Abstract: Recent debates in monetary theory have centered on so-called free banking
and the role of banks in providing money in the form of fiduciary media in a pure
market economy. This paper examines how and to what extent fiduciary media can
emerge in a pure market economy. Based on the theory of value, it is argued that
those economists are mistaken who claim that money substitutes must in all cases be
interpreted as being money titles. Those economists too are mistaken, however, who
claim a large role for the circulation of fiduciary media in a pure market economy.
It is argued that holding fiduciary media in one’s cash balance is an entrepreneurial
error, as fiduciary media by their nature do not have the qualities people demand in
holding money. Money is the comparatively most certain good and the present good par excellence, qualities that fiduciary media do not have. Holding fiduciary media
instead of money is therefore an entrepreneurial error, and like all errors in the free
market, it will tend to be eliminated in the process of entrepreneurial profit and loss,
leading to the virtual disappearance of all fiduciary media from the market economy.

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