Disparate theories of money and credit separate libertarians on the “left” and the “right”. These historical disagreements seem more significant to me than disagreements more in vogue today, and they remain significant, because a free community without money and credit is hardly conceivable. I can easily imagine a free community without marriage licenses, gay, straight or otherwise, but the cooperative social organization that libertarians imagine is hardly conceivable without property, money and credit.

Of course, a community without marriage licenses is not a community without romantic relationships. Romantic relationships don’t require a license, but efficient, decentralized, economic decision making does require money and market prices. I identify more with the “left” than the “right”, but I don’t take seriously any left libertarian disputing this necessity. That said, what is a left libertarian position on money and credit? How does this position differ from positions on the right, such as Nick Newell’s critique of fractional reserve banking?

My goal here is to present an alternative to the reader, not to prove one monetary system right and others wrong. Libertarianism does not assert one, true formulation of property, money and credit. It gives free people choices.

Credit vs. renting money

Differences between “left” and “right” involve the sort of money available to free communities and the sort of money likely to emerge without a state imposing an exclusive legal tender. “Right” libertarians often favor hard money, like gold or silver, with a value determined by its scarcity. Bitcoin appeals to some of these libertarians for similar reasons. “Left” libertarians have opposed this sort of money and attribute its historical prevalence more to statecraft than to free markets. Arguing from the left, I’ll defend the following propositions.

1. Money need not be scarce, i.e. money need not have any scarcity value. Free people may create as much money as they need as they need it. [Scarce money is a product of the state.]

2. Credit does not require interest, where “interest” describes a monopoly rent on scarce money. [This sort of monopoly rent is an illiberal artifact of statecraft.]

My defense of these propositions is constructive. I will describe money without scarcity value and credit without interest in the context of a free market. [The bracketed assertions are defensible historically, but I won’t defend them here. We can discuss them in the comments.]

Money, credit and a standard of value

“Money” here describes a good that persons accept in trade only to exchange it thereafter for other goods. “Credit” describes a transfer of title to property over time, with payment for the property in installments accompanied by payment for use of the property pending completion of the title transfer. “Standard of value” describes a commodity relative to which other goods are valued.

Historically, precious metals like gold and silver have been standards of value, but the standard of value I’ll discuss is grade A whole milk, more specifically a generic brand of grade A whole milk sold by Walmart. Walmart itself may be the only authority defining “Grade A Whole Milk”, or a community authority outside of Walmart may define it and require Walmart’s milk to meet the standard.

Gold or silver can also be a standard of value for extending credit without violating any libertarian principle. I use milk here to avoid confusion with historical systems. [The problem with historical systems involves states imposing a monopoly. We can discuss this history in the comments.]

The money I describe here is a negotiable coupon issued by Walmart and redeemable on demand at Walmart for a gallon of this milk. The monetary unit is one gallon (1 G), but coupons are divisible. The market price of another good may involve a fraction of this unit, but the price of Walmart’s brand of grade A whole milk is definitively 1 G per gallon. Walmart issues these coupons to finance the purchase of houses as follows.

Only real property is scarce

You own a house, and I wish to purchase the house. We agree on a price, 120,000 G, for the house; however, I don’t have 120,000 G lying around. I have my labor and other resources, and I expect to earn far more than 120,000 G over the next twenty years, so Walmart agrees to purchase the house on my behalf and to sell me the house in installments over twenty years. You receive 120,000 G from Walmart immediately, and I agree to pay Walmart 500 G per month for twenty years to purchase the house.

Money is not scarce in this system, but houses are. Libertarians oppose rent seeking and monopoly rents imposed arbitrarily to benefit cronies of the state, but scarce resources monopolized by individuals require a rental value in a market system in which the price of a scarce resource emerges from voluntary exchange. As the future owner of this house, who will eventually be entitled to its rents myself, I accept this principle, so I don’t expect to occupy the house before owning it without paying rent.

In addition to paying 500 G per month to purchase the house, I agree to pay 480 G per month to occupy the house before owning it; however, since I gradually acquire title to the house, I will not pay 480 G per month every month while I purchase and also rent the house. Each payment of 500 G purchases 1/240th of the house, so after my first payment, I own 1/240th, and Walmart owns 239/240th of the house. After one year, following my 12th payment, I own 1/20th of the house, and Walmart owns 19/20th.

During the last month of this agreement, Walmart owns only 1/240th of the house, so I expect to pay only 1/240th of the rent paid in the first month. Since 480 G per month amounts to 5760 G per year, and since 5760 G is 4.8 percent of the agreeable price of the house, I offer to pay 4.8 percent of the price of the house I have not yet paid to rent the house each year or 0.4 (4.8/12) percent of this price each month.

Walmart accepts this logic, so we finally reach the following agreement. Walmart essentially divides the house into 120,000 shares each with a price of 1 G. I will purchase 500 shares each month and also pay 0.4 percent of the price of shares I do not yet own each month. After the first month, I pay 480 G (0.4% of 120,000 G) to rent the house, but after my last month, I pay only 0.4 percent of 500 G or 2 G. In other words, the price to rent 500 shares of the house for a month is 2 G. The price per share is 2/500 G or 4 milligallons.

Money emerges

After this transaction, you own 120,000 G, and Walmart owns 120,000 shares of the house, and I have a contract with Walmart entitling me to purchase 500 shares per month, while paying the rent described above, until I own all shares. [We may also say that you own 120,000 shares of the house initially and that Walmart only holds the title to the house on behalf of its shareholders. Let’s discuss this distinction in the comments.]

You may redeem your coupons for milk immediately, but you have no immediate use for so much milk, storing milk is very costly, and you cannot profitably resell the milk. The impracticality of demanding so much milk at once is a benefit of milk, compared with gold or silver, as a standard of value. A gold standard, particularly a statutory standard imposed on everyone through a legal tender law, is more vulnerable to bank runs.

You may also deposit the coupons with Walmart. Walmart will pay you 3.6% of the value of each coupon deposited each year or three quarters of the rent it collects from me. A coupon deposited with Walmart may not be exchanged for milk until it is withdrawn. [4.8%, 3.6% and other values discussed here are hypothetical. Market forces determine these values in practice.]

Walmart pays you to deposit a coupon less than I pay Walmart to rent a corresponding share of the house, because Walmart provides accounting, arbitrage and insurance services, and these services are valuable. The difference is not (or need not be) a monopoly rent on scarce money. An agreeable price per month for the services is a fraction of the rent, so for the sake of simplicity, Walmart includes the price of these services in its share of the rent, i.e. Walmart accepts my offer of 480 G per month for the rent only because this sum also compensates it for the other services.

You may also exchange the coupons for other goods at Walmart or for the goods of anyone else willing to accept the coupons in trade.

I must obtain these coupons to pay for shares of the house and to rent shares I don’t yet own as agreed, so I must exchange my labor for the coupons. I may work for Walmart, or I may work for you, or I may work for anyone else possessing these coupons. Walmart reaches these agreements with many house sellers and buyers, so many opportunities for employment exist.

Money is a product of credit, not the raw material

In this way, Walmart creates a generally accepted medium of exchange, but no one rents the money itself in the credit transactions described. Money is a product of this system of credit, not the good lent. The house is the good lent, and only the house yields a monopoly rent.

Since you own milk coupons, you might lend these coupons to others and charge interest, if you can earn more than the 3.8% that Walmart pays you to deposit the coupons. If this business model is profitable, the money does have scarcity value; however, you must earn considerably more than 3.8% to profit, because you have all of the accounting, arbitrage and insurance costs that Walmart bears, and you compete directly with Walmart. Walmart has no monopoly on these services, but when its money has this sort of scarcity value, a left libertarian looks for constraints on credit imposed by a state.

Unsecured credit and renting oneself

Walmart’s credit model requires valuable collateral, like houses, securing the coupons it issues. The coupons have enduring value only because this collateral has enduring value. The coupons are redeemable for milk only because milk is the standard of value against which the value of collateral is measured. Their value actually reflects the value of a house or another durable good, not the value of milk or the value of the buyer’s labor.

An unsecured loan is not secured by collateral like a house, but “unsecured” seems a misnomer in light of this credit model. If I borrow 1000 G and repay the loan with interest, what am I purchasing/renting in the sense that I simultaneously purchase and rent the house above? The answer seems to be myself. Essentially I sell shares of myself to the lender and then repurchase these shares while renting the shares I have not yet repurchased.

If I improve myself in the process, selling and then repurchasing myself this way may be worthwhile. With this assumption, I do acquire something in the process, a valuable skill or improved health for example. If I acquire something, we can possibly understand the loan as a gradual transfer of valuable property, as with the house, or as the creation of valuable property that did not previously exist, but if I only maintain myself, the resemblance to selling myself only to repurchase myself is difficult to ignore.

Libertarians don’t want to be owned by others. If self-ownership is an inalienable right, we cannot be owned by others, so this ownership is never enforceable. If borrowing money is equivalent to selling and repurchasing oneself, it is slavery in all but name. We can defend the utility of this slavery, but we can’t deny that selling and repurchasing oneself violates an inalienable right to self-ownership. Renting scarce money arguably violates this right. If a free person may not sell herself, then she may not be forced to repay an unsecured loan of money either.

Usury is slavery in disguise, but we need not be slaves. A freer world is possible, but no state will build it for us.