The sound of panic drums has been heard loud and wide around the financial world since the collapse of Silicon Valley Bank, and the near collapse of Credit Suisse. The failure of a well-capitalized institution has been an enigma to some: how could a publicly recognized banking company suddenly go bankrupt and close its doors within 48 hours? To another lot, the collapse demonstrates the utter irrationality of markets. However, both of these views are misguided as a result of their biased theory of homogenous capital with no difference in quality, and their cognitive dissonance about the role that the exchange and asset functions of money play for its holders.


Money and the market

The concept of “money” is a great reminder of the general state of ignorance of human beings. For example, the use of language is much older than our theoretical investigations into it, and much, much older than modern linguists investigating universal languages. For human beings, most actions precede correct comprehension of actions. Early humans used fire without necessarily having the need to understand its atomic, chemical nature.

People’s awareness of money is similar to that of fire, except that we now understand fire better. This ignorance was shed to some extent with Carl Menger’s explanation of the emergence of money out of exchange. His core insight was that the emergence of the phenomenon, where a commodity comes into use as a general medium of exchange, is a natural culmination arising out differing salability of goods, and the freedom to accumulate and exchange that good. But understanding that money is a product of voluntary exchange and accumulation does not mean that we must then necessarily create and use political fiat currency as the sole medium of exchange; the simple possession of commodity money is enough to engage in exchange.

The use of a commodity as a common medium of exchange probably arose with the first cities in ancient Mesopotamia, where a whole bunch of commodities traded against other non-money goods as common media of exchange in the market, as well as against each other at market-determined exchange rates. Mesopotamian monies are distinguished from ordinary commodities by being exchanged, sometimes for one another, but more often as payment for either tangible commodities or for less tangible goods, such as freedom from obligations of various sorts (taxes, loans with interest, etc.).

Materials that functioned as money could be arranged then in ascending order of their value: barley, lead, copper or bronze, tin, silver, and gold. Of these, barley, lead, and copper or bronze functioned as cheaper monies; tin was mid-range, and silver and the much rarer gold were high-range monies. The existence of multiple monies circulating together in the market is a natural expression of economic calculation. Each of the various circulating monies had certain qualities which made them favorable for its holders, who in turn used them for particular forms of exchange. All of them together satisfied their respective holders more than any one of them could alone.

The demand to hold each of the respective categories of money depended on the relative competence of monies in acting as a medium of exchange and a store of value. For example, gold was best for acting as a store of value or as a medium of exchange in high-value transactions, but wasn’t a good common medium of exchange due to its high relative value, which made holding it by everyone an impossibility. Silver and barley, however, were able to become the common medium with prices being quoted in both of them because barley gave direct utility as a primary food source and would thus be in high demand amongst commoners. Silver on the other hand, being a good store of value and having a lower relative value, served the needs of mass trade more successfully than other easily corroded metals such as tin and bronze.

Monies that have been primarily used as a store of value have been selected due to their market-based ability to accumulate value as a store of purchasing power commanded by an individual, which tends to keep and grow in its relative value or purchasing power. This form of behavior has been documented as early as 1200 BC, but is much, much older. For example, an Egyptian woman cross-examined by a court scribe concerning gold found in her home explained: we got it by selling barley during the year of the hyenas when people went hungry. It illustrates the importance of a store of value that can hold its value even during times of great trouble, as a means of security for the masses.

Pricing, or the act of economic calculation in an economy, is impossible without money, Prices reflect the relative valuation of goods via the demanded money. The money acts as the common yardstick that informs both parts of all prices, bid, and ask by buyer and seller.

However, money is different from a physical yardstick in that its own value changes over time. When people are not in held bondage, they tend to trade away the bad yardsticks whose value either fluctuates violently or tends to lose its value quickly, for better yardsticks that are more stable and thus lend themselves towards a more rationally calculated economic order.

As far back as the second millennium BC, Assyria, which was situated in northern Mesopotamia, provides ample evidence. The southern part of Mesopotamia, its center of influence, had adequate waters for barley cultivation, which in turn produced stable values for grain such as barley. Assyria, in the north, depended heavily on rainfall for its cultivation. This meant violently fluctuating values of grain, as opposed to its more stable value in the irrigation agriculture of Babylonia (southern Mesopotamia), which led to a situation where cheap metals such as lead, copper, and bronze circulated as the common medium of exchange in Assyria.

Prices of goods have historically been posted in the common medium of exchange of the place. Wherever a seller, a buyer, and the broader market all valued, for example, silver, and were ready to hold it as a store of value, this allowed any other person to use it for purchases without any loss in its value. This allows the buyer to demand payments for his labor services in silver, and to carry silver with the expectation of it being accepted by others. The seller accepts the silver knowing that he can exchange it for other many other goods produced by others in the market.

The modern arrangement of the monetary system through legislative means has prohibited the development of alternative measures of holding different kinds of money as legal tender in any practical way. The absence of any systemic changes in terms of the demand to hold fiat money by market participants, in spite of major gradual devaluations, is a testament to the coercive power of taxation. Money’s purchasing power depends on paper money being legal tender and being accepted by the government for the payment of taxes and duties.

By giving its paper money legal privileges, the government subsidizes its demand by increasing its use in exchanges, therefore preventing it from becoming economically uncompetitive versus other monies such as gold, silver, bitcoin or certificates for them. This however is not odd, but another example of the harmful effects on consumers, and the beneficial effects on politically connected producers, namely banks, in the modern monetary system.

When a government subsidizes domestic enterprises by tariffs, the public might be better off using cheaper foreign goods, but are forced to use possibly sub-standard and costly domestic products. The analogous costly nature of fiat monies is less acknowledged than that of tariffs before the failure of the fiat currency, but is ever present, particularly in its spectacular ability to reduce the ability of its holders to accumulate value. The decline in the purchasing power of the US dollar since 1913, when the dollar certificate which represented certain amounts of gold was reduced to only certificates made out of paper, is another illustration of the same.


Effects of monopoly on the money issue

The perverse effects of having a single fiat money are only acknowledged once hyperinflation has set in, when the value of a currency falls much quicker than it changes hands. The most informed and connected market participants are the first ones to substitute the widely fluctuating domestic currency with a more stable currency, like the US dollar. Later, governments acknowledge the failure of its money, and the entire country’s monetary regime is changed. This was evident in the dollarization of currencies in countries such as Ecuador, El Salvador, and Zimbabwe.

Fiat money systems with single paper money, as is the case with most nation-states today, can be contrasted with systems of paper money where other commodities such as gold and silver also function as legal tender and thus have the same playing field as the fiat money, which improves the long-run stability of the latter.

The sudden downfall of fiat monetary systems as the monetary crisis of hyperinflation takes place is due to the absence of the development of a natural adjustment process in markets, where the overissue of one money is signaled as its devaluation in other monies. These devaluations can serve as signals to entrepreneurs, investors, and consumers to adjust their own money holdings. The absence of other monies serves as the root cause in creating and propagating fragile banking systems. This is similar to a market structure where the foundational primary industries such as iron, coal, etc. were to be nationalized, while producers of steel and coal products were left in private hands. It is the private production of iron, coal, and market-determined prices that allows for efficiency and creativity in long-term planning by multiple steel companies and other producers of iron products.

The combination of governments restricting money to a single legal tender, and a central bank acting as the sole issuer of base money creates inefficiency and fragility throughout the banking system.

The creation of a more anti-fragile system requires essential learning from the failures of individual banks. The supply of any given commodity or service which comes on the market is a function of its demand, of the purpose it serves for its demanders. Learning from failures is related to the need for survival in the marketplace, The market where the government is not actively subsidizing producers is not a place that is sympathetic to long-term, drawn-out failures; this can hardly be a disputable statement.

The market becomes anti-fragile through successive failures and rooting out of firms, with the successful firms inheriting informational learning about what to do and what not to do in the market environment. Successful firms become efficient not because they can perfectly plan everything from the beginning but through learning not to make the same mistakes while surviving. This for practical purposes means firms investing in what makes them successful, and abstaining from the devotion of any resources toward identified failures. The “too big to fail” doctrine stops the filtering process by building up and creating more defects by saving failed banks and keeping the value of failed securities such as mortgage-backed securities afloat, making the entire system more fragile, leading only to bigger failures.

The correction of these macroeconomic failures, however, is not to be found in macroeconomic but rather in microeconomic solutions. The reason often advanced for the legitimacy of governments power in private matters is its protection of the private property function, This claim is similar in some aspects to  government’s demand of a monopoly in violence over a geographical space in order to limit violence in private matters. So the central bank demands a monopoly of the issuance of money in order to stabilize the value of ordinary people’s money holdings.

However, in light of the extraordinary amount of both theoretical and empirical evidence of the failure of central banks in maintaining a stable value of their money, the cheapest, easiest, and most just solution would be to accord to gold and silver the status of legal tender in tax payment. This is a modest solution in light of the successive inflationary episodes that impact the less well-off more seriously due to their binding budget constraints. The impact of suddenly higher prices has a disproportionate effect on people with less money stock than on people with more. It also has a larger impact on their ability to accumulate money than those who receive successive inflationary bouts of money.

The effect of a sudden increase in prices on an individual during the last two years who had kept his money balance in liquid savings as bank deposits is more problematic than if he had kept it in the form of digital gold or silver bitcoin which could be quickly converted to dollars. This is because the gold, bitcoin and silver would have provided a premium for holding it, which is washed away quickly in fiat money balances during a general rise in the price level. Restoring the ability to pay taxes in gold and silver for everyone would put gold and silver at a more competitive level with the dollar, would stabilize our currencies, and raise the standard of living of the poorest among us.



Vibhu Vikramaidtya is a scholar with research interests in capital theory, monetary theory, and business cycles writing about events in the economy from a legal and economic standpoint. His other works can be found at the Austrian Economics Center, the Libertarian Institute, and