October 2, 2022

Everything You Wanted to Know About Money, Yet Were Afraid to Request

What is dollars? Thorsten Polleit explains in any brilliant lecture delivered throughout Prague

With my talk, I would like to accomplish three goals:

First , I want to clarify some sound and time-tested basics of monetary theory.

Second , I would like to point out why it is very important have a  free market in money ; that the battlefront of our time is  not   between, say, bitcoin, stable coins, gold, plus silver, but between government-monopolized fiat monies and a  free market in money .

And  third , I hope to strengthen your conviction that we need a totally free market in money! Unless we succeed in ending governments’ money monopolies, I panic we might end up in the most sinister tyranny the world has ever seen.

On the Subject of Money

Let me ask you: What is money? The answer can be:   Money may be the universally accepted means of swap .

Therefore, money is a good like any some other.

What makes this really  special   is that money is among the most marketable, the most liquid of goods in the economy.

Money is no consumer great and no producer good. It does not take exchange good; it is a great sui generis. 1

What functions does money have got? According to most economics books, the answer is that money has three functions: it is way of exchange, unit of accounts, and store of worth.

Upon closer examination, however , we understand that money has just  one   perform, and that is as a means of swap.

The unit associated with account function and the store of value function are only subfunctions of the means of exchange function of money.

This is easy to understand: The unit associated with account function expresses the exchange ratios of goods plus services in money; for instance , 1 apple costs one euro.

The store of value function (which can also be termed as the means of deferred payment function) signifies that people hold money to change in the future rather than today.

Money is an essential tool in an advanced economy characterized by the division associated with labor and trade.

It serves as a typical denominator, a  numeraire   for all products prices. It thus permits the calculation of the results on the various alternatives of economic activity.

In a complex economy, only monetary calculation can allot resources to their most productive uses— that is, uses that satisfy consumer demand greatest.

Today’s modern, advanced economies could not can be found without using money for economic calculation.

The Value of Money

An economy turns into richer if more manufacturer and consumer goods can be found. However , this does not apply at money. Why?

Money, which has only  use value , produced from its purchasing power, is a good, and as such, determining its value falls under the  law of diminishing minor utility .

What does this law say? It says (1) a large supply of goods is preferable to an inferior supply of goods, and (2) the marginal utility of any additional unit of a good decreases.

So an increase in the money supply in the economy reduces the minor utility of the money unit compared to other goods. Since people exchange their additional money holdings for other products, money prices increase.

Therefore , it in fact makes sense to equate inflation with an increase in the quantity of money; the increase in the quantity of money is the  trigger , and rising products prices are its  symptom .

The “ Optimal” Money Stock

If money offers only one function, which is as a way of exchange, it does not matter just how small or large the money supply is.

Whether the money stock is certainly 1 million US$, one billion US$, or 100 billion US$ does not matter.

Regardless of the actual size of the money stock, any transaction volume in goods and services can be conducted with a given supply of money.

A large money stock associated with, say 10 billion US$, would lead to high products prices, while a small cash stock of, say 1 billion US$, would lead to low goods prices.

We come to the conclusion:

No increase in the money supply may improve the monetary function of money . An increase in the money supply will merely dilute the effectiveness of each unit of money as a medium of trade.

In other words:   An increase in the quantity of money brings no interpersonal benefit ; any volume of money that exists at any given time is  optimal .

“ Cantillon Effect”

Now you may ask: Why is the (fiat) cash supply increasing in today’s financial regime (be it in the US, Europe, Asia, or Latin America)?

The solution is that an increase in the amount of money leads to a redistribution of income and wealth among people; it makes several richer at the expense of numerous others. Why?

The first recipients of the new money benefit because they can purchase goods at unchanged prices with their newly received cash.

As the brand new money makes its way through the economy, it drives up goods prices. Consequently, the late recipients of the new money can only buy at already elevated prices.

The early receivers of the new money advantage at the expense of the past due recipients. This is the so-called Cantillon effect.

Origin of Money

Where does money come from? There are several theories about the origin of money.

Most people today believe in the particular “ State theory of money, ” put forward by the German economist Georg Friedrich Knapp (1842– 1926)— published in the book  Staatliche Theorie des Geldes   ( The State Concept of Money , 1891).

According to Knapp, it had been the state that brought money to the people; in fact , a situation is required to provide people with money. This theory has many imperfections, and I think it’s wrong, but I will not go into more detail here.

There is also the theory by the US anthropologist and anarchist activist David Graeber (1961– 2020) on the invention of money. This says that money descends from barter-based credit transactions. I am going to not go into further details on this theory either.

I would like to pull your attention to the theory about the origin of money put forward by Carl Menger in 1871. Menger argues that money originated in the free market, voluntarily adopted by self-interested people, from barter plus from a commodity.

Menger’s theory was afterwards given a rigorous reasonable foundation by Ludwig von Mises with his so-called  regression theorem .

More recently, a discussion has erupted as to whether bitcoin, cryptos or stable coins could become money from the regression theorem perspective.

As far as I know, quite a few responses have emerged. We, for my part, conclude that the regression theorem does by no means rule out that bitcoin and other cryptocurrencies could become money (I say could, for I would not want to produce a prediction at this stage).

I may only add here that the regression theorem holds a priori, which means it cannot be verified or refuted by experience. If something becomes money, it means it conforms with the regression theorem.

Continuous or Increasing Money Stock?

May I ask you: Would you prefer to have money that will loses its purchasing energy over time? Or would you instead hold money that retains, or even increases, its purchasing power over time?

I think most people (in their right mind) would go for money with stable purchasing power or money that gains in purchasing power.

This would suggest deflating goods prices over time.

But wait: What would happen if goods prices didn’t rise as well as fell over time? If which were the case, wouldn’t that create a significant problem for the economic climate as a whole?

Allow us to assume people opt for money that has a constant supply. You might think of people using bitcoin as money, and the total quantity of bitcoin is a constant twenty-one million units.

An increase in the economic result would then (other factors being equal) lead to decrease in goods prices.

Wouldn’t it drive the economy over the high cliff? Wouldn’t it destroy firms’ profits? Wouldn’t consumers cease consuming? The answer to all of the questions is no.

A firm’s profit is just the  spread   between revenue and costs.

Within an economy where the prices of products are rising (which could be the case in today’s “ inflation regime” ), the prosperous entrepreneur must ensure that revenues  grow  quicker than costs.

Likewise, in a price deflation regime the firm need to make sure that its costs  fall faster   than its revenues.

A firm that produces goods and services per market demand can flourish in a price inflation and price deflation routine.

This also implies that there is no need for a chronically rising money supply; a constant and even shrinking money supply would be just fine.

Time Preference

What would cost deflation do to customer demand? Wouldn’t people refrain from buying goods today simply because they can expect to buy them from lower prices in the future?

The answer is no; we can not   come to such a conclusion, and  with good reason .

First, you will find goods and services, the consumption of which can not be postponed. Think of food, clothing, shelter, etc . Whatever their price tomorrow, next week, or even next month, we must purchase them today.

2nd, there is a phenomenon in the world of human action called  time preference .

Time choice means that people value a good available today higher than the same great (under the same conditions) at a later time.

Time preference manifests as the  originary interest rate : the particular discount the value of a future good suffers compared to the value of a present good.

Time preference and the originary interest rate are always positive and can in no way disappear— as they are categories of human action.

To illustrate what period preference means for people’s activities, let me give you a simple illustration.

Imagine a vehicle costs $50, 000 these days and $25, 000 in a year. Whether people will purchase today or postpone their purchase depends on the concept of  marginal utility .

Of course , the marginal utility of buying the vehicle for $25, 000 ranks higher on people’s worth scale than paying fifty dollars, 000 for the car.

However , when it comes to choosing to buy now or afterwards, people compare the  discounted   marginal utility of purchasing the good with regard to $25, 000 in a year from now to the marginal utility of buying this for $50, 000 today.

If the reduced marginal utility of buying the car for $25, 000 in a year is  lower   than the marginal utility of buying it for $50, 000 now, people will buy it now. If it is  higher , they will postpone their purchase.

Since individuals time preference can never become zero for logical factors, let alone be negative, we can not   conclude that people will postpone their purchases only because of lower goods prices in the future.

This little illustration tells us this: There is nothing wrong with goods prices falling (instead of rising); the economy might easily thrive when goods costs decline.

And thus again, the quantity of money in a good economy doesn’t have to grow; it is also constant or even shrink with time, and so can be goods costs.

Credit score Markets

But what about credit markets when goods prices drop, you might wonder?

If, for instance, prices fall by 3 percent per year, the purchasing power pounds increases by 3 %.

In that case, I wouldn’t trade my money for a T-Bill that yields only, say, 3 percent per year.

In order to entice me to part with my money, a debtor would have to offer a return on the investment  greater   than the increase in the purchasing power of money (say, 3. 5 percent).

With declining products prices over time, market financing rates would approach zero in  nominal terms : the price component might become negative, corresponding (grosso modo) with the positive actual interest rate component.

It may well be that under such conditions, borrowing would certainly become more expensive than in this fiat money world.

Firms could finance their expenditures by retaining earnings and rights issues— rather than taking on new debt, and people would invest a greater portion of their savings in company stocks than provides.

So inside a world of goods price decrease, credit markets can be expected to work just fine.

But they certainly wouldn’t be since overblown as they have become in today’s fiat money regime.

The Issue of Price Volatility

Bitcoin fans may know the following phrase all too well:   The bitcoin price is too volatile, and thus it cannot be money . This is, of course , not a convincing argument.

At the outset of its life cycle, the demand for an innovation is normally relatively low. This pertains to bitcoin as well as to crypto systems and stable coins.

However , once bitcoin becomes more widely accepted, its demand will grow wider and less volatile; its market price (its exchange rate against sales items) will show fewer fluctuations.

The finding that the particular bitcoin price is relatively volatile right now would not rule out the possibility that bitcoin could eventually become money.

One more interesting question is: Would certainly people like to have money that causes goods prices to fluctuate wildly, or would they prefer money that will keeps goods prices a little more stable?

Get, for instance, gold. The yellowish metal has use worth as money and as a nonmonetary good (resulting through, for example , industrial applications).   Bitcoin , in contrast, has  only   one purpose : to serve as a means of exchange.

Suppose people use bitcoin as money. Then, for whatever reason, people suddenly prefer to hold less money. They exchange their particular bitcoins for goods, so the prices of goods in terms of bitcoins increase. As bitcoin will be solely held for monetary purposes, there are no counteracting market forces to support its value.

When gold is used as money, and people decide to reduce their particular gold holdings for whatever reason, this would also drive up products prices in gold terms. At the same time, however , the requirement for gold for nonmonetary purposes would increase— counteracting the rise in goods prices.

In other words: In an economy where bitcoin is used as money, goods price volatility would most likely be (much) higher than in an economy where gold is used because money.

However , I cannot say whether bitcoin (higher goods price volatility) or gold (lower goods price volatility) would be much better money from people’s viewpoint. Only a free market in money (where the need for and the supply of money are truly free) could give us an answer.

Intermediation

When we consider money, present and future, there is an issue which we should not overlook, and that is the  intermediation issue .

We have pretty good reason to believe that not just about all money users will want to or even can rely on peer-to-peer dealings.

In a modern, highly developed economy, people demand settlement, storage, plus safeguarding services for their cash, provided by intermediaries, such as down payment banks or payment cpus.

This also pertains to the crypto space— just think of the large number of people holding their cryptos with trading platforms rather than in their private wallets.

Developed credit markets cannot function without specialized intermediaries who else channel money from savers to investors.

Borrowing and lending decisions require  personal judgement — and such judgment is difficult, if not unattainable, to make in an anonymous plus trustless environment where automatic computer algorithms prevail. Also, the deposit business cannot function without  apparent designations .

Money that does not, or cannot, provide for some kind of intermediation providers would severely hamper financial development and would likely end up being overtaken by alternative cash that allows for intermediation providers.

This bottom line does not speak against bitcoin. However , it does pour a bucket of iced drinking water on the idea that anonymous and trustless money would come out out of necessity or naturally.

Without finish anonymity, bitcoin and Co would lose an attractive competitive advantage over, for example , digital gold or silver-backed money and payment system.

Unfortunately, however , with out complete anonymity, the government is going to be breathing down people’s necks in all money matters— whether it is bitcoin money, gold and silver cash, or any other form of money. I will come back to this issue.

Today’s Fiat Money Regime

It is now time to take a critical look at today’s worldwide paper or “ fiat” money regime— as it is a good economically and socially difficult system with far-reaching plus seriously challenging economic plus societal consequences, implications that go well beyond exactly what most people can imagine.

Fiat money is inflationary— it loses its buying power over time.

Fiat money benefits a couple of at the expense of many others— so we can say that fiat money is socially unjust.

Fiat cash causes boom-and-bust cycles— this sets in motion an synthetic economic upswing followed by a crash.

Fiat cash leads to overindebtedness— it is made through credit expansion, as well as the economies’ debt burden surpasses income growth.

Fiat money allows the state to grow ever bigger and much more powerful, makes waging wars cheap— and all this at the expense of civil protections and freedom, paving the way in which toward tyranny.

I should note here that people should not fall into the belief that the widespread use of fiat money indicates voluntary acceptance by money users.

In a world where governments have monopolized money creation, currency competition is under control, and people are effectively coerced into using fiat cash for two reasons.

First, governments have established “ legal tender laws” that effectively privilege the use of federal government fiat money over substitute means of exchange.

Second, governments have accessed capital gain taxes and/or sales taxes on merchandise that might compete with fiat dollars, such as gold, silver, or bitcoin, making them uncompetitive compared with fiat money.

Central Bank Electronic Currency

States and their central banks choose to maintain their fiat cash monopoly. They do not want non-public monies to compete with their fiat currencies.

To tighten their traction on monetary matters, central banks are even planning to issue foremost bank digital currencies. That is, unsurprisingly, rather problematic.

First, central savings account digital currencies are not “ better monies. ” Many people represent fiat monies. Therefore, fiat central bank handheld currencies suffer from the same financial and ethical defects as physical and electronic fedex monies.

Second, central bank digital stock markets will most likely replace cash or maybe allow governments to level out coins and together with. People would lose a major option for making anonymous bills, and what little is kept of their financial privacy are going to be gone.

Lastly, without cash, your money cannot be withdrawn from the financial system. It can be expropriated simply by negative interest rates imposed by your central bank.

Fourth, as acceptance grows, central bank digital stock markets can easily be instrumentalized for broader political purposes. Just think involving China’s social credit process.

Imagine, when you will, only getting usage of central bank digital forex if you comply with the government’s directives (or comply with typically the wishes of those special attraction groups that determine governing administration orders).

Should you not obey, you suffer problems: you can no longer travel, obtain certain newspapers and materials, or buy groceries; your health care data may be frozen, and your money even confiscated if you care to dissent too much.

The list of such antifreedom atrocities made possible in a regarding central bank digital foreign currencies is endless.

The Marxist Understanding of a Central Bank

Perhaps it is a right moment to strong your attention to the fact that the concept of central banking— and by proxy, central bank money, seeking in physical or through digital form— is not your capitalist but a Marxist concept.

In his “ Manifesto of the Communism Party” (1848), published together with Frederick Engels, Karl Marx calls for “ measures” — by which he meant “ despotic encroachments on assets rights” — that would be “ inevitable as means of entirely revolutionising the mode for production, ” that is, contributing to socialism-communism.

Marx’s fifth measure reads: “ Centralisation of credit from the hands of the state, by means of a national bank with talk about capital and an exclusive monopoly. ”

Without doubt, holding the money monopoly leaves the monopolist in a prefer to powerful position. It ascertains who gets credit and additionally money and who doesn’t; it influences the cost of credit history and capital and the submission of income and variety.

So it is no surprise that, especially with the monopoly over fiat money, states that have become bigger and more powerful— measured in terms of their spending and debt relative to major domestic product, the number of ordinances and laws, etc .

“ Superb Reset”

You may have noticed that the system of totally free markets, of capitalism, is by and large in disrepute.

People blame this free market and capitalism for all sorts of evils— budgetary and economic crises, being out of work, income and wealth disparities, environmental pollution etc .

But let me tell you of which we  do not   have   capitalism, not inside Europe, not in the US, or perhaps in China.

What we  accomplish   have is  interventionism : an economic and social system wherein the state intervenes in the operating of the free market— for example , through orders, laws, bans, regulations, taxes, subsidies, peine; by meddling with education, healthcare, transportation, pensions, the environment, and credit and cash.

From appear economic theory, we know, nonetheless that interventionism would not work, that it either does not obtain its goals— or if it does, it causes ugly and negative side effects.

Unfortunately, the failing of interventionism emboldens their staunch supporters to take alternative to even broader, additional aggressive interventions.

As interventionism spreads, the exact free market system becomes increasingly undermined and unable to start. The economy is transformed into a  control economy   (or, to use a German term,   Befehls- und Lenkungswirtschaft ), in which the state has the last say and producers in addition to consumers are given orders.

Against this backdrop, it can be clearly concerning that the basics of “ Great Totally reset, ” “ Great Alteration, ” and “ Eco-friendly Policy” are all expressions among the idea of interventionism.

If the theory of interventionism is correct, and I fear it is, the Western world is moving away from the free economic plus social order— which is inevitably a brainchild of the Even more than Enlightenment— and toward a unfree economic and friendly system.

We will need to be on guard: in an interventionist regime,   digitization  greatly increases the possibilities of a power grab by authorities and their bureaucracies and precious interest groups, which use for both their own purposes (such simply because Big Business, Big Support, Big Pharma, Big Banking).

And it is natural to assume that all of these members want to achieve their plans by controlling money whenever you can.

For this reason, this issuance of central loan provider digital currencies, particularly,   must   raise great concerns for those who want to preserve a free, effective, and peaceful society.

A Free Marketplace in Money

The good news is: There are basically no convincing economic or honest arguments why any federal should monopolize money and even replace the market’s choice featuring its own fiat money.

In fact , there are top notch reasons to advocate for a free of charge market in money.

In a free industry in money, people will have complete freedom to choose the kind of money they want to hold, and the great would also have the freedom to goods that others may like to demand as money.

In a free market in money, the  demand   for cash will determine what money will be. And we should have little suspect that people would most likely interest “ sound money” — that is, money that is wonderful and fair.

How would money turn out to be chosen in a free market? Mr. Miller would go with “ something” as money that his baker, for example , would accept as a means associated with exchange.

Often the baker, in turn, would willingly accept “ something” that they believes his cobbler view as a means of exchange.

In other words, people would choose a money which will be seriously preferred by his or her exchanging partners, that is the good aided by the highest marketability and fluidity of all goods.

And we tend to know which in turn (physical) properties such a great must have: it must be, for instance, scarce, homogenous, durable, transportable, mintable, divisible, and it must symbolize a relatively high exchange appeal per unit.

This explains very well as to why, at least in the past, people have decided to use precious metals, especially in the kind of gold and silver, as money each time given a choice.

The message I want to stress and anxiety (and I think most of you comprehend very well) is that there is not any reason to fear that a 100 % free market in money probably would not work.

In fact , it can be expected to work only fine— like any other free of cost market, such as, say, often the free market for trainers, books, music, cars, and also mobile phones.

A no cost market in money gives the best possible money at the lowest cost.

“ Monetary Enlightenment”

The critical problem is whether new technologies  alone   can bring about better money.

Recent developments in the market segments for bitcoin, crypto divisions and stable coins can be certainly promising— especially while they unmistakably show that people have been completely looking for better money.

The many entrepreneurial efforts to digitize the tallest 3g base station ultimate means of payment, specifically gold, have also made fascinating progress.

At the same time technological advances offer good opportunities to improve our dollars, they might not be enough— when states and their central banks carry out whatever they can to prevent a zero cost market in money.

What is also needed— in addition , and on top associated with technological advances— is  Monetary Enlightenment :

Familiarizing people with your insight that a government fedex money monopoly is actually dangerous and harmful to them.

Especially informing folks that there is better money to them, encouraging them to demand good money— money that behaves their needs better than states’ fedex currencies.

This specific inevitably goes hand in hand utilizing the eye-opening insight that state governments (as we know them today) stand in the way of people receiving sound money.

Once people realize that they would much better off with free market money, the chances of ending california’s monopoly of money, legal tender laws, and tax burdens charged on potential money contenders greatly increase— and it can even result in the state (as we know it today) withering away.

People will need to have the freedom to choose which kind of dollars they want to use: gold and silver, bitcoin, or whatever else.

Let me close with  a quote from Ludwig von Mises , just who understood very well the importance of good money for freedom, not to mention prosperity:

The sound-money principle contains two aspects. It is unreluctant in approving the market’s choice of a commonly used in the middle of exchange. It is pessimistic in obstructing the government’s propensity to meddle while using currency system.

And further :

It will be impossible to grasp the meaning on the idea of sound money in the case one does not realize that it absolutely was devised as an instrument for ones protection of civil protections against despotic inroads for governments. Ideologically it belongs in the same class together with political constitutions and bills of right.

A free market inside money will make our world an improved place.

Thank you very much for your attention!


This lecture was first presented at the Electronic Funds Conference in Prague at August 27, 2022.

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