Prize-Winning Essays on Money and Credit

Two $1,000 prizes were awarded at last week’s 2012 Austrian Scholars Conference for outstanding essays.  Fittingly, in the ASC celebrating the centennial of Mises’ first magnum opus, The Theory of Money and Credit (although, in the conference, Guido Hulsmann explained, among other mistranslations in the English edition of the book, how “credit” really should have been translated as “fiduciary media” instead), the prize-winning essays were, respectively, about money and credit.  The Lawrence W. Fertig Prize in Austrian Economics went to Malavika Nair for “Money or Money Substitutes? Implications of Selgin’s Small Change Challenge, and the O.P. Alford III Prize in Libertarian Scholarship went to Thorsten Polleit and Jonathan Mariano for “Credit Default Swaps from the Viewpoint of Libertarian Property Rights and Contract Theory,”  Congratulations Malavika, Thorsten, and Jonathan!


  1. @Carlos Novais

    Suppose you have physical gold or silver. Where would you deposit it? In a warehouse (the only true demand deposit) or in a fractional reserve bank?

    You avoided my question, but I’ll answer yours.

    I would deposit my gold in a sound bank issuing promissory notes extending credit against valuable collateral, like mortgaged houses, and paying me a portion of the rental value of this collateral. In other words, I would deposit the gold in a fractional reserve bank, because I prefer receiving interest to paying a warehousing fee. If I can’t withdraw my gold so readily, who cares? The houses primarily secure the bank’s notes, not my gold, and I can spend the notes as well as gold.

    My argument is that the “Gresham’s law” reverses in case of clearly non-homogeneous contracts titles. Gresham’s law is an expression of the unintended consequences of enforcing non-market prices or ratios.

    I think I understand Gresham’s law, but I don’t understand you here. Feel free to elaborate.

    A certificate or 100% reserve demand deposit is commodity money proper and should be labeled as such.

    What if someone robs the warehouse? The houses securing my bank’s notes might still be standing.

    Sure, I agree that a warehouse receipt and a promissory note secured by collateral are not the same thing, and people should understand the difference ideally. In reality, most people don’t want to know the difference. Most people can’t find Montana on a map. I’m not sure I can at the moment. Why would common people read this blog? They’d rather watch Family Guy. Who am I to judge?

    Why would a person change a 100% reserve certificate for a promise of payment at par value?

    Because the bank has claims on houses worth more than the par value of its circulating notes. If your bank doesn’t, you have a point, but I bank more carefully. [At least, I would bank more carefully without the FDIC, which I oppose of course.]

    Why would a person accept the settlement of a contract indifferently between both titles? The reason is that historically fiduciary money was able to circulate indistinguishable form 100% reserve banking.

    I’m not sure that’s the reason, but I agree that fiduciary money should be distinguishable from warehouse receipts.

    • “I would deposit the gold in a fractional reserve bank, because I prefer receiving interest to paying”

      This does not make sense. We are not discussing about what is best: keeping money or invest it an interest bearing investment.

      We are discussing about the difference between having money as medium of exchange, in the form of physical gold/silver (or equivalent property titles) and fractional reserve titles.

      In both cases, commodity money or fiduciary money, could earn interest lending it to the bank. The question is about what is medium of exchange that people or the market will choose, if perfectly clear and non-homogeneous titles (physical versus fiduciary) circulate, something that was not true in the gold standard historic examples.

      So, why would a person deposit physical gold in a fractional reserve bank if is able to deposit in a warehouse or lending it?

      My point is fiduciary money is labelled as such and people realize that there are 2 types of titles circulating and one has no credit risk (the risk of being robbed or fraud is not an argument to compare it with credit risk, both have the same amount of risk, but has the credit risk) and that both are able to be earn interest if people choose to lend it, why would people keep the one that as the same par value but have risk?

      That is why I repeat that in perfect clearly labelled and assumed different contract, good money will drive bad (fractional) money away.

  2. ConsentWithdrawn, I like your “property”, but when I consult attorneys about my property rights, and other rights I am bound to respect, they often use the word differently. Utopian ideals are worth pondering, so I’ll make the minarchist case here, but real life property concerns me most as a practical matter.

    In my own peculiar way of thinking, which attorneys often don’t share either, received gifts are not property in general. Receiving a good as a gift, per se, does not make the good property of the recipient. How the giver obtained the good is relevant for example. If a thief gives me a stolen good, even if I have no part in the theft and am not aware of it, the good is not my property. I can sincerely believe it to be my property, but I am mistaken. Another proprietor is entitled to take it from me, even forcibly over my objection.

    I don’t believe that hereditary title generally bestows property, and Locke didn’t believe so either. I want rights of hereditary title limited, through a limited expiration of titles, and I am well within the classicially liberal tradition in this respect, as I am when I advocate a progressive consumption tax. These measures should not empower the most central authority at the expense of less central authorities (the capitalists). They should only check the power of the less central authorities. A progressive consumption tax does not transfer entitlement to organize resources from a capitalist to a more central authority in the state. It only discourages the capitalist’s organization of the resources for his exclusive use. Ideally, the authority distinguishing “investment” from “consumption” is not a more central authority at all. It is a common jury.

    You’re right. I do believe that property cannot exist without a state. Possession and territory exist in the state of nature, and nature is not a Hobbesian war of all against all, but it’s not a Rothbardian utopia either. Natural territoriality is not what people commonly mean by “property”.

    Without a central authority, you may claim a particular parcel of land as your homestead, and I may claim the same parcel (or an overlapping parcel) as my homestead. The resulting dispute between us is not a war of all against all, but if a standard of propriety settles the dispute, as opposed to a clash of forces or a perception of superior force short of a clash, a more central authority resolves the dispute.

    I can have my standards, and you can have yours, and our respective standards can conflict. That’s the problem. Neither of us need be “wrong” in any absolute sense. We only prefer different standards. If my standards entitle me to a parcel of land, and your standards entitle you to the same parcel, one or both of us must yield. If we cannot agree on a compromise, we must accept a standard imposed on both of us.

    I hear a lot about stateless property in ancient societies, but I wonder how stateless the societies actually were. Ancient states must have been more limited than modern states, but nothing fitting Rothbard’s definition of “state” existed? Where something like modern property rights (as opposed to something more like natural territory) existed, I doubt it.

    Ostracized for not playing by what rules? Who decides that someone is not playing by the rules? Each individual decides what the rules are?

    I don’t see anarcho-capitalists describing a stateless system. They presume a state that people commonly accept. People commonly accepting rules is not equivalent to statelessness. People commonly submit to a state, because the cost of submitting is less than the cost of resisting. The standards imposed can be more or less beneficial, but the state is no more or less a state for this reason.

    Standards of propriety emerge from some process. One person need not dictate the standards, but they are standards, i.e. one rule applies to all. A single rule forcibly applicable to all with a region, not a single dictator decreeing rules, is the essence of a state.

    I haven’t read For A New Liberty, but I agree that statutory monopolies are almost always counterproductive, and I agree that many functions of modern states, including law enforcement, can be decentralized and organized by markets; however, I don’t agree that competing legislatures can establish what people commonly call “property”. Certainty of title is inherent in the notion of property, and this certainty implies some final arbiter of disputes that all disputants are bound to respect.

    Two conflicting rules cannot govern the boundary between your property and mine. I cannot have the rule that I prefer while you have a different rule. In a free market, I may have my choice of dinner, and you may have your choice, but each of us cannot have our choice of rules governing who owns the restaurants, except by choosing to be subject to different states.

    Property (the rules governing who governs a resource) is a necessary precondition for markets, not a good for sale in a market.

    Anarcho-capitalism presumes specific, forcible standards of propriety, not just any rules governing forcible possession but specific rules emerging from the classically liberal tradition, like the property that Locke imagined in some idyllic past with an endless frontier for homesteading. In a sense, these standards did emerge from a clash of competing legislators and law enforcers, but the competitors vied to establish a state.

    In Locke’s version of the story, property emerged where little conflict over possession existed, where land is abundant enough for everyone to claim all he can fruitfully use. Under these circumstances, claiming more land than a man employs himself by his own labor is “dishonest”, according to Locke’s. Enclosing much land and forcibly limiting its use, in order to claim rents for the use, is what Locke calls “dishonest” in this context, but where land is scarce, this enclosure is unavoidable. A market in the capital, from which useful prices can emerge, requires this enclosure, but it also requires a single, final authority resolving disputes over boundaries between parcels, unless neighbors resolve the disputes by their own force.

    Where every man is an island, no state is necessary, but neither are standards of propriety. Even in Locke’s day, Lockean property was only a small part of the story. “Of Property” is a very short chapter in the Second Treatise, and it ends with the strong implication that much of what passed for “property” in Locke’s day was “dishonest”. The next chapter is called “Of Paternal Power” and concerns rights of title holders subject to a state. Locke explicitly states that the title holders exercise these powers, specifically hereditary passage of the title, only as a condition of their loyalty to a state.

    I can easily imagine forcible standards emerging, from competing legislators and law enforcers, that I would not call “libertarian”. These standards might organize some sort of civil society within a region, without any perpertual state of war, but I would not call the standards “libertarian”. I imagine a truce imposed by victors on their subjects, not a war of all against all. Rothbard’s “anarcho-capitalism” imagines the same thing. I share many of his goals, but I don’t see Rothbard advocating a stateless system. Despite the name of his system, he is still a minarchist, not an anarchist.

    A simple system of propriety, emphasizing a man’s proper governance of his own person and fruits of his labor and trade in the same, may be adequate for some purpose. This adequacy does not imply that universal (or nearly universal) respect for the system within a region requires no state enforcing it.

    The short, sweet formulation only raises the question: what is your own property? This question provokes endless disagreement. You can’t just wish it away by assuming that everyone accepts your answer. Even if I agree with the general premise of a “property anarchy”, I can disagree over the details of who owns what, when, where and how. When you finally confront these questions in all necessary detail, you find yourself advocating a state.

    The state is often a terrible, ruthless, brutal, tyrannical organization, but it is never a “criminal” organization in common parlance. I understand your point and won’t bicker (much) over semantics, but words mean what people commonly mean by them.

    You don’t need to sell me on the Mises Institute. I’m a big fan.

    I love the ideal of a coercion free society, but I don’t see an-caps advocating one. You want me to respect your property rights, as you define them, whether or not I agree. In nature, a lion has no similar rights. He holds territory only until a stronger lion asserts a competing claim. I’m not even saying that the lion’s way, truly natural law, is so terrible, and it certainly is not a war of all against all, but if I prefer your way to the lion’s, we only prefer the same state. Your way is not the absence of a state.

    A progressive consumption tax, on the model I advocate, is actually a large step toward a much smaller state, and it devolves much state power to capitalists organizing resources seeking profit in the market. If you prefer a different step, I need to know what it is. Given the current, incredible size and scope of the state, the road we take toward a smaller state makes a huge difference, and if we take the wrong road, we’ll lose more support than we gain (and rightly so).

  3. About Malavika Nair for “Money or Money Substitutes? Implications of Selgin’s Small Change Challenge”.

    The main issue about commodity money (or fully backed certificates or demand deposits of commodity money) and fiduciary money (fractional reserve certificates or demand deposits) is that the law allowed (or even enforced) both to circulate as being homogeneous contracts to the advantage of fiduciary money. But fiduciary money is simply promises of payment of money (or certificates) and should be labeled as such. In these conditions of contractual clarity, both titles would not be fungible and even the accounting rules would not allow it, and a possible discount would appear on fiduciary money (credit risk).

    I think that what would happen in this case is that good money fully backed commodity money) would drive bad money (fractional reserve certificates) away. Why a person would accept a certificate labeled as promise of payment at par with the commodity itself?

    The reason I think, Selgin provides historical examples where no such discount seems to appear is because both tittles circulated as money because the law allowed just that, and with bad law, it’s true that bad money drives good money away, so, every bank had the incentive to practice fractional reserve banking.

    • “But fiduciary money is simply promises of payment of money (or certificates) and should be labeled as such.”

      I agree.

      “… a possible discount would appear on fiduciary money (credit risk).”

      I agree; however, fiduciary money can also entitle the holder to interest payments amounting to the rental value of collateral securing credit (like the bank’s equity in a mortgaged house).

      A warehouse receipt for gold cannot pay the bearer similarly. In fact, a warehouse receipt for gold requires the gold depositor to pay for the warehousing service.

      The warehouse receipt is also risky, since gold can disappear from the warehouse improperly. Claims on mortgaged houses could be safer, as well as paying the holder, so warehouse receipts could trade at a discount to fiduciary money.

      “… good money (fully backed commodity money) would drive bad money (fractional reserve certificates) away.”

      This is the opposite of Gresham’s Law. Suppose you’re right. Suppose warehouse receipts are safer, i.e. suppose they have a higher expected value in the foreseeable future. Fiduciary money is not worthless, but it does have a lower expected value, compared with its par value, in the foreseeable future.

      Now suppose you have some warehouse receipts and some fiduciary money. Which do you spend first?

      Money is what we accept for a good only to exchange it later for another good. A depreciating good becomes money before an appreciating good, because people will hold the appreciating good and trade the depreciating good. People will also accept the depreciating good in trade, because they don’t intend to hold it.

      That’s the essential logic of Gresham’s law. People hold “good money”, but money is not what people hold by definition.

      • Money is a medium of indirect exchange. If people use banknotes as a medium of indirect exchange, i.e. if they accept the notes in trade only to exchange them for something else, then the notes are money. They aren’t a substitute for money. They are money.

      • Money substitutes are accepted in exchange because they can be redeemed for money proper, with such money proper being held in full or partial reserve against the substitutes/notes in circulation. Hope you can understand the difference.

      • I understand your definition but don’t consider it useful. Again, “money” describes a good that traders accept as a medium of indirect exchange, accepting the good only to exchange it for a different good soon thereafter. A good that I use this way is not a substitute for money. It is money. “Money” does not describe some intrinsic characteristic of a good. It describes a role that particular goods play in commerce.

        Practically all economists agree that gold in the ground, unmined, is not money.

        If I bury gold in the ground, for safe keeping, and leave it there for years, the gold ceases to be money until I dig it up again.

        I can call the buried gold “saved money”, but this usage only confuses its role. The gold in a gold mine, not yet mined because the mine owner doesn’t find a market for gold to justify the mining, is also “saved” in this sense.

        If I melt gold coins to make an art object, to adorn the dome over a mosque for example, intending this art object to endure forever, this gold also ceases to be money. Calling this gold “saved money” would also confuse its role and create a misleading impression of the supply of “money”.

        If I deposit a banknote in a bank, expecting to leave it there for years earning the interest due a depositor and paid from the rental value of the bank’s stock of mortgaged real estate, then the banknote also ceases to be money. Money must circulate definitively. “Non-circulating money” is a contradiction in terms.

        A gold coin or banknote that I carry in my pocket on my way to a market is certainly money. The line between money and a good potentially useful as money is inherently imprecise, assuming that people are free to use any good they choose as money, but we shouldn’t limit liberty simply to create a more precise definition. Many monetary ills occur when people are not free this way.

      • “Now suppose you have some warehouse receipts and some fiduciary money. Which do you spend first?”

        Suppose you have physical gold or silver. Where would you deposit it? In a warehouse (the only true demand deposit) or in a fractional reserve bank?

        My argument is that the “Gresham’s law” reverses in case of clearly non-homogeneous contracts titles. Gresham’s law is an expression of the unintended consequences of enforcing non-market prices or ratios.

        A certificate or 100% reserve demand deposit is commodity money proper and should be labeled as such.

        A promise of payment certificate (or fractional reserve “demand deposit”) should be also clearly labeled as such.
        Why would a person change a 100% reserve certificate for a promise of payment at par value?

        Why would a person accept the settlement of a contract indifferently between both titles? The reason is that historically fiduciary money was able to circulate indistinguishable form 100% reserve banking.

        Or even better, no bank had any incentive to issue 100% reserve titles or demand deposits as it would circulate as any fiduciary money.

        Clearing-houses would be able to net debit/credits on true demand deposits but it would not be possible to net between to different contracts.

        Also, accounting rules would force the have different accounts for different claims/contracts.

        I think this would set the conditions where good money would drive bad money away.

  4. Readers persuaded by Polleit and Mariano’s defense of credit default swaps might be interested in Ryan Fugger’s Ripple Project.

    Ripple is a system of exchange through a network of credit default swaps. Basically, I accept your default risk, and you accept Bob’s default risk, and Bob accept’s Alice’s default risk. I then trade with Alice indirectly through you and Bob.

    In my trade with Alice, I directly extend credit to you, and you extend credit to Bob, and Bob extends credit to Alice. Alice accepts my good and owes Bob who owes you who owes me. You pay me on demand, Bob pays you on demand, and Alice pays Bob on demand; however, we may also keep the obligations “in the bank” and settle them through subsequent exchanges. All of the accounting is electronic and occurs online, here for example.

    Ripple is similar to another system of exchange, called Favorati, that I develop independently as a hobby (so far).

    Favorati also “banks” obligations and settles obligations through subsequent exchange, but it is not a network of default swaps. It rather circulates promissory notes like more conventional “free banks”.

    Ripple and Favorati are systems of mutual credit, i.e. people extend credit directly to one another without a more central, financial intermediary (like a conventional bank). Creditors may pool default risk in such a system, and Favorati (but not Ripple) incorporates a bit of risk pooling in circulating notes, i.e. everyone accepting a particular note shares default risk with others accepting the same note.

    Broader risk sharing is possible, but I’m skeptical of its utility, and I’m also skeptical of default swaps generally. I don’t want them banned or regulated, but I’m skeptical of their practical application. Ripple assumes that Bob will pay you, and you will pay me, even if Alice never pays Bob, i.e. the system assumes that default risk is not contagious. I doubt this assumption.

    “Right libertarians” sometimes associate mutual credit with mutualist “left libertarians”, but Ripple is only an application of default swaps, and I doubt that Polleit and Mariano consider themselves “left libertarians”. I don’t know what sort of political label Fugger accepts. He seems vaguely “left leaning”, but he’s more a technophile and seems also to be crypto-anarchist. I’m more of a Hayekian (and technophile), but I resist labels generally.

    Many common goals exist beneath these superficial, political labels, and libertarians often emphasize this “left”/”right” distinction to our detriment. We should know better.

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