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How trade exchanges demonstrate the
truth of libertarian theories of money.
by Carol Moore

This article, published in NOMOS in the Spring of 1984, has become even more relevant today as people turn more and more to "e-cash" and "digital currency" systems.  I've included in italics a few comments based on some later developments.  I include at the end some relevant links.  I sent a copy to Friedrich Hayek wjho sent me a congratualtory note; Milton Friedman, however, wrote me a nasty one.  Obviously, both were impressed in one say or another!  See my other relevant article on local economics called Finding Freedom in Your Own Backyard.

          Today’s money system is in crisis. The Nixon inflation, Ford recession, Carter hyper-inflation, and Reagan near-depression have taught the general public more about the money supply and the workings of the Federal Reserve System than they ever wanted to know. Yet most are still confused - and so are economists.
          “Economics,” according to the A.A. Alchian and W.R. Allen university textbook, “lacks a fully satisfactory theory of the supply of money for the modern money system.”(1)  Free market advocates insist that government intervention in monetary systems makes such “satisfactory” theories impossible. They believe that only through trial and error experimentation in a free market will traders be able to discover what is the correct supply of money.
         My interest in theories of money has led me to investigate modern trade exchanges, the spontaneously created alternative money systems currently working outside the government controlled money system. From only a few exchanges in the early seventies, the industry has blossomed to several hundred exchanges serving over 50,000 members. My research and experience (including working for an exchange) suggest to me that we now have enough experience with money to describe both what it is and what should determine its proper supply.
         Money cannot somehow exist apart from trade, or be created to stimulate trade. Libertarian credit analyst E.C. Riegel wrote, “When men form a compact to trade with each other by means of accounting, in terms of a value unit, then a monetary system is formed.”(2)  The concept “trade creates money” helps us recognize that it is the volume of trade and the demand for money that determines a proper money supply. It discredits the belief that either government or the gold standard should restrict the legitimate, trade-created growth in the money supply.
         In order to support this dissident viewpoint, I will describe three kinds of money -- commodity, fiat, and credit --  and then describe how the last of these works in spontaneously generated trade exchanges. Finally, I will summarize what this shows about the nature of money.


         In the beginning was barter; yams traded for chickens, nails for cloth. With the specialization of labor and the growth of cities, traders found it more convenient to use easily transported items with widely recognized value. These commodities included salt, tobacco, beads, and fishhooks. But the most popular commodities, because of their relative scarcity, imperishability and malleability, were gold and silver minted into coins.
         Ancient rulers quickly saw the advantage of monopolizing the minting of coins. By debasing the coins with non-precious metals they could stretch the private gold brought for minting and pocket the surplus. This subterfuge was easier than sending soldiers out to collect taxes from sullen peasantry. When the people noticed the coins were worth less, they didn’t storm the palace but simply raised prices or attacked the local merchants who did!
         In more recent times, individuals found it more convenient to leave their gold in warehouses and circulate their receipts for gold as money. Because most traders remained satisfied to exchange receipts, warehouses began printing up extra receipts and loaning them to eager borrowers to earn interest. However, occasionally one of these “warehouse banks” created too many receipts or made more bad loans than it could cover. Nervous depositors would make a “run” on the bank, demanding to be paid fully in gold. If there was not enough gold to cover the receipts, the bank folded and the depositors were ruined. Since kings, governments and their cronies so often received these extra receipts and defaulted on their loans, it isn’t surprising that governments began to create central banks that would shift gold from bank to bank and even suspend payments when depositors became nervous.
        Today’s hard money advocates want to return to gold, either the 100% gold dollar or fractional reserve banking based on gold. But in government and private hands worldwide there are approximately two billion ounces of gold and eight billion ounces of silver.(3)  That works out to just one half ounce of gold and two ounces of silver for each of earth’s four billion inhabitants. (circa 1984) This is obviously not sufficient to make widespread trade with gold or silver coins possible; even with fractional reserve banking there would be a strong deflationary pressure because of inadequate reserves.


         Fiat money is any coin or receipt simply declared to be money, usually by government, occasionally by private issuers. Once a government announces that it will no longer redeem its notes in gold or silver, it becomes free to increase the supply of its fiat currency without real restraint, at least until inflation destroys government credibility and traders refuse to deal in the currency. While today some governments increase their money supplies by just printing bills and paying their debts with them, others like the U.S. use more sophisticated methods.
         The U.S. Federal Reserve System manipulates the money supply by requiring banks to hold a certain ratio of reserves to loans; only by increasing reserves can banks increase their loans and thereby increase the money supply. When the Federal Reserve lowers either the reserve ratio or the interest rate it charges banks to borrow reserves from it, it increases the amount of money banks can loan out to businesses - to government itself. More often, however, the Federal Reserve just increases the reserves. In accordance with U.S. law it buys U.S. Bonds on the open market. The money, of course, goes straight to the government. The Federal Reserve, with the “backing” of these bonds, can print an equivalent amount of currency as reserves. This is often called monetizing the federal debt.
        Federal Reserve apologists generally fall into two categories: Keynesians and Monetarists. Economists of both types support monetization of the debt but disagree about how fast the money supply should be allowed to grow. Keynesians prefer to rapidly expand the money supply through government spending projects. Although they deny that such spending need primarily go into armaments, it is historically true that voters are more willing to support defense than public works “boondoggles” usually funded by raising local taxes. Most Keynesians deny that their policies lead to inflation, blaming it variously on OPEC, greedy businessmen, and irresponsible consumers.
         Monetarists tend to advocate balanced budgets, deregulation of the economy and a growth in money supply of no more than two to three percent per year. Despite the efforts of influential monetarists in many national governments at the present time, voters, special interests, and politicians all continue to refuse to control their appetites for more guns and butter, insuring continuing massive budget deficits. (Still true today!)
        Eliminating government deficits without reducing spending can only be done through (politically unpopular) tax increases, heavy borrowing from banks (which crowds out the private sector), or monetarization of the debt (which leads to inflation). Pessimists predict that, as hyperinflation and international monetary collapse approach, governments will enforce strict wage and price controls, confiscate private pensions and other financial assets, print metallic stripped money to prevent cash from leaving the country and even abolish cash all together and institute electronic money so that every dollar can be traced and taxed.  Some predict great “patriotic wars” to quash protest, and even nuclear catastrophe.  (Variations on all of these, of course, have happened in various countries over the last 18 years.  The United States' boom of the 1990s based on decrease in the growth of military spending, technological advances, increased free trade and a favorable investment environment is not likely to continue.)


        Credit is a claim on goods or services, or, alternately, the promise to pay cash, goods or services. Verbal promises, bills of exchange, credit notes, etc. have been around as long as humans have traded and often are passed from hand to hand much like commodity or fiat monies. The bulk of savings and bank loans today are not cash but claims to cash. As Alchian and Allen write, “Debt is money - provided that the debt is the particular kind owed by commercial banks, payable on demand, and transferable by checks...the world relies heavily on credit and confidence in fulfilling one’s debt obligations."(4)
       Despite this realization, economists remain uncomfortable with the concept of credit as money. One reason is that credit is not easily quantified. As Milton Friedman writes, “It has so far proved impossible to find a satisfactory quantitative measure of credit conditions.”(5)  Recognizing this, Ludwig von Mises “on grounds of convenience” preferred to use a narrower formulation of the concept of money” which excludes some kinds of credit money.(6)  Hard money advocate Murray Rothbard denies that credit even is money, but Hayek’s broad definition would include it.
        Recently, economist Ludwig M. Lachman urged Austrians to begin applying their “subjectivism,” their concern with individual choice and subjective value, to the theory of money. He also pointed out that economists like Pigou, Keynes and Friedman have shown that the creation and maintenance of credit depends on the individual demand for money.(7)  Leftist economist Graham Thomson has noted that “the financial system has gone on creating credit largely independently of Treasury and Bank of England policy.“(8)


        Libertarian E.C. Riegel (1879-1953) offered a coherent explanation for the mysterious creation and fluctuating supply of money. In his last work, Flight From Inflation: The Money Alternative, Riegel advanced the “subjective” view that “trade creates money. He wrote, “When men form a compact to trade with each other by means of accounting, in terms of a value unit, them a monetary system is formed, and actual money springs into existence when any of them, by means of the act of paying for a purchase, incurs a debit in the accounting system.” Debits create and credits destroy money. There is no “proper supply,” only records of how much was traded and what volume of units remains.
        In effect, Riegel redefines money as a unit of account. He believed that both government reserve requirements and gold standards restrict commercial banks’ ability to create the amount of credit traders need to conduct all the trade they are actually capable of doing. Riegel contrasted this legitimate commercial bank money with government money which does not represent real trade and just adds valueless units to the money system, thereby creating inflation. Riegel considered his system to be a true “economic democracy” because individuals would no longer be constrained from trading and competing by governments and their banker cronies.
        The important features of Riegel’s monetary alternative are:
        (a.)  A credit and debit accounting system using value units or “valuns” issued only by private banks; governments would not be allowed to issue money at all. While banks could establish credit limits, they would be set in recognition that the individual or corporation is “entitled to create as much money by buying as he or it is able to redeem through selling.”
        (b.)  Banks would launch their value units on par with the dollar as a way of keynoting it, just as the American dollar was initiated at par with the Spanish dollar. Although banks could still decrease the value of their unit by making too many bad loans, Riegel felt that the fact that the units are so clearly tied to trade, plus free market competition, would discourage such abuse.
        (c.)  Banks would earn their profits by charging service fees on all transactions.
        (d.)  The system could be instituted by the worldwide efforts of international businessmen or by local traders as an alternative to hyperinflation and monetary collapse.
        (e.)  Riegel believed that, as inflation increased and more and more individuals joined the superior valun system or some other private system, the state would be undermined.


        Riegel’s viewpoints have been largely supported by the development of trade exchanges. (And, today, various forms of "e-cash" and "digital currency.")  In fact, trade exchanges vividly illustrate his contention that “money is but a medium of evidencing barter balances.”
        In 1960 former advertising executive and banker Marvin McConnell formed Barter Systems, Inc., one of the first, and now the oldest, of modern trade exchanges. He pioneered the first system of credits and debits used by an exchange. Trade exchanges began growing in popularity during the 1974 recession when businesses, faced with excess inventories, tight money and inflation, sought to increase sales and reduce overhead. In 1979 the International Association of Trade Exchanges was formed to help legitimize exchanges and to suggest guidelines for exchange operations.
        Exchanges use a credit and debit accounting system which uses the trade credit as the unit of account. Exchanges usually allow members to overdraft up to a certain limit for, as McConnell says, “If you don’t have somebody overdrafting, you will not have your first barter transaction.”(9)  As long as traders take up their debits promptly through credits from sales, exchanges allow them to debit as much as they like. Some exchanges allow traders to loan idle accumulated credits to others and charge interest for them. Traders care that the credits are useful for trade, not that they are solid commodities or emblazoned with the Great Seal of the United States. Says one typical trader, “It’s the bottom line that counts. Who cares how you get there?”( 10)
        Exchanges pay expenses and make profits through charging cash membership fees of $100 to $500 and service fees of 5—10% per transaction. While some exchanges issue script which can be used just like cash, the majority of exchanges utilize checkbooks or credit cards. Members are kept informed of available services and new trading opportunities through directories and newsletters.
        While exchanges too often advertise their credits as being worth a dollar, in fact their value may vary from 5 cents to 80 cents depending on two factors. First, trade exchange operators may just create credits (called deficit spending) to attract new members with “free credits” and to pay business expenses and profits. Second, the value of the credit varies according to the number, variety and desirability of members of the exchange. There are trade credit brokers who take advantage of differences in values by arranging exchanges between members of different exchanges and by buying low from cash-short members or exchange dropouts and selling high to outsiders who want to trade with members.
        Internal and external problems currently limit the growth of trade exchanges. Internal problems include incompetent or dishonest exchange operators. Members often drop out because there is not a good ratio of services to hard goods, because they earn more credits than they can spend in the exchange, or because of obvious overcharging by members or inflation by operators. Often the exchange operator starts creating more credits to attract members and pay expenses. Soon the credits lose all value, trading stops, and the exchange folds.
        The one big external problem is government interference. In 1980 the IRS announced that a trade credit in any barter club (regardless of the health of that club) would, for tax purposes, be considered equal in value to one U.S. dollar. The decision led one observer to predict that “the ruling will undoubtedly have a crippling effect on the trade club industry.. .It may even force a small number of businesses (trade club members) into bankruptcy as the IRS attempts to collect taxes they now believe are due.”(11)  To add to trade exchange woes, the 1982 Tax Bill declared that third party organizations like trade exchanges must supply the IRS with a record of all credits earned by members during the year. Another less widely recognized problem is state and federal labor laws which discourage paying full-time employees partially or fully in anything but dollars. A vigorous campaign to educate the public about the nature of exchanges and to remove legal barriers might overcome public apathy and reverse some of these decisions. (Since then the government has become increasingly suspicious of digital currencies as a means of engaging in "money laundering" and tax avoidance and subjected such trade exchanges to even more regulation and oversight.)


        Using various insights obtained from modern free market economics, E.C. Riegel’s “monetary alternative” and the growth and operation of trade exchanges, I draw five conclusions regarding the nature and proper supply of money:
        (1.)  Money is whatever people are willing to use as a medium of exchange, unit of account, and store of value.
        (2.)  Modern trade exchanges show that it is possible to have a medium of exchange that emphasizes accounting features.
        (3.)  Bank and trade exchange creation of credit are really the same thing, since both represent real trade. But because of legal tender laws, banks must have available currency on hand which restrains them from creating as much money as legitimate trade demands.
        (4.) Units of account can have stable and reliable value only if they are created to represent current or imminent exchanges. The supply of money need only be limited by the individuals’ ability to trade. The devaluation of units is avoided when they are not created for the purpose of paying bank expenses or profits, or to finance long-term or high-risk ventures. (Such ventures would be financed through loans of accumulated units held in time deposits on which a market rate of interest is charged.) In this way, general price rises are avoided, though temporary price rises in booming industries would remain a reality. Since there would be no false market cues from public or private expansion of money supply leading to over-investment, there should be no boom/bust cycle.
       (5.)  We do not have to legislate a change of money systems, but can start educating and organizing around the trade exchange alternative now. In the event of incipient hyperinflation or monetary collapse, prepared individuals could translate a large portion of their assets into trade credits and avoid losing all they own.
        (6.) Perhaps the greatest single cause of war, economic inequality, and poverty is governments’ monopoly over the money supply. Government control of money results in the inability to get sufficient money into the system except through inflationary government spending (which is too often war spending) and the inability of individuals or corporations without substantial assets or government connections to get the investment money they need.


        Finally, this entire discussion should A be put within a moral framework. Any successful alternative to government money could be quickly crushed or co-opted by government. It can only succeed in the context of a movement which emphasizes that the end does not justify the means, that fraud, theft, and violent coercion, private and public, are morally wrong. Also, no financial system can be a “fail-safe” system immune from human corruption and incompetence. In the end, it is not in gold or government or trade exchanges we trust, but in other human beings.
        With this in mind, I urge readers with an interest in financial alternatives to investigate credit money and trade exchanges. I believe convincing others that government cannot create money or prosperity, that only our own efforts and our own trade creates money, is an important way of bringing them over to the true cause of peace and freedom.

Carol Moore, a libertarian activist in California, worked for a small trade exchange in Los Angeles in 1983.


     1. Amen A. Alchian and William R. Allen, University Economics: Elements of Inquiry (CA: Wadsworth Publishing Co., Inc., 1972), p. 585.
     2. E.C. Riegel, Flight From Inflation: The Monetary Alternative (Los Angeles: The Heather Foundation, 1978), p. 21.
     3. Douglas R. Casey, Crisis Investing (N.Y.: Stratfield Press, 1980), p. 198.
     4. A. Alchian & Allen, University Economies, p. 607.
     5. Milton Friedman, Dollars and Deficits (N.J.: Prentice Hall Inc., 1968), page 144.
     6. Ludwig von Mises, The Theory of Money and Credit (CT: Yale University Press, 1953), p. 53—54.
     7. Ludwig M. Lachman, “An Austrian Stocktaking: Unsettled Questions and Tentative Answers,” in New Directions in Austrian Economics, ed. Louis Spadaro (Sheed, Andrew, & McNeil, 1978), p. 9—10.
     8. George Thomson, “Monetarism and Economic Ideology,” Economy and Society, February, 1981.
     9. Peg Long, “The Eight Percent Solution,” Inc. Magazine, August, 1982.
     10. John Mamis, “Trade Secrets,” Inc. Magazine August, 1982.
     11. John Stranger, What is a Barter Credit Worth?” Self—Reliant, April/May, 1983.


Continental Trade Exchange

Trade Exchange of America

Private Enterprise Money by E.C. Riegel

Money - Past, Present & Future: Sources of Information on Monetary History, Contemporary Developments, and the Prospects for Electronic Money