Denationalisation of Money: The Argument Refined

Money is usually defined as the generally acceptable medium of exchange,1 but there is no reason why within a given community there should be only one kind of money that is generally (or at least widely) accepted. In the Austrian border town in which I have been living for the past few years, shopkeepers and most other business people will usually accept D-Marks as readily as Austrian schillings, and only the law prevents German banks in Salzburg from doing their business in D-Marks in the same manner as they do 10 miles away on the German side of the border. The same is true of hundreds of other tourist centres in Austria frequented mainly by Germans. In most of them dollars will also be accepted nearly as readily as D-Marks. I believe the situation is not very different on both sides of long stretches of the border between the United States and Canada or Mexico, and probably along many other frontiers.

But though in such regions everybody may be ready to accept several currencies at the current rate of exchange, individuals may use different kinds of money to hold (as liquidity reserves), to make contracts for deferred payments, or to keep their accounts in, and the community may respond in the same manner to changes in the amounts of the different currencies.

By referring to different kinds of money we have in mind units of different denomination whose relative values may fluctuate against one another. These fluctuating values must be emphasised because they are not the only way in which media of exchange may differ from one another. They may also, even when expressed in terms of the same unit, differ widely in their degree of acceptability (or liquidity, i.e. in the very quality which makes them money), or the groups of people that readily accept them. This means that different kinds of money can differ from one another in more than one dimension.

No clear distinction between money and non-money

It also means that, although we usually assume there is a sharp line of distinction between what is money and what is not—and the law generally tries to make such a distinction—so far as the causal effects of monetary events are concerned, there is no such clear difference. What we find is rather a continuum in which objects of various degrees of liquidity, or with values which can fluctuate independently of each other, shade into each other in the degree to which they function as money.2

I have always found it useful to explain to students that it has been rather a misfortune that we describe money by a noun, and that it would be more helpful for the explanation of monetary phenomena if ‘money’ were an adjective describing a property which different things could possess to varying degrees.3 ‘Currency’ is, for this reason, more appropriate, since objects can ‘have currency’ to varying degrees and through different regions or sectors of the population.

Pseudo-exactness, statistical measurement, and scientific truth

Here we encounter a difficulty we frequently meet in our efforts to explain the ill-defined phenomena of economic life. In order to simplify our exposition of what are very complex interconnections that otherwise would become difficult to follow, we introduce sharp distinctions where in real life different attributes of the objects shade into each other. A similar situation arises where we try to draw sharp distinctions between such objects as commodities and services, consumers’ goods and capital goods, durable and perishable, reproducible and non-reproducible, specific and versatile, or substitutable and non-substitutable goods. All are very important distinctions but they can become very misleading if, in the popular striving for pseudo-exactness, we treat these classes as measurable quantities. This involves a simplification which is perhaps sometimes necessary but always dangerous and has led to many errors in economics. Though the differences are significant, this does not mean we can neatly and unambiguously divide these things into two, or any other number of, distinct classes. We often do, and perhaps often must talk as if this division were true, but the usage can be very deceptive and produce wholly erroneous conclusions.4

Legal fictions and defective economic theory

Similarly, the legal fiction that there is one clearly defined thing called ‘money’ that can be sharply distinguished from other things, a fiction introduced to satisfy the work of the lawyer or judge, was never true so far as things are to be referred to which have the characteristic effects of events on the side of money. Yet it has done much harm through leading to the demand that, for certain purposes, only ‘money’ issued by government may be used, or that there must always be some single kind of object which can be referred to as the ‘money’ of the country. It has also, as we shall see, led to the development in economic theory of an explanation of the value of units of money which, though under its simplified assumptions it gives some useful approximations, is of no help for the kind of problems we have to examine here.

For what follows it will be important to keep in mind that different kinds of money can differ from one another in two distinct although not wholly unrelated dimensions: acceptability (or liquidity) and the expected behaviour (stability or variability) of its value. The expectation of stability will evidently affect the liquidity of a particular kind of money, but it may be that in the short run liquidity may sometimes be more important than stability, or that the acceptability of a more stable money may for some reason be confined to rather limited circles.

Meanings and definitions

This is perhaps the most convenient place to add explicit statements concerning the meanings in which we shall use other frequently recurring terms. It will have become clear that in the present connection it is rather more expedient to speak of ‘currencies’ than ‘monies’, not only because it is easier to use the former term in the plural but also because, as we have seen, ‘currency’ emphasises a certain attribute. We shall also use ‘currency’, perhaps somewhat in conflict with the original meaning of the term, to include not only pieces of paper and other sorts of ‘hand-to-hand money’, but also bank balances subject to cheque and other media of exchange that can be used for most of the purposes for which cheques are used. There is, however, as we have just pointed out, no need for a very sharp distinction between what is and what is not money. The reader will do best if he remains aware that we have to deal with a range of objects of varying degrees of acceptability which imperceptibly shade at the lower end into objects that are clearly not money.

Although we shall frequently refer to the agencies issuing currency simply as ‘banks’, this is not meant to imply that all banks will be issuing money. The term ‘rate of exchange’ will be used throughout for rates of exchange between currencies, and the term ‘currency exchange’ (analogous to stock exchange) for the organised currency market. Occasionally we shall also speak of ‘money substitutes’ when we have to consider borderline cases in the scale of liquidity—such as travellers’ cheques, credit cards, and overdrafts—where it would be quite arbitrary to assert that they either are or are not part of the circulation of currency.

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5 This definition was established by Carl Menger [43], whose work also ought to have finally disposed of the medieval conception that money, or the value of money, was a creation of the state. Vissering [61], p. 9, reports that in early times the Chinese expressed their notions of money by a term meaning literally ‘current merchandise’. The now more widely used expression that money is the most liquid asset comes, of course (as Carlile [8] pointed out as early as 1901), to the same thing. To serve as a widely accepted medium of exchange is the only function which an object must perform to qualify as money, though a generally accepted medium of exchange will generally acquire also the further functions of unit of account, store of value, standard of deferred payment, etc. The definition of money as ‘means of payment’ is, however, purely circular, since this concept presupposed debts incurred in terms of money. Cf. L. v. Mises [45], pp. 34 ff.

        The definition of money as the generally acceptable medium of exchange does not, of course, necessarily mean that even within one national territory there must be a single kind of money which is more acceptable than all others; there may be several equally acceptable kinds of money (which we may more conveniently call currencies), particularly if one kind can be quickly exchanged into the others at a known, though not fixed, rate.

6 Cf. J. R. Hicks [33].

7 Machlup for this reason speaks occasionally, e.g. [39], p. 225, of ‘moneyness’ and ‘near-moneyness’.

8 It is a practice particularly congenial to statisticians, the applicability of whose techniques frequently depends on using it. Though the popular tendency in economics to accept only statistically testable theories has given us some useful gross approximations to the truth, such as the quantity theory of the value of money, they have acquired a quite undeserved reputation. The idea discussed in the text makes most quantitative formulations of economic theory inadequate in practice. To introduce sharp distinctions which do not exist in the real world in order to make a subject susceptible to mathematical treatment is not to make it more scientific but rather less so.

• 1This definition was established by Carl Menger [43], whose work also ought to have finally disposed of the medieval conception that money, or the value of money, was a creation of the state. Vissering [61], p. 9, reports that in early times the Chinese expressed their notions of money by a term meaning literally ‘current merchandise’. The now more widely used expression that money is the most liquid asset comes, of course (as Carlile [8] pointed out as early as 1901), to the same thing. To serve as a widely accepted medium of exchange is the only function which an object must perform to qualify as money, though a generally accepted medium of exchange will generally acquire also the further functions of unit of account, store of value, standard of deferred payment, etc. The definition of money as ‘means of payment’ is, however, purely circular, since this concept presupposed debts incurred in terms of money. Cf. L. v. Mises [45], pp. 34 ff.
• 2Cf. J. R. Hicks [33].
• 3Machlup for this reason speaks occasionally, e.g. [39], p. 225, of ‘moneyness’ and ‘near-moneyness’.
• 4It is a practice particularly congenial to statisticians, the applicability of whose techniques frequently depends on using it. Though the popular tendency in economics to accept only statistically testable theories has given us some useful gross approximations to the truth, such as the quantity theory of the value of money, they have acquired a quite undeserved reputation. The idea discussed in the text makes most quantitative formulations of economic theory inadequate in practice. To introduce sharp distinctions which do not exist in the real world in order to make a subject susceptible to mathematical treatment is not to make it more scientific but rather less so.
• 5Money is usually defined as the generally acceptable medium of exchange, but there is no reason why within a given community there should be only one kind of money that is generally (or at least widely) accepted. In the Austrian border town in which I have been living for the past few years, shopkeepers and most other business people will usually accept D-Marks as readily as Austrian schillings, and only the law prevents German banks in Salzburg from doing their business in D-Marks in the same manner as they do 10 miles away on the German side of the border. The same is true of hundreds of other tourist centres in Austria frequented mainly by Germans. In most of them dollars will also be accepted nearly as readily as D-Marks. I believe the situation is not very different on both sides of long stretches of the border between the United States and Canada or Mexico, and probably along many other frontiers.
• 6It also means that, although we usually assume there is a sharp line of distinction between what is money and what is not—and the law generally tries to make such a distinction—so far as the causal effects of monetary events are concerned, there is no such clear difference. What we find is rather a continuum in which objects of various degrees of liquidity, or with values which can fluctuate independently of each other, shade into each other in the degree to which they function as money.
• 7I have always found it useful to explain to students that it has been rather a misfortune that we describe money by a noun, and that it would be more helpful for the explanation of monetary phenomena if ‘money’ were an adjective describing a property which different things could possess to varying degrees. ‘Currency’ is, for this reason, more appropriate, since objects can ‘have currency’ to varying degrees and through different regions or sectors of the population.
• 8Here we encounter a difficulty we frequently meet in our efforts to explain the ill-defined phenomena of economic life. In order to simplify our exposition of what are very complex interconnections that otherwise would become difficult to follow, we introduce sharp distinctions where in real life different attributes of the objects shade into each other. A similar situation arises where we try to draw sharp distinctions between such objects as commodities and services, consumers’ goods and capital goods, durable and perishable, reproducible and non-reproducible, specific and versatile, or substitutable and non-substitutable goods. All are very important distinctions but they can become very misleading if, in the popular striving for pseudo-exactness, we treat these classes as measurable quantities. This involves a simplification which is perhaps sometimes necessary but always dangerous and has led to many errors in economics. Though the differences are significant, this does not mean we can neatly and unambiguously divide these things into two, or any other number of, distinct classes. We often do, and perhaps often must talk as if this division were true, but the usage can be very deceptive and produce wholly erroneous conclusions.