in metallurgy, geology, jewellery etc. Besides, the question really only arises if you are the one accepting the money (payee rather than payer).

“Besides, the question really only arises if you are the one accepting the money (payee rather than payer).”

Thinking along these lines is dangerous. That some monetary conditions are better for one person and not another is not in dispute – a fiat money system is great if you’re the king. The question is what money system (what system of exchange) allows the members of the economy to maximise their productivity as a whole and distributes the produce most fairly (ie. according to natural law which people will go along with and not according to any one person’s say-so).

“Currencies have a varying composition of advantages for the buyer versus the seller. But that is a reason for having multiple of them competing. In some situations, people might prefer an electronic currency instead of physical. Or a currency with higher liquidity even at the cost of higher volatility.”

This is all way off the current discussion. Electronic or not is secondary. And I’m afraid I don’t konw what the last sentence means – use of the word “liquidity” should be banned.

“If you look at those currencies, issuing new units is much more difficult than writing an IOU on a piece of paper. It involves cryptography, distributed computing, chain of trust etc. In other words, issuing them requires scarce resources, significantly more so than if a central bank changes an entry in a database.”

The reluctance that people have to accepting that gold can do a good job as money never ceases to amaze me. You’re missing the point. Do the resources required to create this currency match what you can buy with this currency? If you write a little program to pop up a form to fill in to create more currency and calculate the RSA codes or whatever, one of the entry boxes will be “Amount” – it will take the same amount of time and resources to create currency of one dollar as 1 trillion dollars (save the 1 second to type 9 0s and maybe a few clock cycles). If these resources don’t match, those who can create the money will take advantage of this arbitrage opportunity by printing for themselves, unless you have the Angel Gabriel on hand to operate the printing press.

I did read how they work already. I have gold – physical gold – in my possession. Someone who wants this will have to invade my property to take it from me by force or other difficult means. If I have tokens in some database, this is a fundamentally different proposition. In worst case scenario of a meltdown after a crack-up boom (one which we might be learning more about soon), how do you hoard your money if it is an entry in a central database that might be thousands of miles away? What is there is a power failure? And these aren’t always like asking “what if there’s an earthquke” – there is cause and effect, non-sound money CAUSES crack-up booms, and my guess is that the market would eventually find ways to exploit the systems of which you speak to a significant degree.

“people might request features that gold or its substitutes do not have (or not in the desired level).”

Maybe I’m wrong, maybe they will work, in which case great. But what “features” are or might be demanded of money that gold does not supply? People might request anything – people might request a car made of chocolate, but those who know how cars work can point out the constraints on what cars can and can’t be made of it they are to actually end up as something that people can drive around in. These requests you mention, are they improving the money from what gold would be or making it worse? You need a good understanding of what money does before you can determine this, not just a general “there must be something better than gold” attitude.

“We don’t know what would happen if legal tender laws were abolished, we can only speculate.”

I suggest you read Do Soto’s “Money, bank credit and economic cycles” or Hulsmann’s “The Ethics of money production” for some monetary and banking history. Describing the knowledge they’ve assembled as “speculation” is simply not correct.

I’ve read the wikipedia page for the “Ripple” and “Bitcoin” monetary systems about 4 times each and still don’t really know how they can perform well as money or even how they work at all, it’s not very clear – my guess is they are designed by people who don’t really understand what properties money must have, but I’m happy to be proved wrong. And by the way, i’m not a layman in this field – I have a phd from an Artificial Intelligence research group and know more about nodes and networks of nodes and such than most.

Can you explain how they work please?

Well, if you’ve read those two books then there is nothing more I can add in reality. You still casually dismiss the proponents of the gold standard but you do not I think understand the subtleties of the problem. You said earlier in this thread “Then let’s assume that by issuing money backed by expected revenue (rather than physical assets), that expected revenue becomes possible. In this case, while issuing money increased the money supply, the market size increased too, so it is possible that there is no upward pressure on the prices. ” I respectfully suggest that you can’t have understood what was said in these books and still make such statements on this site – printing money does not increase the amount of goods and services. Your theory, whatever it is, is not coherent as you present it here – the money supply, the available resources and the price system are intertwined and you can’t just alter one without evaluating the effect this has on the others, on the information which the market has to work with, and on the incentives of the money users.

And your lack of reflection on what I’ve said is now obvious in that you are repeating things you said earlier without regard for my answers and you are not even being internally consistent. For example, your answer to Sproul says

“The core problem, as I found out in the meantime, is not the valuation of the collateral, but that in order to negate the effect of monetary inflation, whatever you are using as a collateral needs to be removed from circulation.”

Although I wouldn’t phrase it like this, you are recognizing that prices rise when IOUs get into the money supply if the “collateral” is already part of the market/price system, it is double counting. Yet in your “hypothesizing” to me, you are perfectly happy for future as yet non-existent goods to be “coined” as money (which is much worse than allowing existing goods only in that it is nowhere near as constrained) and you don’t discuss and follow through with this price rises and the consequent distortions in the price system and wealth redistributions that this would bring about, and whether these are stable in the long run, despite such problems having been discussed to death on this thread.

And again you say “the users of money have some requirements” – I already said this is a separate and fairly trivial issue. Users requirements are to obtain as much of it as possible for as little work as possible, and these are in direct conflict with the “requirements” of the system as a whole ie. system being stable; respecting natural law (is it “fair”) in the distribution of the goods and services; respecting the property rights of the users of the money; and thereby maximizing the productivity of the economy as a whole. You are consistently looking at the “seen” and ignoring the “unseen”, the avoidance of which is on Page 1 of the Austrian Economics Manual and, indeed, the study of any complex system in engineering or biology or whatever.

In doing this, you ignore the effects of IOU issue on the information in the market and the amount of resources available. You still seem to write as if you can produce money and the resources will just appear – no, the money is just a mechanism for a price system and by which barter of real goods and services is made more convenient and efficient. The resources are the core, not the money. I said already, which you basically ignored:

“Secondly, like I said, how do we know when the amount of IOUs issued is valid (ie. Can be repaid) and when it is not? You just say “the market” will keep track of this. But this is the problem – “the market” needs good information. How does the market “know” how many IOUs have been issued? People can make a reasonable guess as to how much gold has and will be mined based on mining costs and so forth. People can’t reasonable predict how many IOUs will be put into circulation. Of course, eventually the issue of IOUs will cause prices to increase (all other things equal) – but at the end of this period when the market has adjusted prices, the people who issued the IOUs still have the “stuff” they bought with them, they don’t care that the rest of the population have each paid a little for this stuff in the form of higher prices. What if Warren Buffet published “3 steps to being a millionaire” and everyone read it and decided that in anticipation of their future earnings, they will issue IOUs for 1 million dollars? Of course, this is a nonsense – these debts could not possibly be repaid, the resources required for everyone to take possession of 1 million dollars of stuff simply don’t exist. But if people can issue their own currency at any point, this situation (and the unpleasant dislocations it would bring) is possible. It is not possible with gold – gold entering the money supply is constrained by mining costs.”

I say again, you can hypothesise all you want about the issue of IOUs which everyone of course says they will honour (who doesn’t?), how do we know when there are actually enough resources to repay these IOUs though? When individuals lose because of a false promise they themselves made, that’s one thing. When the money system sets up a long game of musical chairs and whoever happens to be holding the bits of worthless paper when the music stops (ie. the resource crunch arrives) loses out, that is different – this is not respecting property rights but violating them; it is changing the incentives of the market participants; and it causes booms and busts; i could go on….

I know you partially retracted that statement, but the point is that you had read those books before you made it, so like I said, I suggest that you didn’t understand fully what was contained in these book or you would not have said it. It’s no good saying you’re not convinved by the arguments of Hulsmann or Rothbard when your own statements show that you didn’t fully comprehend them.

No, I did not miss your use of the phrase “as I found out in the meantime” – the hypothesising about the issue of the IOUs occurred in your last post but one, after your post to Sproul. So what I said is: your statement to Sproul says IOU issue causes inflation (and so forth); your post to me – made after this admission – suggests to me that IOU issue is ok WITHOUT considering these very causes, and I say that the post was therefore of questionable value.

You’re right, I didn’t understand your point clearly. Maybe now I do. I’m not arguing that gold will remain for ever the only money that will or could ever emerge on a free market. Obviously – because this doesn’t even apply to the past, let alone the future. I AM saying though that money should be a commodity of some kind and if it is not, booms and busts and the like are certainties.

You are saying it could be “electronic” like these currencies you point out. I am saying that you should understand the precisely what money is and its effects on the economy, and exactly why tradiionally money and other commodities have been the free market money, before you are can make such statements. I’m not saying that they’re necessarily wrong – although I do think so, I admit I have not made this argument – I’m saying you have to undesrstand commodity money clearly before you can say you have a better monetary system.

“However, in the absence of force (i.e. government), inflation becomes an externality, rather than fraud/contract violation/whatever. If that happens, will you take a gun and start arresting people that issue IOUs? That would be an initiation of force. So, you might need to face the choice between initation of force and presence of inflation.”

Ok, let’s just accept that non-commodity money will introduce price and market dislocations and cause booms and busts etc. Then your objection to the gold standard proponents seems to be not that is doesn’t work well but that in a free market, people will always want stuff when they don’t have whatever-commodity-is-money to pay for it and so will issue IOUs in an attempt to get stuff from others and hopefully pass on the costs to someone else in the future? I agree 100% of course, people will always try to issue IOUs to get stuff that they haven’t assembled the wealth to pay for. This is true for any money system, gold or otherwise, and putting in place a system which makes this as hard as possible is the aim of any such money system. This is what I’ve been saying all along – it is far easier to get more than you are have truly earned with IOUs than gold. So gold in fact greatly reduces the problem you bring up, so this can’t reasonably be an objection to it.

Your objection seems to be not that it doesn’t work but that it won’t stay in place. Now, the assumption that issuing IOUs is possible by anyone at any point needs to be examined. this has been assumed for the sake of argument, but of course it is not true – to get you to accept my IOU takes effort on my part, a track record of paying IOUs out when asked and so forth. To get you to accept an IOU that you have no intention of keeping but want to pass on to someone else, this takes much more effort, not everyone will agree with your assessment of my trustworthiness. One step more, to have my IOUs be so marketable that they circulate as “money” ie. the unit of exchange, is even more difficult.

You think that in such circumstances, bad money will rise to the top and allow users of it to create these externalities? Gresham’s law comes about only when the government fixes the price of money somehow, it doesn’t happen on a free market. I think you’re wrong and that the free market will solve the money problem like it does with everything else. That is, people want to “issue IOUs” with everything, not just money. Such charlatans might want to sell a PC or shoes or lawnmower that is cheaper to make than others with similar specification because they leave out essential safeguards and use cheaper parts meaning that it falls apart just after the typical user has finished paying for it and the warranty has run out. Please point out where this happens now, where products decline in quality or where people still consistently buy faulty products despite previous ones being unfit for purpose**?

I know nothing about how a car works or how to evaluate the suitability for purpose of one myself directly by opening the hood, but all the ones I have bought have worked out just fine – there is a market process in place which works. But you think people will be persuaded to use paper for a while, there’ll be a crunch of some kind, many will lose this money and then next time around they’;ll do it all over again? I don’t – in my experience, there is nothing people learn from more than losing a pile of money. So I don;t accept your claim that one must choose between force or inflation.

** and note, I’m thinking only industries which are completely unconnected to government and do not depend on their spending or subsidies or interference? I agree this is contentious as for example I think the food industry is “selling IOUs” to the public on an unbelievable scale – in that they sell what they claim and what people accept as the same as peaches 100 years ago but they are not, they have travelled long distances and so are devoid of nutrients and are covered in pesticides and these produce problems much further down the line, the costs are “externalised” (never mind the fast food industry) – but I think this is largely or completely due to government involvement in agriculture and medicine. I have no direct evidence for this though really. So, I don’t think it will, but if you can convince me that, without government legal tender laws, money will follow the same path as food…

This is going round in circles. We can define “money” (and any other word) to be whatever we like for purposes of discussion, but the definitions should be useful. But you are now saying something is “money” if it is involved in any or a single exchange. As this could be anything, this doesn’t seem very useful to me – in fact, to be frank, it is so stupid that I’m thinking now that you are not prepared to think about this properly at all and this isn’t worth the effort.

Yes, people are for example paid in shares sometimes. But they aren’t buying groceries with shares, and those shares are priced on the market in terms of dollars. No’one ever bought an apple which costs “0.3% of a General Electric share”. People don’t buy cars with shares, they buy them with the money they sold the shares for. You say you have read “What has the government done to our money”? I suggest you should give it another read – you do not have any respect for the lengths to which Rothbard goes to establish useful terms and definitions for these actions of which you speak. For example he says:

“..the superiority of butter—the reason there is extra demand for it beyond simple consumption— is its greater marketability. If one good is more marketable than another—if everyone is confident that it will be more readily sold—then it will come into greater demand because it will be used as a medium of exchange. It will be the medium through which one specialist can exchange his product for the goods of other specialists…Now just as in nature there is a great variety. As they are more and more selected as media, the demand for them increases because of this
use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media—in
almost all exchanges—and these are called money. Historically, many different goods have been used as media: tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia, cattle in ancient Greece, nails in Scotland, copper in ancient Egypt, and grain, beads, tea, cowrie shells, and fishhooks. Through the centuries, two
commodities, gold and silver, have emerged as money in the free competition of the market…”

You say to me: “I did not say that bad money would rise to the top, rather that the composition of the money structure would reflect requirements of market’s participants (which, to me, are unknown). With all due respect, it is you who claims to know what those requirements are, without any proof.”

I’m not sure what you’re looking for here – have you made any effort to read much monetary history? There is tonnes of it on this site (although as you responded to my suggestion to read Hulsmann’s book by saying it was merely a “collection of facts” I’m not sure what else you want). Throughout history all societies of which I have any knowledge have settled on one or two commodities as money or have had fiat money. I would be much more justified in asking you which societies have prospered without a common currency? In which ones has “the composition of the money structure [reflected the] requirements of market’s participants” in a different way, with some other structure which Rothbard was too stupid or idle or ignorant to have discovered? I’m sure some exist but these are exceptions – the most marketable commodities becomes money because that is what is most convenient – even when goods are free a money emerges as the famous story of currency in a german POW camps illustrated http://www.ecoteacher.asn.au/pow.doc.

You say: “If the supremacy of commodities was ultimate, there would be no markets for financial instruments whatsoever.” What are you talking about? Financial instruments are not money – they are bought WITH money. You are totally missing the point. Maybe you’re saying that if shares became the most marketable commodity, then these are not a commodity directly and this contradicts the theory of the commodity money fundamentalists. Well, I doubt this would happen with shares at all, but say some shares did become sufficiently marketable -they are not “IOUS” jsut because they are paper. They represent claims on real goods, capital goods, offices, contract agreements, trade agreements, patents, whatever – they are not just “bits of paper”, they are titles to property and other real, if not tangible goods, so it’s not quite as simple as you say. But as shares have never become money in history, i suggest it is you making the leap of faith.

And I don’t know what you’re on about here: “But, again, if I agree with your premise that the economic utility of IOU is somehow qualitatively different from a commodity certificate, by reductio ad absurdum that would mean that in the absence of force, there would be no markets for labour or services.”

Sorry Peter, I think the problems you have here are ill-defined and can only be well-defined by you further learning about the body of work that you are claiming is incorrect.

No Peter sorry – like I said, I think you need to think and learn more about the terms and concepts which you are saying are wrong. I’m afraid I draw the line at being given tutorials from people who confuse financial instruments with money.

Look at this interview with Doug French from just last week.

http://blog.mises.org/12596/an-interview-with-doug-french/

Douglas French: Mises exposed the fallacies of the quantity theory of money and Irving Fisher’s “equation of exchange.” Mises put individual choice into monetary theory and dispensed with the “distorted concentration on mechanistic relations between aggregates.” Mises’s Regression Theorem showed that money can only be established by the market, beginning with barter, not by government construct. This of course has been proved right as every fiat currency in history has ultimately been made worthless.”

Douglas French: Certainly freely competitive banking is far better than the state regulated, fractional-reserve, fiat currency, central bank cartelized banking system we have now. However, in practice, in a free market, I don’t believe that the market would accept fractional reserves. It would be regarded as embezzlement at best and fraud at worst. Fractional reserve systems have fallen apart since the ancient goldsmiths issued more gold receipts than they had gold for. I can appreciate the theorizing, but when the rubber meets the road, the sternest task master – the market – would just not allow it.

He referred to the real world in his answers! Are you saying Doug French – who did a phd under Rothbard – doesn’t understand praxeology? Have you thought that maybe it is you who does not fully understand the terms and concepts you are using?

“This interpretation is, in my humble opinion, only possible if the bank promised 100% liquidity for the account. Otherwise, issuing company shares can also be considered fraud. If on the other hand they would separate backing of current accounts (100% backing, 100% liquidity) and of savings accounts (fractional reserve backing, limited withdrawal), the changes to backing might be minimal. So instead of getting rid of fractional reserves, I think it is more likely that stronger product diversification would occur.”

My view is that there are properties of money (that are not help by other goods and services) that you are not properly thinking through and understanding and that doing so is essential before debating other more subtle things. If you try and explain the above paragraph again in more detail (and, please, without using the words “liquidity” or “backing”) I will hopefully be able to clarify what I mean.

Peter, the second issue is a red herring, it has nothing to do with the problems you are referring to. This issue just vanishes into the ether with further understanding.

Firstly you say:”If people are willing to accept “something” as a medium of exchange, even if you are reluctant to call it money for various reasons, it nevertheless by definition performs the function of being a medium of exchange.”

NO! YOU ARE CHASING YOUR TAIL. You use the “phrase” by definition, yet what definition are you referring to? If you declare any item that has ever been exchanged for anything as a “medium of exchange”, then almost everything is a medium of exchange. And for how long? Is salt still a medium of exchange because it was used 2000 years ago? Or cattle? I swapped dvds with someone last week, are dvds a medium of exchange? According to you, they are. But this is a supremely useless and ridiculous definition. I quoted above already from Rothbard, and will do so again:

“..the superiority of butter—the reason there is extra demand for it beyond simple consumption— is its greater marketability. If one good is more marketable than another—if everyone is confident that it will be more readily sold—then it will come into greater demand because it will be used as a medium of exchange. It will be the medium through which one specialist can exchange his product for the goods of other specialists…Now just as in nature there is a great variety. As they are more and more selected as media, the demand for them increases because of this use, and so they become even more marketable. The result is a reinforcing spiral: more marketability causes wider use as a medium which causes more marketability, etc. Eventually, one or two commodities are used as general media—in almost all exchanges—and these are called money. Historically, many different goods have been used as media: tobacco in colonial Virginia, sugar in the West Indies, salt in Abyssinia, cattle in ancient Greece, nails in Scotland, copper in ancient Egypt, and grain, beads, tea, cowrie shells, and fishhooks. Through the centuries, two commodities, gold and silver, have emerged as money in the free competition of the market…”

Yet you completely ignore this category of goods that Rothbard is describing here (which I and probably everyone else on this site would refer to as “money” and consider it well defined) and obfuscate the issue by using the phrase “money” and “medium of exchange” in unhelpful and ludicrous ways. You say I’m “reluctant” to use the term “Money” in this fashion? I am. I apologise for using terms as they are generally understood and not according to your whims.

You also refuse to do what I asked – to expand upon this paragraph

“This interpretation is, in my humble opinion, only possible if the bank promised 100% liquidity for the account. Otherwise, issuing company shares can also be considered fraud. If on the other hand they would separate backing of current accounts (100% backing, 100% liquidity) and of savings accounts (fractional reserve backing, limited withdrawal), the changes to backing might be minimal. So instead of getting rid of fractional reserves, I think it is more likely that stronger product diversification would occur.”

and without using the words “backing” or “liquidity”. Doing so would force you to confront the contradictions in your thought. You don’t do this either.

You have ignored all my attempts to get you to expand on how your theory IOUs allow the amount of actual resources to be overestimated ie. my hypothetical problem of Warren Buffet issuing a book and everyone issuing IOUs against what they think they will earn. Expanding on this would force you to confront the contradictions in your theory – you don’t do this either.

You tell me how clever you are and how you did a course o macroeconomics. Who cares? You are clearly unable or unwilling to understand, formulate or stick to definitions in a way that allows a debate to move forward. Instead we go round in circles – yet you have the neck to explain to me what the fundamentals are, while using ill-defined words and terms?

My “theory” is really quite simple – I agree 100% with what Doug French said which I quoted above.

You think I have difficulty understanding what you write. I disagree. You have to subscribe to a working theory whether you like it or not – the sum total of your statements and assertions must at least be consistent with each other. That is, you can’t reasonably object with contradictory statements. Let’s examine your “theory” then.

You say: “I am not interested in that aspect of the problem. I am interested in what happens in the absence of government interference.”

Ok. Let’s assume no state coercion or legal tender laws. Firstly, we need to be able to exchange information efficiently and unambiguously. Yet you make this difficult. You say:

“If people are willing to accept “something” as a medium of exchange, even if you are reluctant to call it money for various reasons, it nevertheless by definition performs the function of being a medium of exchange.”

“My point is that the willingness creates a medium of exchange, even if you have objections to call that “thing” money. You argue that you can’t call something “money” because it does not fulfill some criteria that are derived from your theory. But if exchange happens nevertheless, your argument becomes inapplicable.”

“I showed for example, that there exist currencies that are privately issued and do not have commodity backing.”

“there are also examples of “unbacked” private currencies (e.g. the Ripple monetary system and others mentioned on the wikipedia entry on alternative currencies). What are those currencies then?”

“In my humble opinion, the existence of privately issued money that is not backed by commodities presents a serious threat to the theory and needs to be addressed. They exist even though you might not understand fully how they work.”

“First of all, in my opinion, if at least one person is willing to accept something as a medium of exchange, that becomes money. It does not mean universal acceptance. What if one person refuses to accept gold, does it then unbecome money? Of course not. Therefore, the difference is quantitative rather than qualitative.”

“I do not ignore this category, but I am pointing out that it defines money by historical developments, rather than deductive reasoning. While it does not make the definition false, it merely makes it unusable for praxeological arguments. Saying that because of historical development in the past, future development will be the same is not what the austrian school of economics does.”

It is impossible to stay on point though when you obfuscate the issue with poor or unhelpful or just wrong word choice as you do often. When you say “currency”, is this “money”? Most importantly, you rather bafflingly refuse to distinguish between two clearly different entities – Rothbard describes how there will in general be one or two commodities which come to be one half of all or almost all exchanges and thereby become something we can call “money”, in contrast to something which is used sparingly in exchange which is not referred to as money. I don’t understand your objection, I really don’t. It is deductive – he explains how there is a reinforcing spiral, a feedback, and what’s more it is of course based on Mises regression theorem (p405 HA). In this section Mises actually says “Finally it was objected to the regression theorem that its approach is historical, not theoretical. This objection is no less mistaken..” if you disagree then disagree then do it with Mises words at that point.

I find your stance extremely odd though. It’s as if you were saying there is no such thing as an epidemic, that there is contagious disease and once we get one contagious disease this just joins the list of other contagious diseases, and like you are arguing that I can’t define what an epidemic is because I can’t say “deductively” exactly when and how one will occur, or say a priori exactly the point at which it becomes an epidemic, so therefore epidemics don’t exist. Fine in the ivory-tower academic-type world if that’s your thing but in the real world, epidemics most certainly do exist, and their existence is useful, whether we can define the exact point something becomes one or not. Similarly, some things end up with the reinforcing spiral that makes them sufficiently marketable to become “money” and some things are just used in exchange in isolation but are not “money”. I really don’t understand your objection to this simple distinction.

I say again, I think you are confused about what praxeology is – it is about establishing some conditions and saying that if these conditions occur then XYZ will necessarily follow. It is not about being able to say exactly what will happen ie. exactly what will happen to the money with so many possible variables that are unknown.

So I reject your claim that there is “money” in use in society today (Ripple or whatever) that does not conform to Mises regression theorem. These are not “money” until they enter the reinforcing spiral Rothbard spoke of. This is not word games, it is fundamental. Tp prove me wrong, you then need to either point out where Mises erred (using his words) or explain how the currencies you speak of actually did arise according to the Regression Theorem.

Putting this aside then, what else did you say?

“The core problem, as I found out in the meantime, is not the valuation of the collateral, but that in order to negate the effect of monetary inflation, whatever you are using as a collateral needs to be removed from circulation.”

“I claim that IOUs can, hypothetically, provide money functionality, even in the absence of government interference, even if it still causes (monetary) inflation and exacerbates business cycles. However, in the absence of force (i.e. government), inflation becomes an externality, rather than fraud/contract violation/whatever.”

“I agree that you have valid points. I don’t dispute that gold does a good job as money. Rather what I’m saying is that people might request features that gold or its substitutes do not have (or not in the desired level). We don’t know what would happen if legal tender laws were abolished, we can only speculate.”

“On the contrary, this is one of the things we agree on. But we disagree on whether it can happen without government interference (which I do not know but claim it needs to be proved/disproved and it hasn’t happened yet) and whether this is illegitimate (which I claim that it only is if the contracts lie but in general is avoidable).”

You agree that an increase in the money supply will increase prices and there will be market distortions and consequent booms and busts. You agree that gold does a good job as money. You agree that IOU issue can result in an overestimation of the resources available.

And let’s say that for now i’m not interested in whether issuing IOUs is “illegitimate” in any moral sense. That leaves you caring whether: people won’t stay on the gold standard in a free market – IOU issue will happen ad infinitum and therefore we will have perpetual booms and busts so Austrians are wrong to say gold is a solution; or whether (as Doug French thinks) the market will eventually teach people what good and bad money is and eventually some commodity money will arise and remain stable until government intervention or some other extreme circumstances.

So your disagreement – whether or not gold would take hold in a free market – is really quite tame. Firstly, no’one is saying 100% that gold will become money in a free market (though I think this it would). I’m fairly certain that some commodity – something conforming to the Regression Theroem – would do so, but am happy to let the market decide. As I said,

“You think that in such circumstances, bad money will rise to the top and allow users of it to create these externalities? Gresham’s law comes about only when the government fixes the price of money somehow, it doesn’t happen on a free market. I think you’re wrong and that the free market will solve the money problem like it does with everything else. That is, people want to “issue IOUs” with everything, not just money. Such charlatans might want to sell a PC or shoes or lawnmower that is cheaper to make than others with similar specification because they leave out essential safeguards and use cheaper parts meaning that it falls apart just after the typical user has finished paying for it and the warranty has run out. Please point out where this happens now, where products decline in quality or where people still consistently buy faulty products despite previous ones being unfit for purpose**?”

It might take decades to take hold, but take hold it will.

I think your objection is much more insubstantial than you think it is and really comes down to thinking that Mises Regression Theorem is wrong. If you think so, please point out where.

One random point:

You say: “If fractional reserve banking is fraud…” I didn’t say it was fraud, not if it is clear that money is created that does not correspond to reserves and people know this. You can’t use the actions of people in today’s system to judge this – all deposits are insured by the government, so people don’t know or care about reserves. Without such insurance though – the free market situation we are interested in – one or more round of people losing THEIR money (and not passing the losses into the common pool of losses) (ie. visible rather than invisible losses) will sharpen people’s minds.

“Which brings me back to the original question: if they are not money, what are they?”

There is no point in discussing another bunch of definitions not relevant to this discussion, they’re not “money” as per The Regression Theorem and/or Rothbard – if you disagree, please explain how using their words as your starting point.  Look on the homepage for the Ripple “money” you keep banging on about:

“Suppose you’re in Canada and you want to send money to a friend in Sweden. You log in to your online banking service and enter your friend’s Ripple ID (like an email address), and the amount you want to send. Your bank’s Ripple server communicates with your friend’s Ripple server and they coordinate to find a payment path between you. Your bank reports back the cost to you with transaction fees, if any, for your approval. The money ends up in one of your friend’s accounts a few seconds later.”

This is more like paypal. Confusing paypal with money is even more absurd than your earlier confusion of financial instruments with money.

Fractional reserve banking. Please read EXACTLY what Doug French said:

“…I don’t believe that the market would accept fractional reserves. It would be regarded as embezzlement at best and fraud at worst.”

He’s not making a “deductive” argument, he is speculating on how the market participants would view fractional reserve banking in a free market when bank deposits of the account holders vanish (unlike now because of insurance) and provides a range of views they might have on having their pockets turned out, the worst of these views being fraud. I agree with this statement. He does not state the argument you are refuting ie. “FRB is fraud” – so please refute the actual words and not straw men. What’s more, I specifically expanded on what I said after this comment to be clear, and I think what I said was in fact clear. “FRB is fraud” is not a statement one can make without suitable qualifiers – I actually DO think it is “fraud” as I would define the word, but I’m avoiding saying it explicitly here as frb is only one part of a web of deceit and “fraud” is an ill-defined word about which we could have interminable and pointless discussions. A discussion of what “fraud” means is off topic and not relevant to this discussion, we don’t need to use the word fraud, we can use other better defined words.

And you say I am “unable to provide definitions”?  I am in fact bending over backwards to use only clearly defined terms. I spent paragraphs AGAIN trying to establish what we can agree “money” is in a free market it. Yet look at your paragraph:

“Similarly, with money, the effects we are debating (e.g. inflation, fraud, creation without government interference) have to be present at all levels, only be more apparent when the network effects kick in. If fractional reserve banking is fraud, all IOUs are fraud. If fiat money causes inflation, all IOUs cause inflation. If fiat money can’t be created without government interference, IOUs cannot be created either. It just might not be as obvious.”

You can’t make sense if you are not careful with your words. For example, “fiat money” is not an IOU from a private citizen – fiat money is that which is money only by virtue of government “fiat” ie. legal tender laws, so “fiat money can’t be created without government interference” yes but it does not follow that IOUs in general can’t exist. As it stands, this statement is nonsensical. And ” IOUs cannot be created” – “created”? What kind of word is that? What does that refer to? Making them with a printer? Using them for exchange? What has to happen for one to be “created”? It is impossible to know what you mean when you are this careless with words.

I asked you earlier at least twice to rephrase a paragraph in a different way without using certain words, but in each case you refuse. You think this is pointless? I disagree. Part of your confusion is that you don’t take the time or care to phrase things correctly or clearly – doing so will often answer the question you are asking.

You still object to Rothbard’s words on money by saying firstly: 

“An epidemic does not mean that after a certain threshold of infected population is passed, the disease gains new properties, but that certain effects start to be more important or apparent.”

The disease itself does not get new properties no. But its effect on the people and the system as a whole changes as it becomes more common – this is so obvious that I can’t believe I have to write it down. When the proportion of the population who is infected increases, the chances of catching the disease increase, changing people’s incentives (staying in more or buying face masks or whatever). When the proportion of people who use commodity XYZ as their means of exchange increases, the more uses this commodity has (ie. you can expect to be able to use it for more of your exchanges and stop using the other commodity ABC which the market participants have deemed less useful for this purpose) then the demand for XYZ rises. This really is very simple. You can call these network effects if you want, but they flow seamlessly from the micro level.

”Precisely my point. The argument is that by fulfilling the criteria of widespread usage, “something” gains new features and becomes money. Unfortunately, this is the step that is not explained.”

After a lot of complaining (1000s of words) about the claims of “gold standard proponents”, this is the root of your objection???? Then there is nothing more I can say really. I mean, what is it you want explained? I am now more and not less confused. You don’t even seem to deny epidemics can and do happen – you seem to want me to explain, in a blog comment, “how” they come about? This could be a mathematical/systems analysis question as much as anything else and a highly non-trivial one at that – the variables in real life in such a system are dynamic and there is no way a priori to determine what will happen. So a “deductive” explanation of how these things happen is impossible if that’s what you want. I think you are looking for deductive reasoning where none exists. Conclusions drawn from The Second Law of Thermodynamics are not deductive in the sense that the law is not absolutely true – but it is violated only in the vast, vast minority of cases. Do you refuse to travel in steam engines until such a proof is forthcoming? 

I have skipped your two paragraphs that preceded this not because I agree with them but because I don’t really understand your point – “network effects” is moving towards the answer but there is really no need to make it so complicated. And I think you’re saying macro effects should be tracked back to micro, on which I couldn’t agree more, nor could everyone else on this site – connecting micro to macro is one of the core principles of AE. Rothbard spends an entire chapter on the application of this principle to money in The Mystery of Banking, near the start. It is YOU who is not doing this – and this is mainly because you don’t know what “money” is yet.