Anton Kovalenko


Rethinking Money: Austro-Bulgarian Theory of Currencies

An excercise in Biblical Economics

And when money failed in the land of Egypt, and in the land of Canaan, all the Egyptians came unto Joseph, and said, Give us bread: for why should we die in thy presence? for the money faileth. [Gen 47:15]

Thou oughtest therefore to have put my money to the exchangers, and then at my coming I should have received mine own with usury. [Mt25:27]

I strongly believe in Austrian theory of money being true, given a precondition: a market with common acceptance of a "thing" that "is real money, everywhere".

However, reading about the past (of different times and places) and noticing variety of kinds and representations for money, and considering my personal experience (one local monetary reform with demonetization of some banknotes but not others, several years of inflation and active dollar-based local market; also, dealing right now with cash reserves and payments in four fiat currencies at once) made me suspect that there's something wrong with normalizing "the only kind of money" (be it a commodity, or government-provided bills, or database entries).

Most attempts of analyzing monetary transitions of the past, with one thing "ceasing to be money" and another "becoming money" (in some time and place, including the world), are weak in answering even the basic questions: when did it really happen? What's an indication that it has started, or finished? How to understand people's behavior during the transitional phase (if the explanation allows it to exist), when neither of currencies in the market is "real money", as commonly agreed?

I see a major problem in many other theories in the assumption that their subject themselves never engage in theoretical thinking, or can never (en masse) believe in high-level theories about life, world, governments, currencies, markets. It's a mistake similar to ignoring the role of private enterprises because profits and losses are "too abstract for common market participants". When they supposed to believe a thing like "today's money is tomorrow's money as well", it's represented not as a belief, but as an acceptance of a brute fact of daily life.

These beliefs can be true or false, they can be based on some reason which may be right or wrong itself, and in its turn is based on some higher-order belief. This regression has to end on PRESUPPOSITIONS that are beliefs held for no other reason ("held to be self-evident").

People also learn and come to believe new things from their past experience, especially during events that were generally believed to be impossible. If you're a dictator in an ignorant country with a stable national fiat currency, consider starting hyperinflation two times with an interval of five years: you'll notice major differences in economic behavior of market participants.

Each theory that doesn't account for the FACT that people will consider THIS theory and "similarly abstract" theories as well in their future economic behavior is doomed to "work" (if at all) only until its subjects figure out what's going on, applying their theories to their experience. Trade unions will object to lowering wages and behave well otherwise? Okay, noted. After fifty years, trade unions will accept raising NOMINAL wages and behave well, regardless consumer price inflation? That is nonsense.

We'll also presuppose important facts about our own ability to see "what's really going on in the economy":

  1. What we see can't be a hallucination (we just have to accurately filter out "what we believe to be obvious from what we see").

  2. What we can't see, however, MAY be real. Consequently, what we might consider "obvious from the things we see", may be wrong.

Let's start from scratch: an emergency of a single most marketable commodity as money during barter trade.

As normally it's used to explain the origin of commodity money, specifically, gold -- with the event of "monetization" happening in some prehistoric past, theorists automatically assumed nontheorizing market participants "just using their daily experience".

Let's turn it upside down: place a modern man with some knowledge of economic theories, like you and me, into that "prehistory" and see how the commodity money emerge. Assume you're rich in some commodities, (many of them might be good enough money, technically), and you're expecting to profit with a barter trade. You've got no apriori price information on that time and place, just goods and the desire to trade them.

Daily experience, anyone? What to do? What is "profitable", anyway?

Well, maybe that ancient salesmen were smarter than some economists of today.

One of the things you can do as an Austrian is waiting for money to somehow "emerge" in the community around and start accounting on that day, just exploring what's happening. Then you realise that you're gradually becoming "poor" in your natural goods (just a general impression, as you don't do any accounting), and when the money finally emerge, you realise that the first year was not too profitable. But at least now you know how to continue (it's a normal situation on the new market, by the way, when you sacrifice potential profits in exchange of getting accurate price information).

But what if everyone is an Austrian and is waiting? What if all other people wait for some other reasons?

There is, however, such thing as profit when "money haven't emerged yet" -- natural profit, given an unlikely chain of dealings like "this for that, two thats for this", or more complicated and mediated.

Suddenly you realise that you could do accounting, just with separate balances and profits and losses for each commodity fungible enough to be "counted", either of what you have or what your customers offer in exchange for what you have.

This kind of accounting might be less than useful and more than complicated, but (scale differences aside) it's fundamentally the same thing that you do today with different currencies!

Enters a local, and offers you a large piece of meat for all your stock of salt. You agree, and that, my friend, is probably a trading error: salt is "technically" a good enough kind of money, and is probably in high demand, given that sale. Well, at least we learned about a new prospective currency. Let's compensate this by offering to accept salt in new trades.

After this experience you learn to almost never offer a whole stock of "potential money" in a single trade. Instead we relate the "subjective value" of the good offered in exchange with the percentage of our holding in that prospective currency: "I'm ready to give 20% of my cash reserve for THIS", or in other direction: "I'd give that thing for 10% cash reserve increase".

Sooner or later you'll see that two or three or four things "became money in this society".

They didn't "emerge", however, it's just you and your trade counterparties made it happen, with your customers doing an important job of spreading information and building their own cash reserves.

And they did "become money" together.

As a faithful Austrian, you should now select the most liquid of them and do accounting in that units, and other things are just for final consumption, right?


People around you have their own cash reserves, their plans and trades. They already have two or more currencies, whatever you think about it, and you can't change it single-handedly.

You're free to choose one currency for your accounting without ever treating others as cash reserve. People around you will learn that you're reluctant to accept all currencies except one, as if it were "no money at all". But that'll be understood as your personal weirdness -- "he accepts tobacco with an extra charge above the market rate, better to bring him salt -- perhaps his religion tells him tobacco isn't money". That explanation, by the way, is right: your belief in a single most-marketable commodity is the reason for your behavior. (By the way, there's the case when I could have to "personally demonitize" a commodity according to the law of my religion: if grain and copper are local currencies, I'll hold my cash reserves in copper. Maybe more on that later).

Now even in the model example where one kind of money should have emerged, we have two currencies (say silver and copper). Which is the most liquid? How to measure it? Is that one "real money" and the other just something-not-to-be-accounted-for.

At that point in time, people already have their own definition of money. And it INCLUDES both currencies, perhaps with some preference for one or the other according to their plans, their visions of the future, perhaps their religions.

Maybe one currency is convenient for small trades, the other for big operations. Maybe some is more durable, maybe it weights less for the same price given the common exchange rate.

If we were all-knowing gods, we'd be able to measure "market capitalization" of each currency (selecting one of them as our base unit; "market cap" for copper is [price of copper in silver]x[supply of copper in the whole market];). We could discover that copper's "market cap" is lower and if you sell an elephant for copper, exchange rate fluctuates more significantly than if you sell it for silver.

The only realistic answer, however, is this:

Each of these free-market currencies are "just liquid well enough" for typical operations of economic agents with this currency.

If copper is widely used for micropayments (or for relatively big payments of the poor people), its "market cap" being less than silver's doesn't make "less than money" or "toy money" -- remember, what we see can't be an illusion.

If you decide to test their liquidity experimentally by selling and buying elephants for copper and silver, you'll notice that moneychangers around are good at stabilizing the fluctuations of the exchange rate. It's almost as if copper were "backed" by silver, but of course it's different: it's "backed" by people and their conscious actions.

If you're used to the notion of "network effect" for currencies, this monetary system of two commodities can be seen either as two mutually connected networks, or one network with two physical entities as carriers of information, letting you decide between saving, spending and reinvesting the money you earn.

I would insists that it's significantly safer this way, because of a fundamental fact of our life:

Money can fail.

It's a fact of personal life, that is, if you rely on your savings supposedly making you secure against any challenge you may face, you're wrong: it might prove insufficient or entirely worthless.

But it's also a fact of public life: money can fail as an institution, nationally or even globally. They can fail EVERYONE's reliance not only on the value of their savings, but on "money as such" as a system that "always works" and probably never changes significantly.

Having two physical commodities makes the network more secure in a situation where only one of the commodities "fail". In commodity money system on a free market it might mean just a long, dramatic change in exchange rates due to some fundamental discovery or a new direct use of a commodity. When Powers, Authorities and Administrations engage in market regulation, possible ways of "failing" for one or every commodity currency increase to infinity.

XX century is an illustration of the ultimate significance of this fact: money can fail, globally, worldwide, for a century or so.

Can they, however, be fixed? Will it happen by reintroducing some institutions of the past, "making gold standard great again"? More on that later.

Consider the definition:

Money is a store of value, medium of exchange and unit of accounting.

Being as good as it is for a "normally-running economy", it's a recipe for the mess we're in in theorising about monetary transitions. Which property is more important? In what order do they appear? How to explain if they appear in other order?

Now consider this:

Currency is a fungible good purchased in an anticipation of exchanging it for another good in the future, or

A fungible medium of delayed exchange.

Well that's better. At least we've incorporated three indepented qualities into a single definition ("delayed" takes care of the "store" part, "fungible" allows for using the thing, by itself, as a unit of accounting).

Now what if I purchase ten similar laptops hoping to sell them later? Had it become currency? You'll say: it has not, it's just my profession of reselling laptops make me behave this way.

A new correction:

Currency is a fungible good COMMONLY DEMANDED as a medium of delayed exchange.

I'll use it as my operational definition of currency for the rest of this work, until someone amends it to an even better definition.

How common is common enough? An interesting question. Delaying the detailed discussion, I encourage my readers to try applying my analysis first to things that they KNOW as currencies (as it's obvious to a particular reader) and then to things on which they have doubts whether it's a currency or not.

As methodological individualists, let's consider motivation of an individual economic agent purchasing currency as a medium of delayed exchange.

We presuppose that our agents are thinking and theorizing, so

In a traditional picture of an economy with a single kind of money, the institution of money is self-reinforced by people knowing "it's money", believing "everyone's knows it's money", up to "it has always been money" (oh really?) and "it will always be money" (just you wait).

It's probably the most common (but not the only!) kind of beliefs people hold about currencies of today, except that "always" part has vanished. That's, a belief that money, or currencies, don't fail (or don't fail fast enough), reinforced by their more-or-less immediate experience of the past and the notion of "brute facts" and "common knowledge" (which is the behavior of the markets and the public opinion in their more-or-less immediate environment).

This widely-held belief is enough, in itself, to explain continuity of money and currencies after they're established: why it just doesn't happen that a lot of people spontaneously decide to convert their cash to laptops and live on "laptop reserves" because laptops are a real, objective good and cash is (for example) "just pieces of paper".

Note that this BELIEF is a "monetary theory" of a simple kind (yes, it's unable to explain origins of currency, or they demise, or remonetization, or even popularity, but it's still a theory). If we'll have to refer to this theory in the future, let's call it "trivial monetary theory [TMT]".

We necessarily have to consider other theories held by the people to explain, or predict, or even to make changes in the world of currencies. They have various levels of abstraction: from the vision of tomorrow's supermarket accepting local currency as it was accepting local currency today, to a vision of the world's future through decades or centuries.

Return for now to subjective elements of our agent's reasonable beliefs. Even though he probably doesn't have the one and only plan of spending currency later, he probably "sees" (imagines, plans) a large set of possible ways of spending when he's buying currency.

Most subjective and least abstract elements of this thoughts are pure personal plans (still backed by some fundamental assumptions by the "global nature of money").

Consider these examples, together (they're ALL real, day-to-day things real people think about their currency reserves):

There are important elements of "personal plans for spending" (like going to Bulgaria in our example), that will be subject to our economic reasoning later.

For now notice that

It makes sense to split this "future spending belief" apart, distinguishing "plans" and "theories" of an agent.

A "theoretical" part is necessarily based on PRESUPPOSITIONS: some reasons WHY he holds his theory to be true. The belief that "dollar is more reliable" can be such a presupposition in itself, or it can be based on other theories: either "several years of the past indicate this to be true", or even an abstract economic thoughts on money and banking. You'd have to ASK an agent to get to his ultimate presuppositions. And, as in the case of TMT, "the future will be like the past, more-or-less" is a theory that cannot explain any discontinuity, should it happen.

History of fiat money displacing commodity money varies from country to country in details, but for countries without EXTREMELY brutal dictatorships it includes an element that I want to rethink using our new theoretical framework:

Gold was real money in the economy, banknotes were IOUs for gold (commonly believed to be as good as gold). By government decrees redemption has stopped (once and forever, or in stages), gold confiscated (optional), the use of gold in the market was prohibited, and the banknotes became "real money" with gold "demonetizing" into a consumption good.

Let's challenge first the notion of "real money" and their representations: though it's usually good enough for business accounting, it's completely unacceptable for analysis of monetary changes and revolutions.

Banknotes and gold were always, from the very start, two different currencies with a stable exchange rate (more-or-less, most of the time).

Banknotes were "backed" by popular beliefs, some of them INCLUDING the possibility of redemption (either as a personal plan or as part of a theory). However, a lot of economic agents didn't consider redemption important -- probably most of them held to a version of TMT with banknotes as "money".

This understanding avoids a ridiculous notion of goverment replacing, by decree, one kind of "real money" with another kind of "real money" in the entire local economy.

Sovznaks (soviet tokens) is an example of a CURRENCY introduced by a government entirely "out of blue". However, there is no "brute fact" that at some moment Sovznaks "became real money" created by the government. Money as an institution in that time and place were damaged and crippled, but it continued to include various currencies in a day-to-day people's notion of "money", and no amount of "brute force" could have helped it.

There's, by the way, no pure "brute force" without a theory and plans behind government's actions itself and without presuppositions and plans of its subject. Even if subjects just believe in government's unlimited power (to "create a new kind of money"), it's just that: a belief caused by fear.

A notion of two distinguishable "things" used as currency being forms of the same currency or different currencies is largely context-dependent. Do dollars-in-cash and dollars-on-current-account represent the same currency? Are Bulgarian Levas just Euros in disguise? Are two Rouble banknotes of different nominals units of the same currency? The answer is: it depends.

As an extreme example, I've noticed several months ago that in my personal context, 1BGN coins, 2BGN coins and 2BGN bills were all units of different currencies. That was because of my personal spending plans and actions:

And I've really treated them as different currencies, saving 1BGN coins and preferring to spend bills where possible.

Let's return now to common elements in personal spending plans and sort them out using two important traits:

There's an intersting observation we can make during our daily life in non-dollar, weak-currency countries:

The longer the expected time to hold, the less important is the convenience of transaction.

That is, no one gets dollars in cash for spending on the same day in the store where dollars aren't accepted directly (usually because it's disallowed by local decree). A lot of people get dollars in cash for spending after months or years.

In the latter case, the agent's thinking may include "buying a car for dollars in cash", even if, technically, dollars will have to be exchanged for local currency first, and only then the local currency will be spent for the car. Wait. TECHNICALLY? We were ready, again, to write off a real thing we see as a "hallucination".

We have two incompatible "brute facts" about our agent and the local market. Let's consider them together:

If our theory included a notion of one currency being "THE real money in the economy", we'd have to argue on which currency is local money here and now, or which one is "gradually becoming money" with the other, well, not demonetizing, but... we don't even have a good word for it.

Remembering the original definition of money, we discover that:

It's just natural that the longer the expected interval before spending, the more important a "store of value" property becomes, until it trumps any inconvenience in the "medium of exchange" department.

It's amplified by longer intervals introducing more uncertainty into technical details of future spending. If you leave an inheritance in that currency, you won't even see how spending happens! Or for shorter intervals, you may be unsure what country you'll inhabit by the time of spending, or future regulations and deregulations of trades in foreign currency in your own country.

The situation where people keep dollars and spend local currency may remind us on the Gresham's low: "Bad money drives good money out of the market".

It was several times reformulated (by Austrians as well) to avoid a depressing interpretation that "bad currency always wins currency competition", like this:

Artifically overpriced money drive artifically underpriced money out of the market.

If we have a relatively free currency exchange market in that country, it seems like Gresham's law is irrelevant. However, I believe in its applicability here. Let's just reformulate it again:

Artifically overvalued currencies drive artifically undervalued currencies out of the market.

There's a sense in which dollar is artifically undervalued here, when direct transactions are prohibited or restricted:

It's artifically undervalued as a medium of exchange.

Notice that it's the SUPPLY of "good money" driven out of the market (thing we see: money used in trades), but not necessarily the DEMAND for good money. It may just happen that no one asks for "good money", not expecting that you might be ready to spend them. Try offering your "good money" on your own initiative, and the real demand will manifest itself.

The situation when the local currency is "short-term money" and another currency is "long-term money" can be assessed in two opposing ways by an Austrian or a Keynesian:

[A]. Local currency became extremely risky: without anyone willing to hold it long-term, it has acquired significant liquidity risk in addition to its other problems (that has to exist, gived the dollarisation took place). A large trade by an influential economic agent that uses a local currency temporarily can significantly affect its exchange rate to dollar. Dollar is "almost the real money" here, and local currency is on the verge of demonetisation.

[K]. The problem of cash hoarding is finally solved in local economy, everything is spent and reinvested. Dollar, which used to be a competitor to local currency, doesn't impose a threat anymore, because it's just hoarded as a speculative asset in the hope that an exchange rate makes it profitable, not pretending to be "money".

We're used to a notion that each country has a local currency, used by its citizens for trade and savings. It reflects "the big picture" of the XXth century, leaving out countless exceptions as "minor details".

There's a good tool for understanding "dollarisation" process, using a thing that COULD happen in that "compartmentalized" world, causing similar effects on the economy:

Massive immigration to USA.

That is, "dollarisation is monetary immigration."

The only difference from an economic standpoint is that a full, physical immigrant would probably abandon his former local currency altogether, not having to keep a week worth of expenses in that "short-term money". But for an Austrian it's not much difference.

If something is money, and everyone knows what money is, but due to some foolish restriction, everyone has to exchange it for temporal tokens in day-to-day trade, there's still no doubt what is money and what is not.

Now consider the hoarders of physical gold ("gold bugs") as a community, dispersed all around the globe. Most of them purchase gold in anticipation of either leaving it as inheritance or selling it for higher price later. Some of them, however, envision a world where gold becomes universally-accepted money again, and they might perhaps be able to spend gold in direct transations (which is an extremely rare opportunity today).

Their theories about why and how "gold becomes money again" and their visions of the future are not unified. A lot of them are committed to the Austrian theory of money, by the way, and that's one of the reasons that I've decided to upgrade the theory to make it more useful.

According to our definitions, gold is a currency.

Remember the question mentioned above: How common is common enough?

In this text, however, I struggle to follow an important principle: quantity thresholds shouldn't be used to understand qualitative difference.

If we want to play numbers, let's play but not be too serious. Consider population, savings, resources and activities of the "Gold bug republic", worldwide. Consider the same for Bulgaria.

I love Bulgaria, but it's not exactly a large country. If we WANT to let quantities influence our qualitative decisions, I believe we could conclude that

Are gold bugs a country with their local money? Well, not exactly (because we know that the notion of "local money" is ridiculous and gets ridiculouser over time).

Are gold bugs a "virtual country with their local currency"?

Within the framework of Austro-Bulgarian theory,

The serious, real kind of "monetary immigration" is the immigration of savings, not the immigration of day-to-day spendings.

When a gold bug purchases anything from another gold bug for fiat money, each of them will somehow compensate the effect of the deal on their savings and their short-term spending reserve: the first one will save less (or perhaps even sell some gold to replenish his lack of fiat, if he has fiat income problems), the second will save more (or perhaps have to sell less gold).

This dealing of two people who are SECRETLY gold bugs is almost the internal affair in the Gold Republic, except they've used fiat currency as micropayment token.

When gold bugs are trading with external world, the effects are the same as if their "country" engaged in export, import and foreign investment. Price signals (showing how it's desirable to save, or how it's safe to spend or invest; gold:USD exchange rate is an indicator) are delivered between the "nodes" of golden network using the "medium of exchange" -- fiat currency with a larger market and more liquidity (so far).

The network of fiat currencies is almost safe now for this kind of short-term signal transmission. Interventions of central banks are known to have long-term effects on exchange rate, but not short-term spikes.

What about growing voluntary "currency communities" around the globe, using any non-fiat currency as a store of value? Exactly the same reasoning can be applied to each of them.

Existing theories of money have done a great damage to mutual intellectual relationships of those communities. It's typical to see a non-fiat money proponent accusing some other kind of non-fiat money holders in creating a commodity bubble or running a hoax.

Partially it's due to the miscategarisation of all possible kinds of money into commodity and fiat money. What's a third kind can possibly be, other than a hoax?

Partially it's due to some vision of the future, where multiple non-fiat money grow "big enough" to pose a threat to fiat money, and then...

And then one of them, with bigger market capitalisation, takes over the world! While all other competing communities have their money demonetized and their savings depreciated.

That grim picture has nothing to do with reality. For example, there will never be a global dump of bitcoins for gold, nor gold for bitcoins.

Neither will the largest cryptocurrency "eat up" smaller ones automatically. Risky cryptocurrencies are those who have crappy THEORIES and PHILOSOPHIES behind them (both ideas of their founders and ideas of their holders are important).

What is a bubble?

What if we have a non-fiat currency with sound theories behind it, and we see a rapid price increase? Can we decide that it's a bubble and what to do if it is?

Bursting of a bubble (any. single. one) is really a bursting of a family of subjective beliefs and presuppositions.

The general notion of the future being more-or-less like the past produces dangerous conclusion: if there's a "trend" in a price of some good, the trend will continue. Then something happens, "trend" reverses and the bubble bursts.

A currency with a small community, isolated from other non-fiat networks, necessarily has a liquidity risk. A network of "citizens" engaging in import or export, saving or reinvesting has too few nodes. it's like buying or selling a car in a small town: what if there just happens that no one wants to be your counterparty right now? You'll have to sell with a huge discount, etc.

A relatively small group of outsiders, noticing a random spike in exchange rate which they mistake for a short-term "trend", might try a short-term speculation synchronously, outbetting each other to ridiculously higher price. When there's no more outsiders AND there's a member deciding to spend some savings, the bubble bursts.

Not some "global bitcoin bubble", or "global gold bubble", or whatever. It's theories and believes of those who took a short-term price increase for a short-term trend.

There's nothing wrong, by the way, of a non-fiat currency buyer being just a speculator, which is in it for fiat money, and all that derogatory stuff. The bubble is amplified by those who LOSE money on speculation, and, conversely, MITIGATED by those who win (be it ANY kind of currency). Successfull speculators provide liquidity in risky times and take their reward in less risky times.

Rational behavior for anyone holding sound non-fiat currency during the bubbles is in itself compensatory. When you realise that your savings are now worth more, you can now decide to spend or reinvest some of them. When they depreciated and you feel poorer, it's a great time to replenish them. That's what always happens in sound money systems, and it took a century of fiat monetary mess to make some people learn otherwise. My savings have depreciated? Dump them all, because it's necessarily a monetary catastrophe out there!

No, not in this world. Not in this kind of communities.

I've smuggled a quantitative notion of "short-term" into my discussion of bubbles. I have an argument for a general dependency: the longer the timeframe of a supposed bubble, the less likely are "trend-followers" to see a SYNCHRONOUS signal of "trend starting" or "trend reversing" in exchange rate fluctuations. Their theories are similar, but subjective versions differ in perception of what's a "recent" trend and when did it start. It produces even more diverse visions of the future where the trend will end.

Due to this subjective diversity, trend-followers produce a superposition of "microbubbles".

However, the longer the timeframe of a microbubble, the less probable is the synchronisation of its "burst" with another microbubbles.

If two random trend-followers discovered a price signal yesterday, they may have very similar notions of "fair price", "bubble" and bursting.

If they've discovered a "trend" about half a year ago, there will be much more diversion in this similarity.

An alternative class of theories (that matters) to this "trend-following" bubble-producing beliefs are all monetary theories. They don't burst because of price trends (though some of them, for example, are prone to interpreting governmental restrictions on currency transactions as way more dangerous signals than they are).

I believe that the theory I'm presenting here will be worthy addition to this family, amending some preceding theories to make them more sound than they used to be.

When we compare currencies of the world as a future store of value, we're trained to look first and foremost on their "country of origin", considering the size of their local markets as an indicator for a large network of hoarders and reduced liquidity risk.

However, it might be happening right now that their fiat currecies are demoted to "short-term or micropayment money" for more and more market participants. Don't hope too much to see signs of this process in macroeconomic statistical data. The process is driven by beliefs and presuppositions, and that's what you have to use to understand it.

There are several invisible countries in the world, with open borders and mass immigration, that get right one of the most important thing that every other country gets wrong: money and savings.

If you believe that open borders and mass immigration are a recipe for disaster, then, well, just wait and see.

If you believe that governments are ABLE AT ALL to "create money" in any sense other than producing units of publicly-accepted, perhaps fear-based, deception-based and statism-backed, existing currency, well, just stop and think again.

Every currency is a valid "unit of accounting" as long as you can count it.

A voluntary currency's exchange rate to fiat money is a good indicator of external resources available for consumption and investment, should you spend or invest your savings.

If a voluntary currency continues to grow, there's a problem, however: return on the investment may indicate that it's profitable in fiat money, but not in a voluntary currency. Does it mean it was a malinvestment? If we believed in theories of "real money", rather than an institution of money including the whole set of currencies, we'd have to conclude it was.

This kind of discrepancy of monetary profits is an important indicator of the following truth:

Sometimes, money just won't tell you whether you've done a good thing or a bad thing. Sometimes, no one but God can do it.

Instead of setting out to earn units of a particular kind of currency, I recommend strategies related to what you WANT to see "working" in the world and how you can fix it.

I, for one, based on the market indicator's, decided to divest my TIME from earning fiat money (for 3+ months) and invest it, among other things, into developing a new theory of money.

In fiat currencies, you have a "stable" unit of accounting in relation to consumer goods, and a large, though shrinking, network of hoarders mitigating liquidity risks. Every single day, however, the observed stability can become yesterday's stability.

In voluntary currencies, you have honest weights and measures that cannot be had in any other way.

The moment you're reading this, your beliefs, presuppositions, plans and financial resources -- together -- might indicate that it's time for earning and saving or a time for investment.

If you're into savings, consider a non-fiat voluntary currency with a sound theory behind it.

If you're into investment, consider investing your time into rethinking monetary theory and reapplying it in practice.

If you've got some savings in a non-fiat currency, consider rebalancing them into another one (as all sound non-fiat currencies are "friendly" to each other). Diversifying into or out of gold and silver might be a great idea, if it's neither a risk nor a significant problem in your environment.

If you've got some non-fiat savings that you're ready to invest, consider creating a crypto-to-physical gold exchange (that kind of thing REQUIRES a founder that believes all sound non-fiat currencies to be equally "the real thing"; if you believe it, you might be one of the few people in the world to understand it). It might be very profitable in honest units of accounting, by the way.

I would be grateful first and foremost to some feedback criticising, expanding or applying this theory to new areas of life.

What happens, for example, to a society using grain as money? Isn't it the case that the rich would be able to hold large cash reserves and would be reluctant to dispose them, while poor literally would have to eat their future? Could it be the scenario behind the Egyptian monetary catastrophe? ("Our money have failed", by the way, is translated in Russian Synodal bible in another way, "We've run out of silver")

Can housing, as a commodity, be considered as a kind of currency network with units of awful fungibility, doubtful liquidity, but extremely accurately measuring people's time preference (buying vs. renting, no fractional reserve)?

Can local propaganda (in some countries) of inevitable demise of America, Europe or the West, long-term, be a smart attempt of de-dollarisation of local savings?

What would a typical central bank do when it receives rapidly changing price signals from the market where it believes ITSELF to be the main source of all significant influence?


Gary North --

For first lessons in Biblical Economics and many other things Biblical;

For bashing Bitcoin and open-source, making me want to come up with a coherent counterarguments for several years.

Cornelius Van Til --

For introducing me to the phylosophical problem of "the one and the many", giving me the most useful tool for reasoning about money.

Bojidar Marinov --

Among other countless things, for making me understand the importance of open borders (I had to repent of thinking otherwise).

NAKAMOTO Institute --

For highlighting "speculative philantropy" as a valid investment strategy;

For highlighting the importance of hoarders and liquidity for a currency, that temporary made me an unconditional "primacy of the store-of-value" proponent;

For making predictions about the demise of all cryptocurrencies but the most liquid, making me think why it doesn't happen and how it could happen from individual user's point of view -- and overall, first consider, than doubt the ultimate importance of a currency's network size and market capitalization

Grigory Sapov --

For intellectual guidance in all those years that made me leave statism and embrace freedom, gradually;

For using the notion of "unreal money", "speculated to be money in the future", as opposed to "everyday money" -- making me understand the nature of today's money as a speculation on tomorrow.

Yury Kuznetsov --

For his kindness and intellectual guidance, and

For a good introduction to cross-currency price signalling in "currency zones" in the world economy and local economies.

Jeffrey Tucker and FEE --

For supporting freedom,

And for introducing me to the "origin of money"-style theory of Bitcoin that I've found interesting but not coherent enough.

My mother, Olga Romanova,

Among other things, for making me formulate that while in physical processes the past and the present affect the future, in human action the vision of the future affects the present.

Anton Kovalenko 2017-12-11, Burgas, Bulgaria

APPENDIX I. How the money failed in Egypt

I believe I can now figure out, with our new theoretical tools, what could happen with the monetary system of Egyptians during trade with Joseph, and how exactly "the money have failed" their hopes -- without presupposing unlikely things like Joseph "not knowing what money is".

Let's say there's a nation of Egypt, with some local monetary system (details unknown, but there had to be one currency or more) and some common beliefs about money (probably some version of Natural Law applied to economics, or statism, or a mix of both).

Let's assume that Egyptians used to hold cash reserves in silver at that time.

And there is Joseph, a rich trader, probably doing his accounting in gold and silver (though not BELIEVING in money as the ultimate savior).

Joseph regularly offers his silver for Egyptian's grain.

How does it affect the local market of the nation of Egypt? How their beliefs drive what they do next?

There's a strong price signal sent by Joseph to the Egyptian society:

The price signal itself tells no reason why Joseph is doing it, what he believes about money and which good he will be ready to withhold during the calamity, and which he's going to sell anyway.

Grain liquidity increases dramatically.

If Egyptians are reasoning within some "natural economic law" framework, it's "natural" for them to start considering that

Fungible? Marketable? You bet. Most marketable? Well at least you can always sell it to Joseph. Liquid enough for a kind of money. And, by the way, it's an objective good having an obvious direct use value for ANYONE in the economy (poor people wouldn't have to think about exchanges and markets when they need food -- how convenient).

As more people decide to hold grain as "cash reserves", the demand for grain increases (new harvest might be too distant in time while this happens, or just unable to reverse the bubble significantly). Joseph, having enough silver, has to offer more and more for a unit of grain, but having a long-term business plan, he's ready to risk his cash.

For long-term holdings, Egyptians are engaged in comparing "currencies" on their "currency merits", applying their presuppositions to their experience of the past and present.

Grain, they think (after the process has been going on long enough) is a reliable, most liquid currency. It APPEARS that the richest man around here is also using grain as money (why else would he want to hold it). He worships Almighty God? Yahweh? How is it at all relevant? We all have our religions, and we're talking the economy, stupid!

Some long-term savings are rebalanced into grain, further driving silver depreciation in the local market.

What could a smart Egyptian do?

If he just happens to believe strongly that silver is "real money", in a sense (perhaps knowing it's a popular currency in the greater world), he discerns the times as a wonderful opportunity to earn and hoard silver.

If he's into Pharaoh or the State "making one things real money" and all that stuff, he's less then sure. Maybe grain will be made into a new common money.

If he's a modern economist, he might conclude that silver remains real money while grain is a commodity bubble. The argument is that when direct consumers are priced out of the market, there'll be no demand for direct consumption and the bubble bursts.

The problem is, silver has its direct uses as well (as silver depreciates, we're starting to see MORE INSTANCES of its direct use). How could we know "by pure practical experience" that silver was not a commodity bubble in the first place, which is bursting now?

If our Egyptian is unready to use Biblical Economics and hesitates to learn from Joseph, about the only kind of presupposition he has to apply is that "the future will probably be like the past, more or less".

On shorter timeframe it means that silver will continue to depreciate, just as it depreciated for [some interval].

On longer timeframe, there may be reasoning about "there never was a commodity bubble in our land, it always meant new currency" (very probable in relatively free economy), and "silver already proved two times to be a commodity bubble" (very probably in regulated economy where government aspires to "introduce money" and could have successfully tried "demonetization of silver" a couple of times).

Therefore, he concludes, there's a reason to continue dumping silver for reliable grain.

The process accelerates until the silver is virtually useless as money, and put to direct use by the Egyptians. Transactions in grain become common.

From a natural law point of view, it's just a new kind of commodity money emerging on the market. Let's free market decide, right?

Biblical Economics tells another story.

Rich people are holding large cash reserves in grain. Grain is "obviously the money", locally, and Joseph is not regarded as a currency exchanger anymore: it's just when you need silver to make a silver cup, you may always buy it in his silver store.

Poor people work for grain, with the poorest (supposing equilibrium on a free job market) being unable to save ANYTHING for future investment, they just have to eat all they earn to survive. Well, at least they're saved from the hassle of purchasing food on the market!

The most popular, well-paid kind of work is growing and reaping the grain. No one is allowed to eat the grain in the field while working, because it would be like allowing an engineer fixing the printing press to take home some banknotes ("I was just testing the machine"). Every other economic activity is in decline.

I understand nothing in growing grain, but it seems likely that an overexploitation of the fields, in itself, is not good for future years. And that overexploitation is exactly what happens. Green Party could have helped, but... it's the economy, stupid!

When new grain is reaped, some rich people curse their gods for depreciation of their savings (we've at least come to think that it's a new, reliable currency!). Poor people thank their gods for remaining alive.

Sooner or later, moderately poor people have to eat their savings. They now also have to eat everything what they earn, having no power to invest in local market.

Hey, looks like our savings have stopped to depreciate! Demand for grain increases.

Moderately rich people come to the same position. Well, at least savings are not depreciating ("prices are not rising") - but we have to eat some of them now.

What to do in an economy like that?

Purchase some silver? You must be mad. We're out of money, gradually eating our cash reserves, and you propose an act of luxury consumption.

"Make silver into money" again? That just doesn't happen this way. Who are you to establish and disestablish money? Pharaoh? Well then you could try. Except that everyone knows that the last time silver was a commodity bubble!

We're all out of grain!

The silver is formed into silverware and jewelry.

There's no idea what to do. The economy was running normally! How is that our money had failed? We've run out of grain. We've "run out" of MONETARY silver earlier. We've run out of money!

Perhaps Joseph might at least give us some food.

Suppose that there was a trader in the land of Egypt who had Biblical understanding of economics.

He'd be the only one unaffected by Joseph's "trick", becoming rich in silver in process. (There's nothing about "objective value" of silver, just general understanding of God, money, trade, and savings, and obedience to the law saying not to withhold grain).

He'd be able to move to any other country or remain, as a free man, to help Joseph teach Egyptians some real economics.

It's not ANY market signals that connected our trader to the same "monetary safety net" as Joseph or the whole civilised world. It's their shared knowledge and understanding of God's word.

If you're a secular Austrian economist, it's a good time to think. Even buying bitcoin or gold should be delayed before you make an important decision.

Are "Christian libertarians" and the like just closet Austrians with some re-baptized economic definitions? Most of their conclusions were very similar all the time.

Are free market institutions product of human action, but not human design? Well that's obvious.

Are they products of natural evolution, as opposed to anyone's design? Then you're among the Egyptians trading with Josephs, which is not a great business plan. Ah, we all know, economic knowledge can't make you rich. If you believe it to be the case, are you sure as well that economic ignorance can't make you poor?