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?

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.