Lesson 3 of 9
Claims on money
A claim fully backed by money and a claim that is not look identical to whoever holds one. That distinction is the hinge of the whole course.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- Money proper is the thing itself. A money substitute is a claim on it that people accept in its place, such as a deposit balance or a note.
- A substitute fully covered by money held against it is a certificate. The part of the substitutes not so covered is what Mises names fiduciary media.
- The two are indistinguishable to whoever holds them, which is exactly why they circulate. They are not indistinguishable in what they do to the number of claims outstanding.
This lesson is three definitions. They look like bookkeeping and every argument in the rest of the course turns on them, including the argument the school has with itself.
The three categories, and where the line falls
The thing itself
- Money proper · base money held by the public$10m10%
- Money certificates · substitutes fully covered by money held$15m15%
- Fiduciary media · substitutes not covered by money held$75m75%
A claim with nothing specific behind it
Total$100m
Money proper
The thing that is money in the narrower sense: in a commodity standard, the coin; in a fiat regime, the currency issued by the central authority. Mises's test is that it is not a claim against anybody. It is the final settlement.
Money substitutes
A claim on money proper that circulates in its place. A bank balance a depositor can draw on demand is one. A note redeemable on demand is another. People accept them because they can get money proper for them whenever they want, and because everybody else accepts them too.
Crucially, a substitute does the same work as money for whoever holds it. That is what it means to circulate.
Money certificates and fiduciary media
Now split the substitutes by what the issuer holds against them.
Where the issuer holds money proper covering a claim fully, the claim is a certificate. It is a receipt. Nothing has been added to the total quantity of purchasing power, because the money proper behind it is sitting still.
Where it does not, the claim is what Mises calls fiduciary media: the portion of redeemable substitutes backed by something other than money proper, usually loans the bank has made. Selgin and White, writing in the Review of Austrian Economics in 1996, set out the same terminology and are careful about it: on Mises's usage a fractionally backed note that is genuinely redeemable, and known to be, is not a fiat money and not a claim on nothing. It is a partially fiduciary medium, and they argue the distinction between fiduciary media and fiat money matters because the two have different limits on their quantity.
Why the distinction is load bearing
Because a holder cannot see it. Two deposit balances of the same size spend the same way, clear the same way and feel the same to their owners, whether or not money proper is sitting behind them.
But the economy contains a different number of spendable claims in the two cases. When fiduciary media are issued, somebody has purchasing power who did not have it before, and nobody has given any up. That fact, and what it does to interest rates and to which projects look worth starting, is the entire subject of the courses that follow.
Check yourself
What is a money substitute?
- A commodity that competes with money
- A claim on money proper that circulates in its place
- Any asset that holds its value
Show the answer
Answer: B.
A deposit balance drawable on demand is the standard case. It works as money for its holder because it can be turned into money proper and because others accept it.What distinguishes fiduciary media from a money certificate?
- Fiduciary media are not redeemable
- A certificate is fully covered by money proper held against it, and fiduciary media are not
- Certificates are issued by central banks
Show the answer
Answer: B.
The split is by what the issuer holds against the claim. Selgin and White are explicit that a fractionally backed but genuinely redeemable claim is still a claim, not a fiat money.Why is the distinction invisible to a holder?
- Because banks are not required to disclose it
- Because both kinds of claim spend and clear identically for whoever holds them
- Because the amounts are always the same
Show the answer
Answer: B.
That indistinguishability is what lets substitutes circulate at all. What differs is the number of spendable claims in the economy, not the experience of holding one.Sources
- Mises, The Theory of Money and Credit, German original 1912, English translation by Batson 1934, part three, chapter 16 on the evolution of fiduciary media and chapter 17 on fiduciary media and the demand for money.
- Selgin and White, 'In Defense of Fiduciary Media, or, We are Not Devo(lutionists), We are Misesians!', Review of Austrian Economics, volume 9 number 2, 1996, on the Misesian terminology distinguishing money proper, money substitutes and fiduciary media, and on why fiduciary media are not a form of fiat money.
What this leaves out
- This is a heterodox tradition. The mainstream account of the same phenomenon differs, and nothing here is a forecast or a view on any security.
- The figures in the diagram and in the example are round invented numbers chosen to make the split visible. They are not any bank's balance sheet and not any published aggregate.
- The definitions here are Mises's. What follows from them, in particular whether issuing fiduciary media is harmful, is precisely what the last three lessons of this course disagree about.