Money

From Liberpedia

Money is a medium of indirect exchange: people accept it because they expect to be able to use it in later exchanges. Its usefulness depends on liquidity, acceptability and the terms on which it can be held and transferred.

Monetary units and issuers

A unit of account is the standard in which prices and debts are expressed. Selgin distinguishes adopting a common unit from granting one firm exclusive rights to issue claims denominated in it. Several banks can promise payments in the same unit while remaining separate debtors.[1]

Acceptance and legal tender

Acceptance in exchange and legal-tender status are different questions. In Sweden between 1831 and 1902, private-bank notes circulated in competition with the Riksbank’s notes, although only the latter were legal tender.[2]

Money and claims on money

Holding an asset and holding a claim against its issuer are different arrangements. A banknote redeemable in gold is a promise to deliver gold; it is not the gold itself. A bank deposit is a claim against the bank. The quality of such claims depends on the bank’s ability to honour its obligations.[3]

A redeemable bank claim can circulate in payment without being redeemed at every transaction. In Selgin’s account, deposit balances can be reassigned in the bank’s books, while bearer banknotes can pass from one holder to another. Both arrangements can replace withdrawals and transfers of coin, provided recipients accept the bank’s promise.[4]

An agreed delay in redemption and the abandonment of redemption are different contractual arrangements. Selgin and White discuss an option clause under which a bank can postpone payment for a limited period, owes specified compensating interest, and must still repay the claim’s face value in base money.[5] Hülsmann argues that, when suspended bank claims or equity claims continue to circulate in place of money, they establish separate monies and price systems, producing monetary disintegration.[6]

Bitcoin complicates the conventional opposition between commodity money and fiat money. George Selgin calls it a potential “synthetic commodity” money: it combines the absence of ordinary nonmonetary uses with a supply constrained by its protocol. This classification does not establish general acceptance or stable purchasing power.[7]

Liquidity insurance and withdrawal risk

Diamond and Dybvig analyse a bank claim as insurance against uncertain consumption timing. In their model, consumers invest before learning whether they will need goods early or can wait. Pooling can give early consumers more than the early-liquidation value of their own investment, in exchange for a lower return to those who wait than the asset would yield at maturity. This result depends on the model’s technology, private information and preferences, including its risk-aversion assumption. With withdrawals paid in order of arrival, the same demand-deposit contract can support a bank-run equilibrium if consumers expect others to withdraw early.[8]

Diamond and Dybvig extend the liquidity problem to firms financed with short-term debt. A lender may refuse to renew a loan if other lenders are expected to do the same, even though the firm would remain solvent if its loans were renewed. A binding credit line from an insured bank can protect a firm against this rollover risk. The authors’ discussion therefore turns on whether the promised credit remains available when refinancing fails.[9]

Deposit guarantees and purchasing power

A promise to repay a fixed number of currency units differs from a promise to preserve their purchasing power. Discussing deposit insurance, Diamond and Dybvig distinguish real guarantees financed by taxes from nominal guarantees that can be financed by money creation. They describe money creation as reducing the real value of nominal assets relative to what it would otherwise have been, even when the observed price level does not rise.[10]

Supply, demand and purchasing power

The quantity of money is only one side of its valuation. Demand to hold money also changes. An increase in supply need not raise every price by the same proportion or at the same time: changes in spending, cash holdings and relative prices affect different people differently.[11]

Somalia after the state’s collapse

After Somalia’s central government collapsed in 1991, familiar Somali shilling notes and unofficial copies continued to circulate. William J. Luther argues that users’ general refusal to accept larger, unfamiliar denominations constrained issuers: competition in producing accepted notes reduced their exchange value towards the cost of printing and importing them. This adjustment followed years of depreciation and depended on continued acceptance, denomination limits and production costs. Luther rejects the arrangement as a first-best monetary system. The Somalia case study explains the mechanism, evidence and limitations in more detail.[12]

Money balances and borrowing

Demand for money is demand to hold balances. Borrowing $100 to spend immediately is different from wanting to keep another $100 available in an account. Selgin distinguishes these demands because an increased desire to hold bank liabilities can provide funding to their issuers, whereas demand for loans alone does not do so.[13]

Hülsmann challenges this interpretation of saving: a demand depositor, he argues, retains disposal of present money rather than relinquishing it for investment. This dispute concerns the nature of the claim as well as the economic effects of issuing it.[14]

Hülsmann also calls holding money itself a form of savings-investment, while distinguishing it from holding claims on money. He argues that demand cannot limit fiduciary issue because people continue to want additional purchasing power.[15] Selgin defines the relevant demand as holdings of bank liabilities at given prices. His adjustment mechanism concerns balances people retain, rather than money borrowed and immediately spent.[13]

Selgin and White distinguish a greater demand for bank deposits from an increase in total saving. Deposits can rise because holders reduce their bond holdings without changing planned consumption. They also distinguish demand for bank-issued balances from demand for base money: wanting more gold coins does not, in their account, warrant issuing more bank liabilities.[16]

Readiness to accept a note at face value differs from willingness to keep it. A trader may accept notes from several banks while preferring particular issuers when choosing cash holdings. Selgin distinguishes total demand for notes from its division among issuers; the latter affects which notes return through clearing.[17]

Monetary equilibrium and price indices

Selgin's monetary-equilibrium criterion compares desired money balances with the available supply at current prices. He distinguishes this from keeping a price index constant. In his productivity example, increased output can be sold at lower unit prices with unchanged nominal spending. His price-index critique addresses this equilibrium criterion; effects on debtors and creditors require separate analysis.[18]

Selgin allows for temporary excess supply or demand for bank money while banks adjust to changing preferences. Under a commodity standard, unexpected changes in the output or nonmonetary demand for the reserve commodity can also disturb monetary equilibrium.[19]

Wage adjustment and monetary disequilibrium

Hülsmann argues that a larger demand to hold money can be accommodated by lower wages and other prices without expanding the money stock. In his account, wage adjustment preserves profitability, while falling goods prices preserve workers’ real incomes; he rejects the claim that monetary expansion is needed to prevent a general fall in output.[20]

Selgin and White also accept that prices adjust the real value of a given money stock in the long run. Their disagreement concerns the transition: people do not instantly recognize monetary changes, and some prices are costly to change. They argue that these delays can disrupt relative prices, interest rates and production before adjustment is complete.[21]

Price changes and debt contracts

Selgin argues that the cause of a price change matters for debt contracts. Productivity-driven price falls can accompany higher real incomes with unchanged nominal incomes. A fixed repayment then buys more goods without necessarily taking a larger share of a borrower’s income. His argument concerns aggregate changes; an individual borrower’s position still depends on income and contractual terms.[22]

Liquidity and forgone interest

Holding readily spendable balances provides liquidity but can involve giving up interest available on other assets. Discussing Friedman’s optimum-quantity argument, Selgin contrasts a higher real return from fully anticipated deflation with explicit interest on money balances. He treats competitive deposit interest as a partial response, while noting the practical cost of paying interest on circulating notes.[23]

Mises, Rallo and the regression theorem

Mises’s regression theorem traces the emergence of monetary demand back to a previous exchange value derived from nonmonetary uses. He presents this as a necessary condition. Juan Ramón Rallo disputes that necessity: expected future liquidity can itself support present demand. Prior nonmonetary usefulness may explain a historical route to money without being the only possible route.[24]

Introducing a money and changing its unit

In the introduction to his 1994 paper, Selgin distinguishes introducing a genuinely new fiat money from merely redenominating an existing money. He defines fiat money here by its lack of nonmonetary value and of redemption into real goods at a fixed price. His question concerns the legal, institutional and psychological conditions needed for acceptance. He criticizes conventional Walrasian analysis for treating reform as though identifying which paper units represent the new monetary unit explained its success; he instead calls for an evolutionary account, while noting Kiyotaki and Wright’s work as exceptions to the conventional treatment.[25]

The establishment problem differs from the persistence problem discussed by White: his account explains how an already accepted paper currency can continue circulating after convertibility ends.[26] Hülsmann’s account of fiat money’s origins likewise starts from previously convertible claims, while his argument that fiat cannot persist under free exchange is a further claim.[27][28]

Fiat-money origins and continued use

Hülsmann invokes Mises’s regression theorem to argue that a new money needs an established exchange value. He describes fiat money as emerging when issuers refuse to redeem previously convertible claims, with government protection permitting the breach.[27]

White’s earlier 1981 essay considered both convertible and inconvertible private currencies, treating potential competition from alternative standards as the safeguard against chronic inflation. It also acknowledged that clearing among inconvertible issuers would not by itself restrain monetary expansion common to all issuers.[29]

Selgin and White likewise attribute the historical replacement of commodity standards by fiat money to government intervention and condemn the repudiation of redemption obligations. Their defense of fractional reserves concerns redeemable bank claims, which they distinguish from irredeemable fiat money even when the bank’s reserves consist of fiat currency. They also criticize Hayek’s competing private fiat currencies, arguing that competition alone supplies no natural limit to the quantity of irredeemable money.[30]

Gold’s history and an established currency

White’s 1989 chapter distinguishes gold’s historical emergence from its prospects against an already accepted currency. He dates the U.S. abandonment of gold to 1933, then argues that gold’s earlier monetary status does not guarantee its reestablishment. He explains the paper dollar’s continued circulation through its previous convertibility and the expectation that other people will continue accepting it.[26]

Hülsmann instead argues that gold’s nonmonetary uses prevent fiat money from outcompeting it in free exchange, and attributes fiat money’s persistence to legal restrictions and taxation. Answering White’s reference to more than fifty years without gold, he describes the Western world as only about twenty years off the gold standard.[28] White’s preceding historical reference is specifically to the United States in 1933; Hülsmann’s response uses a broader Western chronology.[26][28]

Monetary freedom and banking

The libertarian question includes freedom to choose currencies and contracts. A contract for safekeeping and a contract permitting the bank to lend carry different obligations. Knowingly accepting a debt claim does not make it a warehouse receipt. Selgin and White defend the freedom to choose fractional-reserve accounts as well as full-reserve custody; Rallo emphasizes the distinction between free banking and banking protected by privileges.[3][31]

Hülsmann objects that agreement between a bank and its customers cannot legitimize losses imposed on people outside the contract. He argues that contractual remedies create no additional real goods and preserve banks through inflation at others’ expense.[6] Selgin and White distinguish changes in the market value of outsiders’ property from physical interference with that property. They also distinguish risks knowingly accepted by depositors from possible increases in risks faced by third parties. They acknowledge that these risk spillovers may occur, but judge the risks small compared with the benefits of intermediation.[32]

Base money and bank-issued money

Selgin’s fixed-base model distinguishes base money from redeemable banknotes and deposits. If the public uses banknotes instead of base money, switching from deposits to cash need not drain bank reserves. He nevertheless identifies limits to adjustment, including residual demand for base money and growth in real money demand.[33]

In Selgin’s example, exchanging $100 of a deposit for $100 of the same bank’s notes changes the form of its debt without increasing total liabilities or creating reserves. This assumes that customers accept the notes and that reserve needs remain unchanged. Redemption into a settlement asset, such as gold, instead removes reserves. Demand for hand-to-hand payment therefore differs from demand to withdraw base money.[34]

A fixed base with competing bank money

In his 1988 reform proposal, Selgin retains the dollar as the unit of account and permits competing banknotes redeemable in existing fiat dollars. The proposed freeze applies to the stock of base dollars; bank-issued notes and deposits could still change with demand. Continued use of this standard depends on acceptance of the base dollars.[35]

Hülsmann argues that competition must eventually eliminate fiat money in favor of gold or silver: their nonmonetary uses sustain demand, while shifts in monetary acceptance reinforce themselves. He attributes fiat money’s persistence to restrictions on alternatives and taxation in fiat money.[36] Selgin’s 1988 proposal makes continued dollar use conditional on its remaining the most readily saleable settlement asset. He explicitly allows another asset to displace it; with no nonmonetary demand, the old base dollars would then lose all value and a new monetary unit would emerge. His reform permits such replacement without guaranteeing that it will occur.[35]

Gold’s industrial uses and demand as a store of value

Gold held above ground and annual gold demand, by use. Sources: World Gold Council, Metals Focus and Refinitiv GFMS.

Gold’s industrial uses are real, but they account for a small part of its annual demand. In 2025, technology represented 6.5% of total gold demand by weight, compared with 43.5% for private investment and 17.3% for net purchases by central banks and other official institutions. Jewellery fabrication represented 32.7%. Investment and official purchases together accounted for 60.7%; in 2024, the corresponding share was 45.9%.[37]

The stock of gold already held gives a different view. At the end of June 2026, the World Gold Council estimated that 44.8% of above-ground gold was jewellery and 45.3% was physical investment gold, comprising bars and coins, gold-backed funds, OTC investment holdings and official reserves. Central banks held 17.5% of the total. The remaining 9.9% was a broader category that includes technological uses and cannot be treated as an industrial-use total.[38]

Jewellery itself can combine adornment with savings and collateral. It cannot all be assigned to either monetary or nonmonetary motives.[39] Gold’s physical usefulness therefore does not establish that its market value is mainly derived from industrial consumption. The percentages describe quantities demanded or held, rather than a precise division of the causes of its price.

Lectures and debates

See also

References

  1. ↑ George Selgin, The Theory of Free Banking (1988), chapter 10, pp. 153–154.
  2. ↑ George Selgin, The Theory of Free Banking (1988), chapter 1, p. 7; Lars Jonung, “Free Banking in Sweden: The Case of Private Bank Notes, 1831-1902”, Lund University, Working Papers 2021:6, abstract.
  3. ↑ 3.0 3.1 George Selgin and Lawrence H. White, In Defense of Fiduciary Media—or, We are Not Devo(lutionists), We are Misesians!, 1996.
  4. ↑ George Selgin, The Theory of Free Banking (1988), chapter 2, pp. 19–21 and 23–25.
  5. ↑ George Selgin and Lawrence H. White, “In Defense of Fiduciary Media—or, We Are Not Devo(lutionists), We Are Misesians!”, The Review of Austrian Economics 9(2), 1996, pp. 89–92.
  6. ↑ 6.0 6.1 Jörg Guido Hülsmann, “Free Banking and the Free Bankers”, The Review of Austrian Economics 9(1), 1996, pp. 42–47, especially p. 45.
  7. ↑ George Selgin, Bitcoin, 22 April 2013.
  8. ↑ Douglas W. Diamond and Philip H. Dybvig, “Bank Runs, Deposit Insurance, and Liquidity”, Journal of Political Economy 91(3), 1983, section II, pp. 405–410; doi:10.1086/261155.
  9. ↑ Douglas W. Diamond and Philip H. Dybvig, “Bank Runs, Deposit Insurance, and Liquidity”, Journal of Political Economy 91(3), 1983, section VI, pp. 417–418; doi:10.1086/261155.
  10. ↑ Douglas W. Diamond and Philip H. Dybvig, “Bank Runs, Deposit Insurance, and Liquidity”, Journal of Political Economy 91(3), 1983, section V, pp. 413–414; doi:10.1086/261155.
  11. ↑ Ludwig von Mises, Human Action, XVII.4, The Determination of the Purchasing Power of Money.
  12. ↑ William J. Luther, “The monetary mechanism of stateless Somalia”, Public Choice 165(1–2), October 2015, pp. 45–58; doi:10.1007/s11127-015-0291-6. See the author manuscript, revised 26 August 2015, sections 1–4, pp. 4–22; these locators refer to the manuscript’s pagination.
  13. ↑ 13.0 13.1 George Selgin, The Theory of Free Banking (1988), chapters 4–5, pp. 52–69.
  14. ↑ Jörg Guido Hülsmann, “Free Banking and the Free Bankers”, The Review of Austrian Economics 9(1), 1996, especially pp. 25–30.
  15. ↑ Jörg Guido Hülsmann, “Free Banking and the Free Bankers”, The Review of Austrian Economics 9(1), 1996, p. 34, note 64, and pp. 39–40.
  16. ↑ George Selgin and Lawrence H. White, “In Defense of Fiduciary Media—or, We Are Not Devo(lutionists), We Are Misesians!”, The Review of Austrian Economics 9(2), 1996, pp. 103–104, including note 28.
  17. ↑ George Selgin, The Theory of Free Banking (1988), chapter 3, pp. 41–46.
  18. ↑ George Selgin, The Theory of Free Banking (1988), chapter 7, pp. 94–103 and note 10 on p. 188.
  19. ↑ George Selgin, The Theory of Free Banking (1988), Conclusion, p. 174 and note 1, p. 198.
  20. ↑ Jörg Guido Hülsmann, “Free Banking and the Free Bankers”, The Review of Austrian Economics 9(1), 1996, pp. 14–17 and notes 18–22.
  21. ↑ George Selgin and Lawrence H. White, “In Defense of Fiduciary Media—or, We Are Not Devo(lutionists), We Are Misesians!”, The Review of Austrian Economics 9(2), 1996, pp. 100–101; compare Selgin, The Theory of Free Banking (1988), pp. 53–56.
  22. ↑ George Selgin, The Theory of Free Banking (1988), chapter 9, pp. 126–129 and notes 1–4, p. 192.
  23. ↑ Selgin, The Theory of Free Banking, chapter 10, pp. 155–158 and notes 36–41, p. 197.
  24. ↑ Juan Ramón Rallo, Crítica al teorema regresivo de Mises, 15 January 2016.
  25. ↑ George Selgin, “On Ensuring the Acceptability of a New Fiat Money”, Journal of Money, Credit and Banking 26(4), November 1994, p. 808 and note 1; doi:10.2307/2077948.
  26. ↑ 26.0 26.1 26.2 Lawrence H. White, “Gold, Dollars, and Private Currencies”, in Competition and Currency: Essays on Free Banking and Money (New York University Press, 1989), pp. 129–131, publisher-authorized preview.
  27. ↑ 27.0 27.1 Jörg Guido Hülsmann, “Free Banking and the Free Bankers”, The Review of Austrian Economics 9(1), 1996, pp. 47–49 and notes 86–88.
  28. ↑ 28.0 28.1 28.2 Jörg Guido Hülsmann, “Free Banking and the Free Bankers”, The Review of Austrian Economics 9(1), 1996, pp. 49–52, including notes 91–98.
  29. ↑ Lawrence H. White, “Gold, Dollars, and Private Currencies”, Policy Report, June 1981; reproduced in the Congressional Record, 18 June 1981, pp. 13059–13061 (PDF 44–46). This is the 1981 essay, rather than the 1989 book edition.
  30. ↑ George Selgin and Lawrence H. White, “In Defense of Fiduciary Media—or, We Are Not Devo(lutionists), We Are Misesians!”, The Review of Austrian Economics 9(2), 1996, pp. 83–86 and notes 2–6. Their introduction states that Hülsmann’s article appeared too recently for a direct reply; the main reply addresses Hoppe.
  31. ↑ Juan Ramón Rallo, Free or privileged banking: the true dichotomy, 26 June 2013.
  32. ↑ George Selgin and Lawrence H. White, “In Defense of Fiduciary Media—or, We Are Not Devo(lutionists), We Are Misesians!”, The Review of Austrian Economics 9(2), 1996, pp. 92–94.
  33. ↑ George Selgin, Synthetic Commodity Money, 10 April 2013, p. 16–18 (PDF 17–19).
  34. ↑ George Selgin, The Theory of Free Banking (1988), chapter 8, pp. 108–114 and notes 1, 9–11, pp. 189–190.
  35. ↑ 35.0 35.1 George Selgin, The Theory of Free Banking (1988), chapter 11, pp. 167–171, especially pp. 167–168 and 171.
  36. ↑ Hülsmann, Free Banking and the Free Bankers, pp. 49–51, journal text.
  37. ↑ World Gold Council, Gold Demand Trends: Q4 and Full Year 2025, 29 January 2026, table 1; percentages calculated from the published tonnages, including OTC and other in total demand.
  38. ↑ World Gold Council, Above-ground stock, updated 18 August 2026, estimates for end-Q2 2026; percentages calculated from rounded tonnages.
  39. ↑ World Gold Council, Jewellery, 29 January 2026, sections on India and Japan.
Retrieved from "https://en.liberpedia.org/en/index.php?title=Money&oldid=15820"