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The Second Greatest Story
Ever Told, Chapter Nine -
- Marketability of Goods M The Marketability of Paper -
- The Goldsmith as Banker -
Evolution of
Marketability
I dedicate this Lecture to the memory of Carl Menger (1840-1921), monetary scientist; the founder of
the Austrian School of Economics; author of the greatest book ever on
economics (Gundsätze der Volkswirtschaftlehre, 1871, translated into English
under the title Principles of Economics); one of the discoverers of
the concept of marginal utility. He also introduced the concept of
marketability upon which the theory of money and credit rests.
"The differences in the degree of marketability is of the
highest significance for the theory of money. The failure to recognize this
is one of the essential causes of the backward state of monetary theory. The
theory of money necessarily presupposes a theory of marketability of
goods."
(Carl Menger On the Origin of Money, 1892)
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In the next Chapter of The Second Greatest
Story Ever Told we shall see that the bank note originated, not as a
fraudulent warehouse receipt issued by the goldsmith against non-existent
gold, but, quite legitimately, as a bill of exchange drawn on and accepted by
the goldsmith. Just as the market promoted gold to the station of money through
the evolution in its marketability, so the goldsmith=s bill was promoted and
became the bank note, through a similar evolution in its marketability among
bills of exchange.
Chapter Nine
in which the gentle reader learns why the traders picked the bills of the
goldsmith
Traders at the Discount
House noticed that the bills drawn on and accepted by the goldsmith behaved
quite differently from other bills. Although they were, just as any other
bill, maturing within 91 days, they were coming back to the goldsmith after a
few weeks or even a few days of circulation. Not as if anything about them
was suspect. On the contrary: the bills were 'too good'. They circulated too
fast. Further circulation was hampered by the limitation of space on the back
used for endorsements. When the bill=s back was filled up with signatures, it
had to be returned to the goldsmith who substituted another one with a 'clean
back'. As this was a nuisance, soon the goldsmith solved the problem with a
clever innovation. He instructed his suppliers that they bill him with the
legend "payable to bearer" on the face of the bill. This innovation
eliminated the necessity of endorsing, and the goldsmith's bearer bills were
taken in and paid out almost with the same ease as were gold coins.
Then the goldsmith made a
second interesting discovery. Now his bearer bills kept coming home 'late',
sometimes weeks or even months after maturity. This was completely unknown in
the experience of other merchants some of whom tried, unsuccessfully, to imitate
the goldsmith in issuing bearer bills. Traders at the Discount House
explained the mystery. As most people were holding the goldsmith's paper only
for a fraction of a day, they did not bother calculating and charging the
negligible discount due to them. The goldsmith's paper mostly changed hands
at face value. In effect, the market segregated the bills according as the
acceptor was the goldsmith or someone else. The goldsmith=s bearer bills were
no longer treated as an earning asset but, rather, as a surrogate of the gold
coin, which was easier and safer to carry and to transfer. These bills
circulated very fast indeed, even faster than the gold coin itself. Other
bills were circulating much more slowly, as they were sought after mainly as
an earning asset by merchants in their slow season who wanted to participate
in the earnings of their colleagues in their high season.
The promotion of the
goldsmith's paper was a spontaneous development. It had no roots in
legislation, government patent or monopoly (nor in
the lobbying activity of the Goldsmiths' Guild). The reason was also clear. A
bill is considered more marketable if the drawer stands closer to the head of
the line waiting for the consumer=s gold coin. Thus the bill drawn on the
clothier was more marketable than the one drawn on the weaver, which in turn
was more marketable than the bill drawn on the spinner. Now the bill drawn on
the goldsmith was more marketable than any one of those for the simple reason
that the goldsmith was working with the very material of which the standard
of value was made.
Soon enough people were
making new demands on the goldsmith that were quite unrelated to his trade.
Those who had to make several smaller payments but had only one large bill in
their possession came to the goldsmith asking him to 'break' their large
bill. Thereafter the goldsmith issued his bearer bills in standard
denominations of $100, $500, $1,000. He then balanced the liability arising
out of this issue not by gold coins but, at least in part, by large bills
drawn on other merchants that have been presented to him for 'breaking'.
In an unrelated
development, the goldsmith dropped the maturity date on his
standard-denomination bills, as it served no useful purpose any more. The
maturity date was replaced by the legend "payable to bearer on
demand". These were called the goldsmith's "bearer sight
bills", the precursors of the bank note.
The market process promoting the bill of the
goldsmith to become the most marketable paper in the bill market was analogous
to the market process that had earlier promoted gold to become the most
marketable good in the commodity market. The latter was studied by Carl Menger in his seminal paper On the Origin of Money
in The Economic Journal, in describing the concept of marketability.
There is a phenomenon which has from old and in a peculiar degree
attracted the attention of social philosophers and practical economists,
namely, the fact that certain commodities became universally acceptable as
media of exchange. It is obvious even to the most ordinary intelligence that
a commodity should be given up by its owner in exchange for another more
useful to him. But that every economizing individual should be ready to
accept a certain commodity . . . even if he does not need it, or if his
need for it is already satisfied, in exchange for all the goods he has
brought to the market, while it is none the less what he needs that he first
consults when acquiring goods . . . has been considered >outright
mysterious= even by such a distinguished thinker as Savigny
. . .
The difficulties of
barter would have proved insurmountable obstacles to the progress of trade,
had there not lain a remedy in the very nature of
things, to wit, the various degrees of marketability (Absatzfähigkeit)
of commodities. The differences in this degree are of the highest
significance for the theory of money. The failure to recognize this is one of
the essential causes of the backward state of monetary theory. The theory
of money necessarily presupposes a theory of marketability of goods.
The person who wishes to
acquire certain definite goods in exchange for his own is in a more favorable position if he first exchanges his own wares
for highly marketable goods. Then, through a second exchange, he can more
easily acquire the goods he wants . . . Men have been led, with increasing
knowledge of their own individual interest, without convention, without legal
compulsion, nay, even without any regard to the common interest, to accept
highly marketable goods in exchange for their wares . . . The most highly
marketable goods have thus become, over a considerable period of time, the
generally acceptable media of exchange . . . (Op.cit.,
p 239-255.)
The most marketable good that, through the
evolution described by Menger, has ultimately
become the generally acceptable medium of exchange, is gold. In the bill
market an analogous evolution has promoted the goldsmith's paper to become
the bank note, the most widely acceptable form of a bill of exchange. Even
though all properly constructed bills showed a high degree of marketability,
there was a difference. Some bills lacking a high recognition value might be
less negotiable, their discounting might run into problems, and they might
have difficulty in circulating.
What Is Involved in
Selling a House?
Take the case of selling a house. As we shall
see, the exchange involved in this sale is quite a bit more complicated than
it may appear at first sight. It involves no fewer than five different
exchanges, until the deal is complete. I wonder how the finer details in such
a common deal as the sale of a house could have escaped the scrutiny of
economic theoreticians.
The buyer and the seller of the house agree on
a closing date by which the seller can vacate it and the buyer can come up
with the full purchase price. Suppose the closing date is two months away.
The buyer expects that in two months he can liquidate some of his
investments, say stocks, which will enable him to cover the price of the
house. He knows that a nearby closing date may not let him get the best price
for his investment, due to the limited marketability of stocks. On his
broker's advice he needs about one month to get the best price. After one
month the buyer of the house sold the stocks and received bank notes in exchange.
As he realized that holding such a large amount in the form of bank notes for
one month would involve him with a loss of income, he decided to get a bill
to mature in a month or more to derive an income on his funds for the interim
period. On the day of closing the deal, the buyer of the house discounted his
bill. Since this was a highly marketable paper, he knew he would be able to
do it on any day of his choosing. He discounted his bill against payment in
the form of bank notes. There was no question about the acceptability of this
instrument by the seller of the house, since the bank note was the most
marketable paper there was. Later in the day the buyer of the house, in his
turn, exchanged the bank note for another bill of exchange maturing in three
months. He wanted to earn an income while he was finding a suitable
investment for his funds. Ultimately, he wanted to invest the proceeds from
the sale of the house in bonds. They earned a higher income than bills, but
they were not as marketable. It would take time get them at the best price.
The bond dealer suggested to him that a new issue would be floated in three
months. After three months he used the proceeds of the 3-month bill to pay
for the bond.
We can see that the sale of the house took six
months and five exchanges to complete. All five exchanges involved the bank
note, the common purchasing medium. The five exchanges were: (1) selling the
stocks, (2) buying the 1-month bill with the proceeds from the sale of the
stocks, (3) paying for the house with the proceeds from the sale of the
1-month bill, (4) buying the 3-month bill with the proceeds from the sale of
the house, (5) paying for the bond with the proceeds from the sale of the
3-month bill. At that point the market agitation caused by the sale of the
house came to rest.
We can see that the goldsmith=s bearer sight
bill, alias bank note, plays an important role in facilitating the
purchase or sale of real estate, stocks, bonds, bills, etc. The goldsmith
through his money-changing business has become a banker. His bank notes were
considered mature bills (sight bills) which could be exchanged for gold coins
on demand at any time. There is no fraud involved. The bank note is not
a warehouse receipt for gold on deposit. It is a bill of exchange that the
market has promoted to the station of medium of exchange, for being more
marketable than any other. People were happy to hold it, especially if they
needed ready cash on hand for unexpected purchases, and they willingly paid
for its use in the form of foregone discount. They were paying for the
convenience to use a paper surrogate of the gold coin, in applications where
the direct use of the gold coin would be less convenient.
Where Paper Cannot
Deputize for Gold
The bank note could be used as cash
universally. The question arises whether it could serve as a surrogate of the
gold coin in every application. Mises gives
an unconditional "yes" as the answer. My answer is that there are
several applications where it could not, two of which I have already
mentioned earlier. The consumer must have gold coins, rather than bank notes,
to pay for consumer goods the production and distribution of which has been
financed with bills of exchange (or, what is the same to say, to buy goods
belonging to the Social Circulating Capital). The gold coin is the consumer's
>ballot paper= with which he casts his vote on a daily basis, conveying a
message of his satisfaction or dissatisfaction with their services to the
producers and distributors of consumer goods. (See Lecture 2.) He must have
the gold coin, otherwise he would be deprived of his
right to vote.
Another example where paper cannot deputize
for gold is the payment of a bill of exchange at maturity (see Lecture 6,
Chapter Five), for the same reason that a bill cannot be settled at maturity
by redrawing it, and 91 days is the absolute limit for its maturity. In order
to safeguard the integrity and solvency of the clearing system, gold coins
must be used for this purpose. The gold coin in the possession of its ultimate
guardian, the sovereign consumer, will retire the real bill at maturity.
A third and most important exception will be
discussed in my next course in this series entitled Gold and Interest,
to start in the Fall Semester. In it I shall introduce a character called the
"marginal bondholder". He is the first to sell his bond when the
rate of interest drops. He finds the low rate unrealistic and unacceptable.
He is willing to take profits on his holdings of bonds, keep the proceeds in
gold, and buy his bonds back at a lower price when interest rates rise again
to a reasonable level.
If he were to accept the bank note instead of
the gold coin in exchange for his bond, then he would be jumping from the
firing pan into the fire. He must insist on payment in gold if he wants to
assert his time preference, in protest against unreasonably low interest
rates. Incidentally, as we shall see, this is a point that escaped David
Ricardo as well as Ludwig von Mises. Mises specifically says that "claims [to gold coin]
are complete substitute [for the gold coin] and, as such, are able to fulfill all the functions of [gold coins] in those
markets where their essential characteristics of maturity and security are recognized"
(op.cit., p. 300, emphasis added).
Circulation of Bank Notes
The bank note, as I have mentioned already, is
the most marketable among the bills of exchange. It is assumed that the
banker (originally the goldsmith) holds a blend of gold and maturing real
bills against this liability. As a bill matures in his portfolio, he has to
follow one of three possible courses of action. Either he replaces it with
its face value in gold coins; or he can discount an equivalent amount of
fresh bills. As a third possibility, he may also retire an equivalent amount
of bank notes from circulation. If he fails to do one of these things, then
the bank note becomes a phony bill, and the banker a counterfeiter, just as
the goldsmith in the fable who would issue fraudulent warehouse receipts
against non-existent gold.
There is no mystery about the circulation of
the bank note which, unlike a bill of exchange, is not an earning asset. It
circulates because it satisfies a need very different from that of the bill
of exchange. Unlike bills that cannot circulate after reaching maturity, that
is, after they cease to be an earning asset, bank notes circulates
indefinitely. I have expressed this by saying that the bank note is a sight
bill. It is more versatile and convenient than other bills. It relieves the
holder of the chore of keeping track of the various maturity dates. It is
accepted as hand-to-hand money without the need to check the credit standing
of the drawer and acceptor at every time a payment is received. (It goes without
saying that the banker must have an impeccable name.)
Combining the business of the goldsmith with
that of the money-changer was no fraud. As long as the bank note in
circulation is properly backed by gold or by maturing real bills, there is no
counterfeiting involved. The superficial similarity
between the goldsmith's bearer sight bill (the bank note) and the warehouse
receipt representing gold deposited for safe keeping (the gold certificate)
is misleading. Both instruments are promises to pay bearer so much gold on
demand. But the difference, although less apparent, is far more significant.
The bank note is not specific about the asset held against its issue, that
could be gold, or real bills, or a blend of the two. The gold certificate, on
the other hand, explicitly states that a specified number of gold coins are
held on deposit to balance the liability. The legal and economic differences
between these two instruments were well-understood by the goldsmith's
creditors. They trusted the goldsmith that he would balance his liability
represented by the bank note with a blend of gold coins and maturing real
bills drawn against consumer goods in urgent demand. On the average,
one-ninetieth of the real bills in his portfolio would mature every single day,
bringing in more than enough gold coins to satisfy normal demand for
converting bank notes. Holders of the goldsmith's paper also knew that the
marketability of the assets in the goldsmith=s portfolio guaranteed that even
abnormal demand for gold coins could be met. The goldsmith could discount his
bills with people in need of earning assets, or at the Discount House. Thus
real bills could be liquidated at any time, virtually without loss. Bank
notes were safe, and their issue did not give rise to credit expansion, as
charged by Mises. For each bank note of face value
$1,000 issued, the goldsmith had to withdraw $1,000 worth of real bills from
circulation. For each $1,000 loan issued to a merchant in the form of a bank
note, the banker would put the bill of exchange drawn on the merchant into
his portfolio C a bill which, with a little more trouble, the merchant
himself could put into circulation.
Run on the Bank - Wages
of Dishonesty
There are those critics who assert that the
removal of the maturity date from the goldsmith's bearer bill was a
high-handed act. In any case, these critics say, it is impossible to make
good on the goldsmith's promise if all the bearers of bank note show up at
the cashier's window at the same time demanding gold. Critics conclude that
the goldsmith's promise to pay bearer gold on demand is dishonest. It cannot
be made good. As a proof, they cite the periodic runs on banks, the
suspensions of convertibility, and the 'bank holidays'. They assert that the
so-called >fractional reserve banking' is unworkable and dishonest.
This is not a frivolous criticism, and it
deserves a careful answer. The problem is in the double standard the
government has in contract law. It gives special protection to banks, but not
to other firms involved in bankruptcy. The government does this in return for
the banks' cooperation in sheltering illiquid government paper in their
portfolio. Unlike the bill of exchange, the government's treasury bill would
not circulate. As part of a sweetheart deal, the banks would discount them
along with the commercial bills of exchange. Incidentally, the real cause of
bank runs is: illiquid assets such as treasury bills in the bank portfolio.
In the sequel we assume that the banks decline
the government's request to discount treasury bills. In that case the phrase
"fractional reserve" is a misnomer. The issue of bank notes is
fully backed by reserves consisting of gold coins and bills of exchange
maturing into gold coins. Nevertheless, it is true that if all holders of
bank notes wanted gold from the bank simultaneously, there would not be
enough to satisfy demand simultaneously. But what is the probability of this
happening? In order to find the answer to this question we have to make
certain assumptions about the intention of customers withdrawing gold. It is
reasonable to assume that the majority wants gold because they would like to
purchase earning assets. This part of the demand for gold presents no
problem, as in retiring the bank notes the bank can sell an equivalent amount
of earning assets. Other holders of bank notes may need the gold to make
remittances abroad. This part of the demand presents no problem either. As
the banks liquidates an equivalent amount of real
bills from its portfolio, it is pushing up the discount rate at home relative
to those prevailing abroad. Foreigners will find this country an attractive
place where to buy real bills and, as a result, the gold will stay in
domestic circulation. This leaves us to deal with the third and last group of
holders of bank notes: those who are withdrawing the gold coin in protest
against low interest rates. As long as this third group is a small minority,
the bank can survive the run. It will sell a sufficient amount of assets in
order to pay the holders of its bank notes in gold coins. Losses, if any, can
be covered by canceling the shareholders' dividend
for the quarter.
Thus the problem boils down to the case where
a majority of people holding bank notes want to register a protest against
low interest rates by demanding gold. If this protest is in response to the
bank's hiding illiquid assets in the balance sheet, then, indeed, dishonesty
is involved, and the run on the bank is just the wages of dishonesty. The
protest is legitimate, and the resulting 'shortage' of gold is just a
reminder who the boss is and what he thinks of the credit policy of the bank.
The run is not an instance of a malfunction of the gold standard, nor is it a
proof that commercial banks cannot operate on the basis of real bills as liquid
earning assets backing the note issue. Quite to the contrary: it shows that
the gold standard is functioning exactly as it is supposed to. The public has
the gold stick, and is using it to force the bank to play by the rules. We
are justified in suggesting that virtually all the runs in the history of
commercial banking have been of this type.
Stocks or Flows?
We shall now assume that the bank plays by the
rules and it is not under pressure to monetize government debt, and that bank
notes and deposits are balanced exclusively by gold and self-liquidating real
bills. Can a run on the bank develop under those circumstances? History
provides no guide in this regard: commercial banks have always been under
pressure to monetize government debt. All we can say is that the possibility
of a run on the bank is extremely remote. While remote, it cannot be ruled
out. In order to put the problem in the right perspective we must look at
analogous situations wherein the potential demand to use a facility, should it
present itself simultaneously, cannot be met. There are many such cases. It
is true that the George Washington bridge joining New York City to New Jersey
could not meet the potential demand if all the people living in the vicinity
wanted to cross it simultaneously. Was it therefore a mistake to build the
bridge in the first place? Of course not! Is the Port Authority acting
dishonestly when it posts toll charges and promises the right to pass on
demand, 24 hours a day and 365 days a year, against the payment of the toll?
Of course not! All bridges, roads, railways, ferries, elevators, etc., are
designed and constructed with the understanding that not all potential users
will want to use it simultaneously.
Murray Rothbard
advocates 100 percent gold reserves banking >to
eliminate dishonesty' in the promise to pay gold to the bearer of bank note
on demand. Apart from the fact that there is no dishonesty in the promise as
long as the bank is run properly, as explained above, even the 100 percent
gold reserve would not remove the contingency that requests for redemption
cannot be honored. There is always a remote
possibility that an act of God, or human error, might temporarily prevent the
bank from making good on its promise. In the realm of human existence no promise
is ever free from such contingencies even if it is not explicitly stated C
nor does honesty have anything to do with it.
The notion that the bank's promise, if it is
to be honest, forces it to have a store of gold on hand equal to the sum
total of its note and deposit liabilities stems from a fundamental confusion
between stocks and flows. The promise of a bank, as that of
every other business, refers to flows, not stocks. The promise is honest as
long as they see to it that everything will be done to keep the flows moving.
In the case of the bank, the promise is honest as long as the bank carries
only self-liquidating bills, other than gold, in the asset portfolio backing
its note and deposit liabilities.
"You Can't Imagine
How It Pleased the People!"
If the goldsmith's creditors had ever had any
doubts about the security and integrity of his money-changing business, then
they would have accepted his bills only at a discount, or not at all. The
financial annals fail to reveal an instance of a lawsuit filed against the
goldsmith for fraud in misrepresenting sight bills as gold certificates or
warehouse receipts. Such a charge, if one had been made, would have been
thrown out of court with a remark from the judge to the effect that
"plaintiff ought to familiarize himself with the difference between a
promise and a certificate".
So did the Commercial Bank grow out of the
goldsmith's money-changing business, and such was the evolution of the bank
note from the bill of exchange. It is not possible to understand the
circulation of the bank note without understanding that of the bill, and the
evolution in the marketability of the bill of the goldsmith. The special
status granted to the goldsmith's bill was free from government intervention
and coercion (at least before the advent of central banking).
The goldsmith's money changing business was
legitimate and honest. He offered his own bills, which were more convenient,
more marketable, and more negotiable, in exchange for bills drawn on other
merchants "which were less convenient, less marketable, and less
negotiable." This was a genuine service for which people were willing to
pay a fee in the form of foregone discount.
The truth is that the goldsmith's money
changing business was the great success story of the Renaissance. It was not
the beginning of the Great Fraud perpetrated on the people, aptly described
in the famous paper-money scene:
Damit die Wohltat allen
gleich gedeihe,
So stempelten wir gleich die ganze Reihe:
Zehn, Dreissig, Funfzig, Hundert sind parar.
Ihr denkt euch nicht, wie
wohls dem Volke tat.
(Goethe's Faust,
Part two, Act one)
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(For an English translation, see Lecture 4).
The Great Fraud, the disenfranchisement of the laboring
classes, and the commissioning of the Invisible Vacuum Cleaner, was to come
later. It was done in three stages: (1) making bank notes legal tender,
(2) introducing bank notes of small denomination, as Mephistopheles
astutely noted in the Faust story, (3) inventing the Acceptance House.
The next Lecture will deal with the first two; the third will be the subject
of Lecture 11.
The Holder of a Bank Note
Is a Creditor to the Bank
When someone accepts a bank note he becomes a
creditor of the bank issuing it. This is clear if we consider that the bank note
is basically a bill of exchange and the holder of a bill is a creditor.
Making it a bearer sight bill does in no way change the creditor-debtor
nexus. Mises demurs: "A person who accepts and
holds [bank] notes grants no credit; he exchanges no present good for future
good . . . The [bank] note is a present good just as much as the money"
(op.cit., p 304-305). The fact that
the bank lists the bank note outstanding among its liabilities in the balance
sheet does not make Mises to relent. He proves his
contention by going, not to the balance sheet, but to the profit and loss
statement which shows that the profit from the outstanding bank note accrues
to the bank, not to the holder of the bank note. I cannot accept this
argument. The profit arises from the discount that the holder of the bank
note could collect, were it not for his conscious decision to forego it. He
finds it more convenient to hold the bank note instead of the bill of
exchange. He deliberately confers that profit, which could be his, to the
bank, in exchange for a service that he considers more valuable.
Mises continues: "Is it then correct to say that
when the bank discounts bills it does nothing but substitutes a convenient
note currency for an inconvenient bill currency? Is the bank note really
nothing but a handier sort of bill of exchange? By no means" (op.cit.,
p 307). In the rest of the argument Mises goes into
the question whether the bank, in extending a loan in the form of bank notes,
contributes to the demand for or to the supply of credit. If it
is the former, then the bank's action tends to raise the rate of interest;
otherwise it tends to lower it. Here we got to the bottom of the
disagreement. Mises does not recognize
the difference between the rate of interest and the discount rate. My
position is that as long as the bank holds only gold and self-liquidating
bills to cover the bank note issue, it changes neither the supply of nor the
demand for credit. There is no change either in the discount rate or in the
interest rate. The case where the bank holds less marketable assets to cover
the bank note issue will be discussed in Lecture 11 on the Acceptance House.
* * *
Mises by North
Dear Gary:
I am struggling with your statement that
"money is not a measure of value" (Gary North, Mises
on Money, Part I: Money, a market-generated phenomenon) supported by
various quotations from Mises.
We are in complete agreement that the value of
goods had its origin in the comparison of utilities to the individual, and
under barter there was just no way to measure it, although values could still
be compared, subject to the rules of ordinal arithmetic. But then, through
the evolution in the marketability of goods, gold has been catapulted into
the position of the most marketable good, money. Prices emerged for
the first time, which could be compared as well as measured.
They are subject to the rules of ordinal as well as cardinal
arithmetic.
Mises admits that the emergence of money, prices, and
"the opportunity for exchange induces the individual to rearrange his
scale of values" (op.cit., p 61). This, I take it, means that he rearranges
it to conform to the constellation of prices. Since another individual will
rearrange his own scale of values to conform to the same constellation, the
valuation of individuals becomes universal. Prices harmonize individual
values. Mises says that "if we wish to
attribute to money the function to measure prices, then there is no reason
why we should not do so" (op.cit.,
p 62). Thus the standard gold coin is rightly called the unit of value,
and the price is rightly called the measure of value.
I am a professional mathematician and through
my long career I have been trying hard to convince my layman friends that
mathematics is much more than a science of counting and measuring. In
particular, it is also a science of comparing. A large branch of mathematics
called lattice theory, which also embraces ordinal arithmetic, is
devoted exclusively to the study of comparing (ordering). In a typical
lattice one cannot measure for lack of a metric. But then, there are also
metric lattices in which both order and metric obtain, and the metric is
compatible with the order. In these lattices comparing and measuring are both
possible.
The mathematician is quite comfortable with
the idea that in the beginning there was no metric in his lattice. Later, to
his delight, he found a way to construct one,
moreover, the metric was compatible with the order. To express this formally,
let A, B denote goods and let a, b denote their
respective prices. Furthermore, let A d B mean that A is valued
less than B. Then compatibility can be stated as follows: A d B
if, and only if, a < b. If there was a
pair of goods A, B such that a < b but A e B (meaning that A is valued more than
B even though it is the cheaper of the two) then arbitrageurs would
buy A and sell B, and keep doing it until the anomaly in prices
disappeared. This refutes Mises= dictum that it is
"unscientific [to] attribute to money the function of acting as a measure
of price or even of value" (op.cit.
p 61). Money does more. Through the market, money harmonizes individual
valuations to become a universal valuation, applicable to all individuals, as
manifested by the constellation of prices.
I would be grateful if
you could show me the weak point in this argument.
Yours, etc.
Antal
References
Carl Menger, On
the Origin of Money, The Economic Journal, June 1892. Reprinted by CMRE,
10004 Greenwood Ct., Charlotte, NC 28215
Ludwig von Mises, The
Theory of Money and Credit, Indianapolis (Liberty Classics) 1981
Murray Rothbard, The
Case for a 100 Percent Gold Dollar, Mises Institute, Auburn, Alabama 36832-4528
Gary North, Mises
on Money, Part I (Introduction) January, 2002, www.lewrockwell.com/north86.html
August 19, 2002
Antal E. Fekete
Professor Emeritus
Memorial University of Newfoundland
St.John's, CANADA A1C5S7
e-mail: aefekete@hotmail.com
GOLD UNIVERSITY
SUMMER SEMESTER, 2002
Monetary Economics 101: The Real Bills
Doctrine of Adam Smith
Lecture 1: Ayn Rand's Hymn to Money
Lecture 2: Don't Fix the Dollar Price of Gold
Lecture 3: Credit Unions
Lecture 4: The Two Sources of Credit
Lecture 5: The Second Greatest Story Ever
Told (Chapters 1 - 3)
Lecture 6: The Invention of
Discounting (Chapters 4 - 6)
Lecture 7: The Mystery of the Discount
Rate (Chapters 7 - 8)
Lecture 8: Bills Drawn on the
Goldsmith (Chapter 9)
Lecture 9: Legal Tender. Bank Notes of Small Denomination
Lecture 10: Revolution of
Quality (Chapter 10)
Lecture 11: Acceptance House (Chapter
11)
Lecture 12: Borrowing Short to Lend
Long (Chapter 12)
Lecture 13: Illicit Interest Arbitrage
FALL SEMESTER, 2002
Monetary Economics 201: Gold
and Interest
Lecture 1: The Nature and
Sources of Interest
Lecture 2: The Dichotomy of Income versus Wealth
Lecture 3: The Janus-Face of Marketability
Lecture 4: The Principle of Capitalizing Incomes
Lecture 5: The Pentagonal Structure of the Capital Market
Lecture 6: The Definition of the Rate of Interest
Lecture 7: The Gold Bond
Lecture 8: The Bond Equation
Lecture 9: The Hexagonal Structure of the Capital Market
Lecture 10: Lessons of Bimetallism
Lecture 11: Aristotle and Check-Kiting
Lecture 12: Bond Speculation
Lecture 13: The Blackhole of Zero
Interest
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