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Comments on Block and Barnett on the Optimum Quantity of Money

My friends Walter Block and William Barnett published an interesting paper several years ago, “On the Optimum Quantity of Money,” Quarterly Journal of Austrian Economics, Vol. 7, No. 1, 2004, pp. 39-52. At a Mises Institute conference in 2010 or 2011, or perhaps in a phone call with Walter, I believe we  discussed this issue and some papers they had written about this. I disagreed with Walter and, after reading their full paper, sent them some critical comments. These (lightly edited), with some prefatory and additional comments, are appended below.


Prefatory Note

In this email, back in 2011, at the dawn of bitcoin, I said bitcoin seems almost like an “ideal money”. Too bad I didn’t act on it… :

(IN the bitcoin thing with digital currency, you can arbitrarily increase the granularity by adding more digits; in such a digital numeraire (which I confess I sort of think is the ideal money, in some sense, though not in a practical sense given some political and other problems), you never need to increase the supply at all (once it reaches its asymptotic maximum), because any supply truly is enough: you never face the granularity problem you guys allude to.

The “political problems” I referred to was my belief that if Bitcoin were to gain steam and look like it might succeed, the state would sense this threat and stamp it out, much like FDR outlawed gold in the 1930s. This is why, on Aug. 15, 2012, I made a $100 bet with Vijay Boyapati that by the end of 2012 the price would be much lower than it was then. It was about $13.50 at the time. I said it would be less than $0.65 by Aug. 15, 2013, or one-twentieth its current price. By Feb. 2013 the price had almost tripled to $30 so it was clear I would lose the bet, so to cut my losses I paid Vijay $90 in 3 bitcoins purchased from Coinbase. And so it started.

Walter also wrote this to an Austrian economics email list a couple years later:

This paper argues that money is a part of wealth, that it is a “good”:

Barnett, William II and Walter E. Block.  2005.  “Money: Capital Good, Consumers’ Good, or (Media of) Exchange Good? Review of Austrian Economics. 18 (2): 179-194;

These papers claim that “the issue with having more or less of (money)” is a very important one:

Barnett, William II and Walter E. Block. 2004. “On the Optimum Quantity of Money,” Quarterly Journal of Austrian Economics, Vol. 7, No. 1, pp. 39-52;

Barnett II, William and Walter E. Block. 2012. “The Optimum Quantity of Money, Once Again.” Economics, Management, and Financial Markets; Vol. 7, No. 1, March, pp. 9-24;

All three papers critique Mises and Rothbard. I’d be curious as to how many people on this list agree or disagree with me and Bill on these issues.

And see also David Howden’s recent piece, A Refinement to the Typology of “Goods”,  an interesting attempt to clarify some related matters.


Kinsella to Walter Block & William Barnett, II

Dec. 1, 2011


I read your first paper.1 (My marked up copy attached.)

I’ll give you my (very amateur) comments.

During a brief talk just now with Walter, I asked this: Money arises from a valuable commodity like gold. The gold then has monetary value and value for non-monetary purposes. Is it possible for the gold to remain as money even if lost all other value?2 That is, suppose it became useless for industrial purposes and nobody liked it for ornament or jewelry. Walter agreed it could remain money.

I then asked: if someone then mined gold and coined it, would this be good? He said yes, because of Rothbard utility and welfare economics. And also because of this “granularity” (my word) issue you note on p. 47. There you say:

The value of the new money would arise out of the additional transactions
that would be made possible by its existence. That is, there would be transactions, previously impossible to undertake because the cost of using valuable gold to mediate such was excessive, which would now be made possible because the new monetary gold reduced the value of money at the margin. There are, at any time, a variety of potential exchanges. Some of these would create a great deal of value; others only a minute amount. The value that would be created by some potential exchanges is so small that the utility of gold in facilitating such exchanges would be less than its utility in nonmonetary uses. In such cases the potential exchanges would not occur.

To me this was the most intriguing and interesting argument, and much of your argument relies on this, yet it’s just asserted here as if this is obvious or established. It’s not defended at length or in detail. So to me it’s like an assertion. Maybe this is well known or seems obvious to you, but not to me. I think this needs much more argument to sustain it.

And if it’s correct, then it seems you are wrong to write:

in a fiat-money-using society, the optimal quantity of fiat money is whatever is in existence, and, from an Austrian perspective, that quantity should never be changed, either increased or decreased, save for its complete elimination in shifting to a commodity money”

For after all, if you increase it, then you facilitate additional transactions, just as when gold is increased (assuming your argument first quoted above is right). So isn’t this a contradiction or inconsistency?

Your paper it seems to me goes astray by weirdly straying back and forth from wertfrei to normative libertarian analysis. I’ll give some quotes below, to back this up, but you seem to argue this:

  1. Rothbard thinks producing more gold money is socially wasteful.
  2. Therefore Rothbard (must? does implicitly? “should”?) believe that the governemnt or private law “should” prohibit more gold coining.
  3. But Rothbard is a libertarian and does not believe this.

This is a weird argument. You attribute a false view to Rothbard, one that he does not hold, one that contradicts his libertarianism, and then announce that there is a contradiction. You attribute 2 to him as if it follows from 1. I do not think it does.

Just because you think something is socially wasteful does not mean you believe it should be outlawed. It is socially wasteful for me to make a bad investment. Hey, mistakes happen. My view is that from understanding what money is and why it arises, we have an idea as economists as to what characteristics would likely accompany the things selected as money. In prison it might be cigarettes but that is not as ideal as gold coins for obvious reasons. The cigarettes would be money but not as ideal as something else. So what? You use what is available. Gold might be the best thing available but that does not mean it is ideal. For example you would probably agree (I think) that in a world of gold money, where gold has lost all its non-money value and now is only valuable as money—a world where this gold is rare and very hard to find—would probably be a more ideal money, than a world where there is a huge pocket of gold that someone might stumble onto and increase the supply of money by a factor of 10,000. Right? To me this implies that (for money purpose) the harder it is to find, the better;3 in the limit, this means that if we had a totally fixed supply of money that would be the ideal money.

Now I can see only two exceptions to this. First, the issue that it becomes too valuable to serve as money any more (the atom issue you mention on p. 49). There, I agree with you. But that is not the issue at hand, I don’t think. Second, the granularity issue you bring up: but I am not persuaded of this, since you only assert it in a paragraph with skimpy reasoning.

I agree that in our world, finding more gold is good in that it makes more non-monetary uses possible. I think it’s socially wasteful in the sense of causing price inflation, but that’s a cost of having imperfect money in the real world. It’s not a rights violation. It’s just …. not as good as it could be if money were even more ideal.

Now here are some of your impermissibly normative comments: where you hop back and forth from economics to norms, and attribute norms with no justification to Rothbard:

If Mises and Rothbard are correct, then any additions to the stock of gold should be allocated only to uses as jewelry or as contacts.

If you believe this, then you are wrong (IMO). The “should” does not follow. In any case this is an impermissible assertion both as an economist and as a matter of logic. If you are attributing this to Rothbard—where is the evidence? I am sure he would disagree. He might say: “no, there are no rights violations, and so this social waste has to be permitted. Would that we had a better, more fixed, supply of money. But alas, we don’t.”

And what if someone owned gold bullion and wanted to destroy it? Rothbard as a libertarian would say he has a right to, and as an economist would say that this increases overall welfare. So he would not say it “should” be allocated to jewelry or contact use—not if the owner wanted to destroy it.

given his law that additions to the stock of monetary gold do not confer a social benefit but that additions to the nonmonetary stock do, it does not follow, as Rothbard says it does, that “the supply of money, like all other goods, is best left to the free market.”

I think it does follow.

Rather, it follows that the market should determine the supply of gold for nonmonetary purposes, but there should be a prohibition on socially wasteful additions to the stock of monetary gold.

Why? Libertarians don’t believe that just because something is “socially wasteful” that it “should be prohibited”. Where do you get this from?

And note 5:

If the case can be made that no newly mined gold should be monetized,

Where do you get these “shoulds” from? Are you speaking as economists? Or as libertarians? Or saying what Rothbard would say (should say? is implicitly saying?)? It apparently seems obvious to you that if you declare something socially wasteful you are willing to prohibit it. I am frankly mystified why you think this. The only thing I can think is that you have to argue this, to put the prohibition stuff in Rothbard’s mouth, so as to show he is contradicting his libertarianism. And then you can say: well what leads him to ethical contradiction is his erroneous assumption (about the optimum quantity). But this is a strained attempt to do that. You are basically trying to show that the economic premise is wrong, by showing that it leads to libertarian contradiction ….


if Austrians (e.g., Mises and Rothbard) are calling for an unchanging stock of the monetary metal,

Why do you say they are “calling for” it? (with the implication that they are calling for a legal prohibition on changing)? Just because you have a view as to the nature of money, does not mean you want to outlaw deviations from this.


This supports the (false) position that a voluntary increase in gold money in a free-market economy is a case of “market failure,” and invites governmental intervention to correct the “problem.”

“Invites” it? Why? And I don’t agree that Rothbard would view coining new gold as market failure any more than he would say that use of cigarettes as money in jail is market failure. Just because cigarettes are terrible form of money (as are coconuts, seashells, bananas, etc.) compared to gold, does not mean there is market failure if these items serve as money in some community or social context.

“Moreover, the logic of the positions “[e]ach individual and all individuals
together always enjoy fully the advantages which they can derive from indirect exchange and the use of money, no matter whether the total quantity of money is great or small” (Mises 1996, p. 421 emphasis added) and “[w]e conclude that there is no such thing as ‘too little’ or ‘too much’ money” (Rothbard 1993, p. 670) implies that existing gold coins should be converted into use as jewelry or contacts.”

An economic view does not imply anything normatively—not a mere “should,” and not a “should be illegal” either. And so what if Rothbard did merely believe it “should” be converted—as long as he didn’t want to mandate it by law, there is no contradiction.

“The only way to prevent, or at least lessen, such a “socially-valueless” use of resources would be governmental intervention.”

That may be true, but who says Rothbard wants to prevent it??

Thus we again arrive at a fork in the road, facing two possibilities. First,
the free market is inefficient, i.e., it allocates some of the new or extant gold
to a valueless use as money, when it could and should have diverted it to a
valuable use in jewelry or contacts,

As I noted above re market failure, I don’t see that this implies the market is inefficient. Only that actual money is not perfect. Would use of sea shells as money mean there is an inefficient market? Does a free market guarantee that the most perfect money imaginable will be found? I don’t think so. And again: note the should here.

The logic of seeing that as a problem is that we should never produce anything

Sloppy language again—does the “should” merely mean a moral or ethical “ought”? Or a legal should, as in there oughta be a law? If the former, … so? there is no problem. You can have whatever moral opinions you want about what “should” be done. That does not mean your economics are wrong. And again: you are assuming Rothbard sees the social waste of money production as “a problem” … not only is this wording prone to equivocation, I don’t think that you support this contention. You just keep assuming that Rothbard thinks recognizing social waste implies some kind of rights are violated and thus it should be outlawed. Where does Rothbard say that money production violates rights? Why do you assume “social waste” implies rights violation?

On p 49:

It is true that this infinitesimally small amount of gold could intermediate
all of modern trade, but it could not do so efficiently. If it could have done so
efficiently there would have been no additions to the stock of gold money as
such uses have non-zero opportunity costs.

Just my amateur comment here: but when I read this it seemed like you were making a circular argument here, because you were relying on, merely restating your own argument, in an attempt to shore it up.

In note 15, you talk about atoms of gold. I am not sure that I agree that the atoms pose a limit…. why couldn’t the atoms be co-owned…? I am not sure about this.4 Maybe you could just keep using math—increasing significant digits. Again, I am not sure. (In the bitcoin thing with digital currency, you can arbitrarily increase the granularity by adding more digits; in such a digital numeraire (which I confess I sort of think is the ideal money, in some sense, though not in a practical sense given some political and other problems), you never need to increase the supply at all (once it reaches its asymptotic maximum), because any supply truly is enough: you never face the granularity problem you guys allude to.)


Those were my comments to Walter and Bill. A few further observations. As I pointed out above, note that they go back and forth (and confuse) positive and normative issues. Money must arise as a commodity, but as Mises pointed out (and we all seem to agree) it can lose all nonmonetary functions (industrial and jewelry) and still remain a money. That, in my view, and the view of Hoppe, Mises, and others, settles the question that money is not a production good, nor a consumption good, but instead a sui generis good.5 An increase (or decrease) in the quantity of such a money without any non-monetary uses, then, while of course permissible from a normative point of view, does not have any effect on overall social wealth—unlike the increase (or decrease) in the quantity of normal goods, that is, producer or consumption goods. Otherwise Block & Barnett would also have to admit that an increase in paper money has a positive effect in making more transactions possible.

And actually, more commodity money without any nonmonetary uses reduces social wealth, as resources would have to be committed to its production which could also be used to the production of consumer or producer goods, and in this regard more paper money would be even better than more commodity money since it is essentially costless to produce.

  1. The first paper being Barnett, William II and Walter E. Block. 2004. “On the Optimum Quantity of Money,” Quarterly Journal of Austrian Economics, Vol. 7, No. 1, pp. 39-52. The second may have been the followup paper, Barnett II, William and Walter E. Block. 2012. “The Optimum Quantity of Money, Once Again.” Economics, Management, and Financial Markets; Vol. 7, No. 1, March, pp. 9-24, but I cannot recall for sure. []
  2. See Rothbard: “it does not follow from this analysis that if an extant money were to lose its direct uses, it could no longer be used as money. Thus, if gold, after being established as money, were suddenly to lose its value in ornaments or industrial uses, it would not necessarily lose its character as a money. Once a medium of exchange has been established as a money, money prices continue to be set. If on day X gold loses its direct uses, there will still be previously existing money prices that had been established on day X – 1, and these prices form the basis for the marginal utility of gold on day X. Similarly, the money prices thereby determined on day X form the basis for the marginal utility of money on day X + 1. From X on, gold could be demanded for its exchange value alone, and not at all for its direct use. Therefore, while it is absolutely necessary that a money originate as a commodity with direct uses, it is not absolutely necessary that the direct uses continue after the money has been established.” Man, Economy, and State. Block and Hoppe also agree; I think Mises does too but can’t find it. If any reader knows a Mises quote on this please send to me. []
  3. See the “stock-to-flow” concept discussed re Bitcoin Saifedean Ammous in ch. 1 of The Bitcoin Standard and by Plan₿.  []
  4. See the famous account of the stones of Yap used as money: Nick Szabo, Shelling Out: The Origins of Money; Rai Stones (Wikipedia); J.P. Konig, Yap stones and the myth of fiat money, Moneyness. []
  5. See Mises, The Theory of Money and Credit, ch. 5, §1, “Money Neither a Production Good nor a Consumption Good“; Rothbard, Man, Economy and State, with Power and Market, ch. 11, §4. Barnett & Block disagree: Money: Capital Good, Consumers’ Good, or (Media of) Exchange Good? (2018); Thorsten Polleit, Why Governments Hate Currency Competition (“Money is no consumption good and no production good. It is the exchange good, a good sui generis. I should also note that money is not a claim on goods, and in a free market, no one is obliged to give you something for your money.”). []
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