Fiat money can be as good as gold, possibly better...

[Zygote]

The main critics of fiat money come mostly from the Austrian school and the various hard-money schools. Since I'm most familiar with the Austrian position I'm going to try argue why fiat money can be as effective or more effective than gold in providing a stable monetary system for the economy to evolve within, while staying consistent with Austrian principles.

To start, the core of the Austrian argument goes like this:

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In his writings, Mises had shown how money becomes accepted. He began his analysis by noting that today's demand for money is determined by yesterday's purchasing power of money. Consequently for a given supply of money, today's purchasing power is established in turn. Yesterday's demand for money in turn was fixed by the prior day's purchasing power of money.

So, for a given supply of money, yesterday's price of money was set. The same procedure applies to past periods. By regressing through time we will eventually arrive at a point in time when money was just an ordinary commodity where demand and supply set its price. The commodity had an exchange value in terms of other commodities, i.e., its exchange value was established in barter. To put it simply, on the day a commodity becomes money it already has an established purchasing power or price in terms of other goods. This purchasing power enables us to set up the demand for this commodity as money.

This in turn, for a given supply, sets its purchasing power on the day the commodity starts to function as money. Once the price of money is fixed, it serves as input for the establishment of tomorrow's price of money. It follows then that without yesterday's information about the price of money, today's purchasing power of money cannot be established.

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Using the Mises framework of thought, also known as the regression theorem, we can infer that it is not possible that money could have emerged as a result of a government decree or government endorsement or social convention. The theorem shows that money must emerge as a commodity.

On this Rothbard wrote,

In contrast to directly used consumers' or producers' goods, money must have pre-existing prices on which to ground a demand. But the only way this can happen is by beginning with a useful commodity under barter, and then adding demand for a medium to the previous demand for direct use (e.g., for ornaments, in the case of gold). Thus government is powerless to create money for the economy; the process of the free market can only develop it.
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From this analysis, many readers develop ideologies dictating that fiat money can never be money because there is no commodity to gauge past prices. This is the idea I intend to attack the most because the rationale is senseless.

To start, fiat money clearly can be money. Empirically, we've all used it and seen it used for the purpose of money. Im as sure fiat money can be real world money as the sky being blue.

So why the discrepancy?

I dont think many realize that fiat money is not the same as "play play" monopoly money. Fiat money is not a claim to nothing. The price of fiat does not arise out of air. Rather, fiat money, like all money, is based on past prices. Without this factor, fiat money would in fact be as good "play play" monopoloy money. However, in actuality, the decreed aspect of government paper is where the value of their money comes from and this is where laws forcing citizens to redeem paper for goods comes into play as well.

The national productivity of a nation is what is used to back the issuance of currency - not nothing. The national productivity of the nation satisfactorily fulfills the incompleteness of the Austrian postulation of regression ad infinitum with regards to the value of money as well as any commodity does.

Where does the animosity to paper money come from then?

I think the right place for Austrians to place blame is in the creation of new paper money. Once a given supply of paper money is created and the value is determined based on an evaluation of the past price of national production, assume then someone goes about to create new money that represents redeemable notes on the same claim of assets as the previous money supply. This what counter fitting is defined as, so far as i can tell. The negative effect of this will be the dilution of the marginal value per existing note. This only really becomes problematic since this dilution is not uniform and precise in time or space. Simply -put, the counter-fitter's early expenses will set the dilution in motion, stealing value from all holders of paper money as dissemination occurs. This process has a variety of adverse effects on the economy but no need to get into this here since most already accept and understand the costs of inflation to an economy's health.

In today's world the problem with fiat money is not economically based but rather the economic side targets the fraudulentness of the system of central banking, managed interest rates and open market operations.


Without the fraud a stable fiat money supply that is allowed to free float will provide as useful a monetary structure as any other general commodity based money system.


Why does fiat money have the potential to be even better than gold?

Well the costs of dealing with gold on top of the perpetual increase in the gold supply include the productive resources and storage resources. A fiat money without the fraud would not entail any of the above.

Some may counter that gold is valued precisely for the fact that it is fraud-proof or much more so than any fiat money. This is likely true but doesn't counter the fact that a properly managed fiat system can bear all the benefits of a commodity standard.

[Borodog]

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From this analysis, many readers develop ideologies dictating that fiat money can never be money because there is no commodity to gauge past prices. This is the idea I intend to attack the most because the rationale is senseless.

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It's a strawman. No Austrian says anything of the sort. Of course fiat money is real money. It's a general medium of exchange. You don't need a commodity to guage past prices, you only need the knowledge of yesterday's prices in terms of the fiat money.

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In today's world the problem with fiat money is not economically based but rather the economic side targets the fraudulentness of the system of central banking, managed interest rates and open market operations.

Without the fraud a stable money supply that is allowed to free float will provide as useful a monetary structure as any other general commodity based money system.

Why does fiat money have the potential to be even better than gold?

Well the costs of dealing with gold on top of the perpetual increase in the gold supply include the productive resources and storage resources. A fiat money without the fraud would not entail any of the above.

Some may counter that gold is valued precisely for the fact that it is fraud-proof or much more so than any fiat money. This is likely true but doesn't counter the fact that a properly managed fiat system can bear all the benefits of a commodity standard.

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This is like saying, if only government were filled with angels, we wouldn't have to worry about them counterfeiting money.

Protecting assets in the real world of real human beings requires resources. Wouldn't it be much cheaper if, rather than having to buy a heavy chain and padlock to lock up my bicycle, I could just write "LOCK" on a piece of paper and tape it around the front wheel? Think of all the resources we could save!

This would be true even in an anarcho-capitalist society. The temptation for the people who have the capacity to print money out of nothing, without the check of having to actually redeem it for a commodity that cannot be counterfeited out of thin air, would be insurmountable.

[Zygote]

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It's a strawman. No Austrian says anything of the sort. Of course fiat money is real money. It's a general medium of exchange. You don't need a commodity to guage past prices, you only need the knowledge of yesterday's prices in terms of the fiat money.

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I wasn't criticizing Austrian theory, just some flawed supporters of hard money schools.

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This is like saying, if only government were filled with angels, we wouldn't have to worry about them counterfeiting money.

Protecting assets in the real world of real human beings requires resources. Wouldn't it be much cheaper if, rather than having to buy a heavy chain and padlock to lock up my bicycle, I could just write "LOCK" on a piece of paper and tape it around the front wheel? Think of all the resources we could save!

This would be true even in an anarcho-capitalist society. The temptation for the people who have the capacity to print money out of nothing, without the check of having to actually redeem it for a commodity that cannot be counterfeited out of thin air, would be insurmountable.


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I dont disagree with any of this. I think gold is a better form of money in practice but the off shoot of the monetarist ideas i laid out can lead to a stable money system, if only in theory.

[Borodog]

ok

[Brainwalter]

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The national productivity of a nation is what is used to back the issuance of currency - not nothing. The national productivity of the nation satisfactorily fulfills the incompleteness of the Austrian postulation of regression ad infinitum with regards to the value of money as well as any commodity does.

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I've seen this asserted before but never satisfactorily explained. Can you more specifically explain what you mean by this?

I can only think of one way a nation's productive economy can be said to "back" a currency in the way, say, gold does. The citizens are obligaed to accept the notes for the things they produce. But isn't this another way of referring to what you called the "decreed aspect of government paper". Prior to now I have believed that decree is the only thing giving the paper value, and unless you can tell me what you mean by "the economy backs it" I will be forced to continue so.

I think it's worth pointing out too that when currency is backed by gold, the issuer has their own gold in a vault somewhere (their ownership may be suspect if they are a state but it is under their control), while under your "the economy" scheme as I understand it the issuers are backing their currency with goods that don't belong to them and again the force of the decree is all that supports the currency. I hope you can see why this is seen by some as a less solid promise than "we have one ounce of gold for every $20 in circulation, redeemable on demand." I asked another poster in the last gold thread what "promise" he claimed the government had made regarding the dollar's value, and it would appear your interpretation of it is "we will continue to force our productive citizens to accept these notes" (but with no reference to a level of prices).

I kind of took the ball and ran with it based on my interpretation of the quoted text, if I am wrong ignore the above and explain it please.

[Borodog]

I skipped that part, but it basically seems kooky to me. There is no way that "national productivity" can possibly "back" a fiat currency. How does one redeem one's fiat money for a fixed weight of "national productivity"?

But you don't need it. All you need to do to get out of the "infinite regress" of fiat money is to look back in history at what actually happened. One Friday afternoon you could redeem your paper dollars in for gold, but nobody had done this for twenty odd years, and the next Monday you couldn't. That's it. For a generation paper had been the money everyone was used to, so there was a well established purchasing power in consumer's minds. There's no problem at all.

[Felz]

Gold reserve currency is only one way to bind monetary policy to rules, it's by no means the only way nor necessary.

[DcifrThs]

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Gold reserve currency is only one way to bind monetary policy to rules, it's by no means the only way nor necessary.

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gold only binds monetary policy rules until the bind is too restrictive for govt/authoritative figures. this is the debate i've had numerous times with gold backers saying that gold won't work b/c it doesnt allow flexibiliity of monetary policy. eventually the gold system as we know it today and recently cracks b/c the policy needed to avoid a devaluuation (or revaluation) is the opposite of what is "needed" for the economy.

but i agree gold backed currency (if kept to it) does bind monetary policy.

Barron

[ianlippert]

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eventually the gold system as we know it today and recently cracks b/c the policy needed to avoid a devaluuation (or revaluation) is the opposite of what is "needed" for the economy.


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Why exactly is inflation needed for the economy? It seems to me that it is needed politically, but much like debt its not actually needed for the economy.

[vulturesrow]

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eventually the gold system as we know it today and recently cracks b/c the policy needed to avoid a devaluuation (or revaluation) is the opposite of what is "needed" for the economy.


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Why exactly is inflation needed for the economy? It seems to me that it is needed politically, but much like debt its not actually needed for the economy.

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Its not so much that you need inflation, its more that you really want to avoid deflation. All sorts of nasty things arise out of that.