I came across this excelent article from Hans-Hermann Hoppe “The Yield from Money Held” Reconsidered. It explains very well how and why hoarding money is important as it mitigates uncertainty, which leads me to very interesting considerations about time and interest. But I will leave those considerations for another post as I would like to focus on a very specific insight from this article, which is the following (emphasis is mine):
While this brief reconstruction of the origin of money is familiar, insufficient attention has been drawn to the fact that, as the most easily and widely salable good, money is at the same time the most universally present — instantly serviceable — good (which is why the interest rate, i.e., the discount rate of future goods against present goods, is expressed in terms of money) and, as such, the good uniquely suited to alleviate presently felt uneasiness about uncertainty.
In order to understand the full meaning of this paragraph we need a very specific definition of money, to ensure that money is indeed a present economic good that can perform the role of mitigating uncertainity. Since the article is based on Mises monetary theory, let´s see Mises definition of money:
From Theory of Money and Credit, Chapter 1: “universally employed medium of exchange”. This definition was later nuanced in his 1949 treatise Human Action (chapter 17, section 1) as “commonly used medium of exchange”. This is not enough to decide if money is a present good or not. Let´s examine then Mises monetary taxonomy with more detail:
From the above diagram it is not clear which kind of money are present goods. I would say that only “Money certificates” and “Commodity Money” are present goods, but that´s my own interpretation. I can not draw a clear conclusion from this diagram. So for more clarification, at page 266 (Ludwig von Mises 1953, The Theory of Money and Credit, Yale Univiersity Press), Mises wrote (emphasis is mine):
The peculiar attitude of individuals towards transactions involving circulation credit is explained by the circumstance that the claims in which it is expressed can be used in every connexion instead of money. […] For everybody they therefore are really money-substitutes; they perform the monetary function in the same way as money; they are ‘ready money’ to him, i.e., present, not future, money.
Moreover, it happens throughout the whole book that Mises does not include in the definition of the terms “Money”, “Money proper” and “Money in the narrower sense” if they must be present or future goods.
So from the above analysis, we conclude that Mises believes that currency is always a present good, no matter if it is a commodity or fiduciary media as long as it fullfills the utility of medium of exchange. It looks like for Mises being a present good is not an objective property but a subjective perception of the owner.
I don’t think that the fact of being a present or future good is a subjective property. If that is true, then we could not objectively decide who is the creditor and the debtor in a credit transaction when money is involved, as the definition of credit is an exchange of present goods for future goods.
Claims issued by an entity differ from present goods in a very important aspect, the market not only needs to assess the value of the good underlying the claim, but also the creditworthiness of the issuer of the claim. Present goods are subject only to market risk, while claims are also subject to counterparty risk. What would be the impact on the value of a pure gold coin if its producer goes bankruptcy? Probably none. What would be the impact on the value of a claim if its issuer goes bankruptcy or disappears?. Probably devastating.
Going back to the article of Hans-Hermann Hoppe, all these considerations are absolutely key in the context of certainty. While full certainty is impossible to achieve by hoarding present goods due to market risk (i.e. price changes) and theft risk, adding an additional layer of risk (counterparty / credit risk) could never possibly decrease the risk for bearer claims. We could concede that adding a counterparty could decrease the risk of theft for nominative claims, but on the other hand counterparty risk could be greater than theft risk, and the counterparty cannot be fully exempt from theft risk either.
We have many examples of the materialization of counterparty and credit risk throughout history. Bank runs, inflation and hyperinflation are all examples of this kind of risk. Indeed, the uncertainity in economic crisis is more often than not a widespread materialization of credit risk of currency issuers throughout the economy. This was specially the case for the 2008 crisis where the market was uncertain mainly about the creditworthiness of certain issuers of claims (i.e. the commercial banks).
If a claim or a debt can become a present good by the mere fact that is being used as a medium of exchange, what is the problem of exchanging that debt (now a present good according to Mises) for more future goods (more debt) and so forth? Maybe we will end up with absurdily high trembling skyscrapers of debt on top of more debt?
As long as economic science is not able to reach a consensus on a formalized criteria on what is a present good and a future good, and that credit (debt) is always a future good regardless of its utility as medium of exchange, the confusion between money and credit will always propagate through the financial system, inexorably leading us to recurring financial crisis.
The good news is that a formalized criteria already exists, now it is up to the academia to embrace it.