At the annual Property and Freedom conference in September 2024, Hans-Hermann Hoppe criticized Argentinian President Javier Milei. Hoppe’s critique is, in summary, that Milei compromised on principle in pursuing his goals, and that he is more like a Reagan or Thatcher than a radical libertarian. Milei responded in an interview in December, but surprisingly, he only engaged one of Hoppe’s points at any length. Hoppe had said Milei should have closed the central bank on day one, Milei responded that this would have created hyperinflation. Milei’s counterargument, like Hoppe’s initial critique, is a matter of pure theory rather than practical politics: is a central bank needed to ensure the value of fiat money?
Milei’s Bad Arguments
How would closing the central bank lead to hyperinflation, according to Milei? The argument is pretty straight-forward: the pesos in circulation in Argentina are a liability of the central bank—like all fiat money in the modern world—so if you close the central bank, they lose their value, as there is no longer any institution that promises to back or redeem the liabilities. This is no different from what happens with the liabilities of other companies and institutions.
This argument must be seen in connection with a second point, which Milei hinted at: the last period problem. A fiat money only has value to an individual because others are willing to accept it in exchange. Now, at the end of time, there will no longer be anyone left or willing to exchange. That means that, in the period just before that, no one would be willing to accept fiat money, since they knew they wouldn’t be able to spend it, and the same would then be the case in the period just before that period. And so, in a logical process of backwards-induction, we come to the conclusion that a fiat money cannot have any value today, since it would not have any value at the end of time.
If the last period problem destroys the value of fiat money, the central bank or some other institution is needed to provide some positive value to money. Yet how does it do this if there is no redemption of money into something else? The answer is what is called the asset-backing theory of money. Backing theorists assert that money is in fact backed by and redeemable into something—the obligation to pay taxes in standard money, or the loans and bonds on the balance sheet of the central bank. This is no different today than on the gold standard, except that, on the gold standard, redemption in gold was a third possibility.
Thus, the Spanish economist Juan Ramón Rallo in his defense of Milei argues that the central bank is crucial for the supply of money and that the assets that it holds determine the value of the currency it issues. What makes the peso a bad, inflationary money is the quality of the assets backing it, not the rate of inflation, and removing all backing from the peso—the consequence of abolishing the central bank—would drive the value of the peso to zero, resulting in a hyperinflation, as Milei stated. While the asset-backing theory of money is not widely known, it has a long pedigree. Its modern formulation stems primarily from the economists Thomas Sargent and Neil Wallace, but it is really just a modern version of the old real bills doctrine. It is thus no surprise that Rallo, a key defender and seeming influence of Milei, is known for his support of the real bills doctrine.
How Money Really Works
Javier Milei and his defender Juan Rallo argue against key tenets of the Austrian School in the realm of monetary theory, not only against positions unique to Hoppe. For while modern free bankers have some affinity for the real bills doctrine, Mises and his followers were and are committed to the tenets of the currency school and the quantity theory, rightly understood. But are Milei’s arguments successful?
The Final Period Problem
Let us take the final period problem first. If, at some point in the endless future, there are no more exchanges, and thus, no more demand for money, does this have any relevance for the value of money today? Backward induction from the endless future implies that a pure fiat money would today have no value. While the argument is logical as far as it goes, it overlooks a crucial point: time preference and discounting.
Expected future costs and benefits are discounted to the present when a person acts. The future costs of a given action may exceed the present benefits, but a person may nevertheless still undertake it, since what matters is the discounted cost in the present. Similarly, in the case of money, it might be true that fiat money is worthless in the far future, but this must be discounted to the present. In fact, the end of time is probably outside most people’s planning horizon and would never enter into their deliberations before acting. What matters when evaluating one’s cash holding is the expected value of money in the immediate future, not speculations about the end of time. So there is no difficulty in fiat money being valuable.
While the final period problem is formulated in relation to fiat money, it would also affect other kinds of money. A commodity money such as gold is valued partly for its industrial and consumptive uses, partly for its use as money. Yet gold, too, would have no monetary use at the end of time, so it could not in the present have any monetary value. That is, people would only value gold for its non-monetary uses. Is it really a reasonable conclusion that only demand from industry and jewellers determined the value of gold on the gold standard? Yet this is the conclusion we are forced to if we accept the final period problem.
More generally, the problem only exists in the reified world of mathematical economics, where you model time as a spatial dimension. An objective fact at the end of the timeline is, in this world, just as real as an objective fact at the beginning. But this is not the case. As a philosophical point, it must be stressed that the future does not exist—only the present exists. And, in economics, what matters is not what may objectively come to pass in the future, but present expectations about what may come to pass and present subjective valuations of expected future outcomes.
The Central Bank and Backing Theory
As the final period problem is not a real problem, we don’t need an alternative theory of the value of money. However, what merit does the proposed backing theory have? Not a lot, as it turns out.
Money is, first of all, in no real sense, a liability of the central bank. You do not have an enforceable claim against the American central bank or government if you hold a dollar, nor does an euro note grant you a claim against the ECB, and so on. That dollars are recorded as a liability on the balance sheet of the Fed is a vestige of the gold standard, when the Fed really was liable to redeem Federal Reserve notes in gold. The same holds true for other central banks. It is simply an accounting fiction that helps the central bank keep track of its issue, nothing more.
What then about the assets of the central bank backing its currency? Is it not possible to redeem money into the bonds and other assets it holds? Well, no. The public has no better access to assets on the central bank balance sheet than it does to the market where said assets are traded. The only connection between the assets of the central bank and the currency it has issued is historical: its money entered circulation initially through purchase of its current assets. There is no current tie between assets and liabilities, as backing would require. The value of fiat money is completely independent of the value of central-bank assets, since there is no way to turn your money into these assets except by buying them. If that is backing, then money is backed by any service or commodity offered in exchange. Yet it does not sound quite as convincing if you argue that the value of money is backed by tinned tuna and dentistry.
The backing theory is, as mentioned, a version of the real bills doctrine, which has again and again been dissected and refuted by Austrian and other economists, most recently by Philipp Bagus. According to the real bills doctrine, a bank can safely expand its circulation and increase the money supply without causing inflation, if it does so on the security of short-term real bills (i.e., bills originating in real economic activity). So long as a bank or central bank acts in this way, it cannot issue more money than is needed. It is from this thesis that backing theorists—quite logically, it is true—conclude that the value of the money in circulation depends on the assets “backing” it. Yet the real bills doctrine fails, since it does not see that the value of bills is not independent of bank action. If banks lower their discount rates, more bills will be presented for discounting (and the same bill multiple times) and the nominal value of bills will increase.
Closing the Central Bank
What would then really happen if Milei followed Hoppe’s advice and closed the central bank? We can dismiss his own scenario of hyperinflation, as it is the product of wrong-headed theories. Rather, the opposite would likely occur—the peso would appreciate greatly in value, to the benefit of holders of Argentinian money.
The value of the peso is, as we have established, independent of the assets of the Argentinian central bank, but this does not mean that the central bank has no influence. It is the monopoly producer of pesos, and its existence is thus a guarantee for inflation. By shutting down the central bank, the Argentinian government would give a guarantee that, at least in the short term, there would be no increase in the supply of pesos. The stock of pesos would become fixed, which would greatly increase the quality of the peso as a money. Demand for pesos would therefore likely rise, leading to further appreciation.
For the Argentinian government, this would also mean a substantial financial benefit. Insofar as its debt is denominated in dollars, an appreciating peso would lighten the debt burden, as fewer pesos would be needed to pay back the debt (of course, the principled policy would be debt repudiation).
Closing the central bank is thus an ideal short-term policy. It is also superior to dollarization, as I’ve argued previously. Yet sadly, Milei is beholden to false theories and blind to this opportunity.
Conclusion
Javier Milei has repeatedly claimed to be inspired by Rothbard and Hoppe and to have read Human Action by Ludwig von Mises multiple times. Apparently, he did not read what Mises had to write on the subject of money, or he was unable to comprehend it. He will, therefore, waste his opportunity to bring monetary freedom to Argentina.
This, of course, does not mean that he is not a vast improvement on the alternative candidates in Argentina—a point that Hoppe also made. But Milei is no Austrian, and that he resorted to name-calling and quack theories in response to Hoppe’s calm critique suggests that he is not much of an economist either.
