Can Credit Instruments Function as Money?
Some opponents of the real bills doctrine claim that credit instruments are not money and presumably cannot be used as money.
Mises defines money as “the thing which serves as the generally accepted and commonly used medium of exchange.” According to his definition, anything that a community accepts and uses as a medium of exchange, i.e., a purchasing medium, is money.
His definition does not preclude bank notes, gold certificates and checkbook money as money. All are credit instruments. All promise to pay in gold in the future. Moreover, all are used as media of exchange. All are used to pay debt.
A real bill of exchange is no different. It can be, and has been, used as a medium of exchange. It can be used to pay debts. Like bank notes, gold certificates, and checkbook money, it promises payment in gold in the future. The major difference between the bill and the others is that the bill promises payment in gold by a specified date. The others do not; they just promise payment in gold when demanded.
As for debt being used as money, the irredeemable federal reserve note, which is a credit instrument and debt, has been used as money since 1933. Granted, it is poor quality money that cannot extinguish debt. All it can do is discharge debt by transferring it to another. Nevertheless, it has function as a medium of exchange since 1933.
Under the gold standard, the only true money is gold. It is the only money that is not another’s obligation. All other forms of money (bank notes, certificates, checkbook money, real bills, and token coins) are representative money. They represent something besides themselves. They represent that something is due. That something is gold. As such, they are all credit money and debt instruments. Real bills do not differ functionally from bank notes, checkbook money, or certificates. The difference among all these forms of money is technical.
1. Ludwig von Mises, Human Action: A Treatise on Economics (3rd revised edition. Chicago, Illinois: Henry Regnery Company, 1963), p. 401.
[This article first appeared in The Gold Standard, issue #7, 15 July 2011.]
Copyright © 2011 by Thomas Coley Allen.
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