WORDS AND PICTURES

A discussion with Sandeep Jaitly on the theory of money put forward by Austrian economist Carl Menger in The Origins of Money.

---

ORIGINALLY PUBLISHED 12 May 2014

RF: Austria has produced a succession of intellectuals who have informed economic policy making around the world; Carl Menger, von Mises, Hayek, your own colleague Professor Fekete. At the heart of the Austrian model is the idea that all value resides in the human consciousness.

SANDEEP: Yes.

RF: Is that what first led you to the Austrian School?

SANDEEP: No! I only appreciated that eight years after I started reading about Austrian economics! But this was the difference between Menger and Mises. Menger was very non-dualistic and did not compartmentalise or objectify anything he was looking at, whereas Mises was dualistic. I did not really appreciate these things until I had been reading Professor Fekete for a number of years. But there isn’t a cohesive element to Austrian economics unless you start with that particular axiom.

RF: The stuff that we call money today is credit, loaned into society. But by your definition money is, or should be, something else; the most “saleable product.”

SANDEEP: Yes; Menger uses this concept called Absatzfähigkeit, which means marketability. Money is the most marketable good, and if you go back to Mengerian philosophy it is not something that can be objectified. You cannot list out what makes something marketable or not.

And we have come to the conclusion that no matter how much gold you have, the next bit of gold is accepted on exactly the same terms. Even if you have 10oz of gold or 100oz of gold or 1000oz, you will accept the next ounce on the same terms as your current holding. We call this constant marginal utility Something must have constant marginal utility. That happens to be gold and silver. I do not know why it’s gold and silver; that is a topic for sages by the banks of the Ganges!

The problems arise when you start naming a gold coin. One pound was originally a gold sovereign and the philosophy since the 1920s has been that the name is the money; the object is just coincidental. So gold is then portrayed as the money itself it was the name of the gold that was the money. The denarius became the money not the four grams of silver that it was meant to represent.

RF: There are reasons why gold would qualify as highly marketable; or having the highest sustained marginal utility. It cannot be used for much else, it does not corrode and is relatively transportable. But regardless of whether gold or something else has that status, another way to express what you are saying is the utility of liquidity.

Because everybody wants this stuff, you can get it off your own books; you are not going to get stuck with it. But also when you have the highest number of potential buyers and sellers, you have price stability; or at least you also have the highest chance of a stable price.

SANDEEP: Yes and this is another thing often misconstrued when it comes to Mengerian and non-Mengerian Austrian economics. The concept of price does not mean anything unless you have a most marketable good. Price means comparison against that most marketable good; whatever it happens to be. Obviously it means an exchange against gold coin and that is what we understood; or what the common man should understand as price; and would have understood as price from time immemorial. So it is putting the cart before the horse to talk of a gold price; you do not talk about the length of a metre.

RF: It’s a tautology.

SANDEEP: Yes, it is.

RF: And because value resides in human consciousness; and everyone has their own perceptions of value; there is no objective measure of value. So the closest you get is the most stably priced asset; the asset with the highest liquidity; with constant marginal utility. It is the closest you can get to an objective measure of everything else.

SANDEEP: Yes. Objective is just the communal subjective; if we all agree on something, Professor Fekete and I would define that as objective. We do not like the word intrinsic. No object has any intrinsic quality. A cup can be used for many things apart from holding a liquid; there is nothing intrinsic about being a cup. We do like the word objective, but only in reference to everybody agreeing subjectively. Which I think we do on gold. Not many people would disagree that gold has consistent value.

RF: Well those that have, have been subject to the accusation of playing politics. Today we have paper money. It is easy to bleat about central banks manipulating the supply of money and shaking everyone down as a result. But look to the high seas. It is not that expensive to buy a seafaring vessel. If we did not want to live on the farm we have the right to exit. We can go and live in the wild, on a boat; there is sunshine, there is fresh fish… but there are no utilities.

It seems most people want to live on the farm not in the wild, and if people are willing to put up with constant inflation then paper money is the most saleable asset. It is real money.

SANDEEP: Well this is what we are lead to believe. I was indoctrinated until very recently; I have to bring back the explanations given to me as a fifteen year old; they still do not make sense. I remember my geography teacher saying the currency was backed by the productivity of the country. I remember we all looked at each other… it is the kind of thing a crook would say. What a load of nonsense!

We do not just do things or say things; exchange is always with a purpose; the term includes the concept of there being no exchange! You cannot split the way we live into the exchange universe and the non-exchange universe. You cannot compartmentalise or say “Right, we are going to introduce something specifically for exchange; to be gotten rid of.” If you stretch that concept slightly, it is a game of pass the parcel where no-one wants the parcel. If the only use for this paper is in exchange then you will end up with everybody trying to get rid of it at the same time. You can see today interest rates are falling much more than people expect. Professor Fekete and I had been talking about this for a long time. Interest rates are only denominated in a state number, so there is nothing to prevent them from falling a lot lower. The bank has expanded what they have remonetised; it is just an extension of what they started in the 1920s; trying to control the interest rate by buying and selling short term government bonds. It caused the end of the Bretton Woods system, the end of trying to fix a number to an ounce of gold, and it led us to today’s situation where the teleological basis of bank notes has been forgotten; and they only have value inasmuch as people remember the process which they represented.

People are infected by a philosophy of trust; that money is about trust. This is all positivism. It is all a load of rubbish basically. There is nothing to trust about gold or silver. I do not need to trust anything about my psychological faculties to say that gold and silver will have value.

RF: But you and I only value gold because we predict that other people will.

SANDEEP: Yes, but that is the least unreasonable assumption one can make about anything in the material world. .

RF: Well; I would love to have a Picasso hanging on my wall and if the rest of the world blew up I would still enjoy my Picasso. That isn’t true of a pile of gold.

SANDEEP: Well gold is there to fill the holes in exchange. So if you look at exchange non-dualistically and think every exchange is connected to every other exchange, gold and silver fill the space and time holes. You do not want gold, you want what can be bought with gold and silver. So simultaneously there is infinite supply and infinite demand for gold. It puts linear supply and demand analyses about the price of gold on its head.

RF: Near infinite demand again relates to the role human consciousness. If all value resides in our minds, every trade can be an act of creation; because we each occupy a unique place, have unique desires, and have something unique to offer. It seems very elegant to suggest trade is an act of creation and therefore liquidity is an end unto itself. Is that a view you subscribe to?

SANDEEP: It is. You would not be able to exchange trucks of apples for a 747. You have to go via an intermediary, if you cannot exchange directly and this intermediary will precipitate itself the more exchanges that come across each other which cannot be done on a direct basis. This invisible third party will naturally precipitate to help the exchange.

RF: But for a trade to be an act of creation it is contingent on both parties acting of their own volition and there being no negative externalities. At some point Austrian economics starts getting applied; co-opted into policy. It was morphed into monetarism with the likes of Milton Friedman. When you read Capitalism and Freedom he glosses over the issue of negative externalities in a way that makes him look rather complicit in supporting private authority. Is that a fair criticism?

SANDEEP: I think it is a fair criticism. All of the Austrians other than Menger wanted some kind of state control over the flow of gold. Mises said a claim to gold coin is the same as the gold coin itself. Obviously that is rubbish; a picture of a spoon is not the same as a spoon. There was always this idea of gold controlling the government or preventing evil government excess. Nothing like that from the Mengerian Austrian perspective. Gold liberates you; allows you to do whatever you want. The Misesian Austrians always had this element of government control that they did not want to have excluded from their theories. It infects what they say; the most stilted and slanted things that Menger would have been horrified by if he had heard all these people speaking in the name of the Austrian School of Economics.

It continues with the nonsense that you just need to keep printing 2%… creating money at 2% a year. How do you create money at 2% a year? To me its positivism. Not just in economics, you see it in physics, in maths, statistics; you see it everywhere. Positivism skews the comprehension of processes and ignores the teleological basis for everything 00:26:20

RF: What did Menger have to say about what we think of today as free markets and the management of externalities?

SANDEEP: Well that kind of thing wasn’t on the spectrum but I imagine if he could observe what we are doing he would die of a heart attack straight away. There is no basis to what we are doing in terms of marketability. Nothing gets extinguished in this system. There is no way of extinguishing fiat debt, so it is all swimming around the system. Debt is not the right word for it, because debt assumes that there is some substance to what you owe. Ultimately you do not owe anything, you just owe some British state numbers; which we call “The Pound.” Concepts of debt and savings and interest rates do not mean anything in a fiat system; they are just numbers and capitalised numbers.

RF: Adrian Kuzminski has revived the ideas of Edward Kellogg, an 18^th Century economist who proposed local public banks issuing money with a fixed 1% interest rate. So the dangers of centrally controlled monetary policy was understood long before Carl Menger.

SANDEEP: Back then you had isolated examples; someone trying to introduce a fiat currency and failing. But there was no experience of a global concerted effort with fiat. A lot of the “fiat dogmatists” as I call them, say fiat is going to work now because every single country is on it.

Well; that is an interesting philosophy but I do not think it will succeed. Someone will be left in the predicament of not being able to exchange fiat for what they need and whether that is one country or the whole world is irrelevant when you cannot get what you need with what you have. You can already see draconian laws being introduced, saying, “If your property is worth over two million you cannot do this or there is an extra tax here; and we are going to determine how much you can borrow and the things which you can exchange your fiat for.”

It is the end of Rome. Rules to justify the political status quo. Rules appear that hinder the exchanges you would naturally wish to do with your fiat. But ultimately no authority can pass value to something which does not add value; no matter how big their army. People are infected with the idea that the banknote in their pocket will always have value. They make their plans accordingly, but I think the smarter people remember or have read about these things are exchanging their fiat for more marketable goods.

More marketable goods does not just mean gold and silver. It could mean the equity of Unilever or Nestle. People complain; “Oh the stock market is soaring for no reason and it’s going plunge.” Well it is not. Companies like Unilever, Proctor and Gamble; they make marketable goods. They make goods which we will always need and in some ways are just like gold.

RF: Equity of course is not dominated in any a currency.

SANDEEP: All these companies have looked at how to operate in hyperinflationary environments. When you have Global Mega iPad App floating for 20 billion dollars or something… it shows that if you have all this fiat you have to have crap ideas to surround it… otherwise its value will go away!

RF: Today we live in a world of digital money and the medium is the message. Digital money is very liquid; it can appear on anyone’s mobile phone instantaneously; so the logistical challenge of liquidity has been solved. Digital money is also not fungible by nature; fungibility has to be imposed with continual regulatory investment in the privacy of market participants. Is there a case to be made that fungible money is money laundering; that society no longer needs money to be fungible at all today?

SANDEEP: Society might think that but they may come to realise it needs to be. Money has a very strict definition; the most marketable good. That means talking about tangible versus intangible; it’s a dualism. I cannot split something into tangible and intangible. How do you get people in touch with each other more effectively? How do you build networks; how do you encourage the growth of interconnectivity? That is not separate from gold, it is a way of making gold more fluid and more mobile. We were talking about digital money in the 1920s with the first telephones. The more we are connected the more we can use true money more efficiently.

RF: You do not want to live in a world where your transactions are restricted to what you can fulfil with actual lumps of physical gold I assume, which makes shopping on Amazon quite difficult to do. There has to be some kind of a proxy that provides a greater level of physical liquidity than gold itself.

SANDEEP: Well there is. A lot of people have said “You are very dogmatic saying, ‘All exchange has to be done against gold coin.’” I have never said that! The vast majority of transactions would be cleared by gold Bills of Exchange. The gold Bill of Exchange is the origin of the lawful banknote. It represented the exchange of very marketable goods in the future, represented by a Bill of Exchange which can be discounted before its maturity date. The majority of transactions could be done with a Bill of Exchange.

RF: A Bill of Exchange is basically an invoice?

SANDEEP: Yes. Say I delivered petrol and you are a petrol pump retailer. I deliver 30,000 litres of petrol to your forecourt, you sign the invoice that says I will pay 5,000oz of silver in 90 days. As the wholesaler of the petrol, I am in possession of this signed invoice; or a Bill of Exchange; which will mature into 5,000oz of silver when you have sold all of the petrol; it will mature into 5,000oz of silver in 91 days.

If you want 5,000oz of silver sooner, you approach a discount house. The Bank of England was the discount house for the entire world, with the basis of the sovereign coin. People who wanted an income would bid for your Bill of Exchange just shy of its face value, say 4,995oz. This induced a gold or silver “discount rate;” a measure of how the gold and silver is circulating in the economy. So gold and silver do not sit there getting hoarded; I would much rather have a Bill of Exchange than gold or silver coin because that means my gold and silver coin is earning itself. I am getting a return.

RF: So this document evolved from being manually assignable to other counterparties, too being unnamed; and emerged as bank notes? If society migrated back to a Bills of Exchange structure you would envision them being fully transferable?

SANDEEP: Yes, and bearer as well. You endorse it; you make it payable to bearer; that is the origin of the bearer note.

RF: This brings me back my questions about monetarism and Austrian economics; and how subject to corruption different monetary models are. Because another way to think of money as the “most marketable good” is that money should be the least corruptible method of storing or transferring value.

SANDEEP: Yes, yes.

RF: So can one assert that a Bill of Exchange system, if not completely incorruptible, could be “the least corruptible model?” And accepting that it is not completely incorruptible, how is it corruptible?

SANDEEP: It is corruptible. If you understand the process it is not too taxing for someone to practice fraud. But Bills of Exchange come under common law, so if one did not get paid, it is nothing to do with the process of the Bill of Exchange. It would mean one of the underlying signatories was a fraudster. They might not have committed the goods for sale in the first place or there might have been a conspiracy between the wholesaler and the retailer or with the discount house and the Bank of England; but this is just a default.

If you allow free gold coin circulation Bills of Exchange would arise naturally. You have to introduce statute law to say people cannot have them.

Goods which sell very quickly like toothpaste or shampoo are unlike goods which sit on the shelf for a long time like a car or a television. Goods which naturally sell themselves would be amenable to having Bills of Exchange draw against them.

For goods that do not naturally sell themselves you might take an inventory loan rather than finance them by drawing Bills of Exchange because they do not turn quickly enough.

A particular sort of devious mind could try and finance an airport or a television by drawing Bills of Exchange and hoping they can keep redrawing them. Borrowing short to lend long. The cost of shorter-term credit is lower but the spanner in the works comes if you cannot refinance at some point.

All of these kinds of borrowing short to lend long, inverted yield curves; the evil aspect of finance was borne from people trying to hijack and subterfuge the Bill of Exchange market; trying to stuff things in the Bill of Exchange market that should not be there. Like government bonds; things which do not sell themselves. A government bond only has value because the government can tax. These things are all questionable at the moment.

RF: That is the point where the feedback mechanism is completely broken; fundamentally there is an act of theft taking place.

SANDEEP: Yes, it is an act of theft. The Federal Reserve was set up to mimic the London Gold Bill Exchange, which closed just before World War One.

The London Gold Bill Exchange was so successful; it allowed the British Empire to do what it did with only 300 tons of gold. It was the Bills of Exchange of lawful true business; which had nothing to do with the Bank of England.

The Bank of England, like any good discounter must be a master of all trades; understand a bit about how all businesses are done, from the manufacture of books or food or shipping. They have to understand the process behind each Bills’ creation. That is the true job of a banker; but the person who discounts the commercial Bill of Exchange has gone.

The Bank Manager in my hometown of Kingston-upon-Thames is meant to know about the business of Kingston-upon-Thames because he should be discounting the Bills of Exchange from Kingston-upon-Thames

RF: There is a degree to which you simply cannot outsource the management of trust. No amount of network structure or policy can replace one human-being knowing another human-being and their capacity to do what they say they are going to do. The moment you have a separation between one person’s oversight of another… well it is the thin end of the wedge.

SANDEEP: Yes.

RF: You have all of the capacity you require to abuse the system.

SANDEEP: Absolutely. I recall my fund manager exams; learning the difference between the English and American ways of doing things

The British are form over substance and Americans are substance over form. As soon as you write something down there is a way of not understanding what has been written; it is almost as if British culture knows you are not meant to write things down because of that. You are not meant to write your laws down, you are not meant to have endless statutes because it induces this separateness. People think it makes the process better but it does not, it makes it infinitely worse.

RF: Well it makes it susceptible to corruption. But we now have a trap; basic things like toothpaste depend on a scale of complexity that it is hard to deliver with a monetary system that is limited by those human relationships.

In that context and in the context of the potential use of a Bills of Exchange model, what do you think of things like the Bitcoin block chain; the idea of crowd-sourcing the verification of transactions and building further systems on top of that?

SANDEEP: I like the fact that you have this ledger but it’s what the Bank of England was doing; they were the ledger. It has all been done before, thousands of times before across thousands of civilisations!

That kind of that ledger mode is the central discount house of the gold Bill of Exchange market. That was the ledger of its day. It is a good idea to make it open source where everybody is on a level playing field and everyone can see what each other is doing. It is the right direction for things to go.

But let’s not think that it has never been done before. Our ancestors were not stupid people. All these problems have been solved many times.

RF: Well that is very encouraging really. It brings me back to the point about the fungible nature of money. When you talk about the need for the Bank Manager to know the counterparty and the Bill of Exchange being tied to the reality of each individual’s capacity to fulfil their obligations; and the potential to vest everything in the public domain… at that point every coin becomes unique; and arguably then we suddenly price externalities as well; because we can say, “I do not take coins that have come through a company that sells landmines to dictators.”

SANDEEP: Yes.

RF: So in fact it is the regulatory investment in the privacy of transactions that is the principle barrier to releasing public value.

SANDEEP: Yeah. I think it is, sadly.

RF: One last question; I know Austrian economics does not draw on empiricism for its analysis, but has Austrian economics been implemented anywhere in a way that you would say is to good effect? Are they case studies you can point to that highlight the applied success of the Austrian model?

SANDEEP: No, not really! Well; my bosses have made a lot of money on Austrian business cycle theory. When I started I was learning about the concept of borrowing short to lend long. When I realised this was just mismatching maturities; which is a much broader problem; well you just need to sit and wait for the banking system to collapse, as it did in 2007. My boss at the time was quite a famous fund manager, berated for causing the financial crisis. He was just placing his chips.

But no government is going to be willing to accept what our conversation started on; they are not willing to accept that value is in our consciousness; because it makes people very uncomfortable about their nature and they do not want to accept it.

RF: I guess from a government’s point of view it’s also something they cannot take away.

SANDEEP: That’s very true.