Volume 5, No. 4 (Winter 2002)
The false-money debate of 1866 in the Journal des Economistes was the first time that uncompromising laissez-fair advocates clashed on the question of fiduciary media. Victor Modeste was with Henri Cernuschi a forerunner of the present-day advocates of free banking with 100 percent reserves. By integrating vital concepts developed by earlier laissez-fair economist in nineteenth century France, Modeste put fort a systematic argument against fiduciary media. He distinguished between money and money representatives, and argued that bank notes are either real money representing the money in reserves, or they are fiduciary media that do not represent anything but thin air. He argued that fiduciary media—whether publicly or privately issued—are a specific type of money: false money. He also defended the theory that business cycles are based on the illusion and error created by fiduciary media. Modeste was not simply following Cernuschi but was important in his own right. Just as Cernuschi anticipated Mises with his policy conclusions, Modeste was essentially Rothbard's forerunner. To him the key question was about honest business against robbery and fraud. Modeste argued that fractional reserve banking was a form of fraud and theft and that it should be abolished not by central banking but by prohibiting fiduciary media under criminal law.
