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Source link: http://archive.mises.org/12582/fiat-money-as-an-administrative-good/

Fiat Money as an Administrative Good

April 28, 2010 by

Imagine a community with a barter economy where a group of men are permitted to impose a great deal of violence on their fellow citizens. Let’s call this group the state. The state prints paper tickets denominated in numbers, passes them out to the population. FULL ARTICLE by Yuri Kuznetsov

{ 19 comments }

Mike Sproul April 28, 2010 at 9:25 am

If there were such a thing as fiat money, it would create a free lunch for its issuer. That would attract issuers of rival moneys, as well as issuers of derivative moneys, until the free lunch disappeared and the fiat money had zero value. This means a true fiat money would never get off the ground.

Economists observe that the dollar is inconvertible, and conclude that it is unbacked, even though they cannot point to a single example of a bank that ever issued money of positive value without holding assets against that money.

The dollar is backed by the issuers’ assets, but physically inconvertible. That is not the same thing as being fiat money.

Michael A. Clem April 28, 2010 at 12:55 pm

that would attract issuers of rival moneys, as well as issuers of derivative moneys,
Unless, of course, they were legally prohibited from doing so.

billwald April 28, 2010 at 11:54 am

Consider the song, “Sixteen Tons.” Is not fiat money created when the miner makes a purchase at the company story and the store clerk puts the total on the books? The milk man knows the company store has this fiat money on their books and delivers the milk without payment because he knows the store will mail him a check on the first of the month when the store books are credited with the miner’s payroll deductions.

Say the company store wishes to stock a new line of beer. The beer guy doesn’t know the the system the store uses for paying bills and demands cash on delivery. Or, these days, the beer guy could have the store clerk sign a credit account charge slip and the exchange would be registered on the bank’s computer instead of the company store’s computer.

In other words, the cash, the store computer, and the bank computer all serve the same function: they register a transfer of goods and services. None of them, since the world went off the gold standard, function as a store of value . . . except maybe in times of price depression.

There is one major difference between cash and the company computer. Look at it this way. My local store guy has known me for 10 years. When I buy stuff he lets me sign an IOU which he knows I will pay off on the first of the month. In theory, my store guy could give my IOU to his bread guy but the bread guy doesn’t know me and it would be messy for me to try and pay off the bread guy. Cash money functions as a public substitute for a personal IOU. The government is countersigning my IOU which eliminates the mess.

I pass a $20 bill to my store guy. What does this mean? It means that I did $20 worth of work for my employer and passed the value of my time on to the store. The store guy then passes the same value, the $20 bill, on to the bread guy. It doesn’t matter if the form of the $20 is a paper rectangle or electronic transfer.

But EVERY money system requires honesty and in every system one can cook the books. Say we were on a gold coin money system. The government could conspire to add 10% tin to the coin mixture and the average citizen would not know the difference.

Dick Fox April 28, 2010 at 12:49 pm

While a fiat money as envisioned by Kuznetsov would exchange for freedom from persecution it does not hold that the government could then use the money to exchange for goods and services. Granted, goods and services would be exchanged for the fiat money but unless the government defined the money in terms of goods and services the amount exchanged would always be valued at one tax unit. The government could not get moret than that. One tax unit would remove the threat of coercion.

Kuznetsov fails to recognize that the government must have transactions denominated in the fiat currency to levy any tax other than a head tax and transactors will not value their transactions in the currency so that they can avoid taxes. The economy will be totally black market with coercion tickets traded on the side.

C Keith April 28, 2010 at 1:16 pm

Not necessarily. In any monetary system the social interaction of people determines the rates of exchange between various goods and services. Thus, the government cannot “define” the price structure of the economy (see “Socialist Calculation Problem”). In the Mengerian framework, a money will arise due to its being a more easily marketable good relative to others. Greenspan once wrote that a monetary good is usually one that is a luxury good in the society in which it is traded. To be sure, in the presence of a coercive state, the ability to pay off ones oppressors is a luxury indeed.

As you stated in your post, any goods and services circulated by an alternative money will necessarily be in a black market, with the white market being denominated in “coercion tickets.” Provided that the state hasn’t (yet) totally wrecked the economy, the average person will prefer to obtain his goods and services in the white market, both because not doing so exposes him to state violence and because alternative monies (or barter?) will be restricted by legal tender laws, increasing his transaction costs.

Dick Fox April 28, 2010 at 3:29 pm

Keith,

Understood but your statement, “To be sure, in the presence of a coercive state, the ability to pay off ones oppressors is a luxury indeed” is key. Through coercion the state can set taxes in terms of the “coercion tickets” as well as what producers must give to the government for “coercion tickets.” If the government says that one apple is worth 1 ticket but one car is worth 10 tickets that does not mean that 1 car is worth 10 apples. It only means that the government mandates that ratio. Coercion totally removes any calculation or marketable good relationship. The black market would still thrive with market exchange rates.

Mike Sproul April 28, 2010 at 2:39 pm

Michael Clem:

Laws don’t prohibit banks from issuing checking account dollars, credit card companies from issuing credit card dollars, stores from issuing gift certificates, or foreign countries from issuing money that circulates outside the country. All of these money substitutes would reduce the demand for so-called fiat money, and thereby reduce its value, if it ever had any value to begin with. Fiat money simply never gets off the ground. If it ever existed, you should be able to name at least one historical example of a bank that issued money without holding assets against that money.

Billwald:

The company store’s money is backed by the store’s assets. A true fiat money would have value even if there were no assets backing it.

Peter Surda April 28, 2010 at 3:52 pm

Dear Mike,

we’ve been through this before. While legal tender laws do not prevent the existence of other non-commodity money, they disadvantage them (you need to use the legal tender for accounting and to pay taxes, you cannot refuse them as a settlement of debt, and counterfeiting them is punished more harshly, and probably other restrictions). I think the most important is the inability to refuse them as debt settlement. That eliminates the effect you described earlier (crowding out by competitors).

Gerry Flaychy April 28, 2010 at 5:56 pm

I deposit 1 000 $ in cash (money) at the bank in exchange for 1 000 $ in checking-account-money, which is also used as money in the market.
A few minutes after, the bank issue the money, the 1 000 $ in cash, to someone else in exchange of a loan contract of 1 000 $ (asset). Then we can say that the money that has been issued to the borrower is backed by the asset, the contract loan.

But what is backing now my 1 000 $-checking-account-money issued by the bank ?

Nothing !

The bank has issued money without holding any asset against that money.

Gerry Flaychy April 29, 2010 at 10:57 am

Mike Sproul wrote: “The 1000 checking account dollars, which used to be backed by the 1000 paper dollars, are now backed by the $1000 IOU. The original paper dollars were, and still are, backed by the third party that issued them. No unbacked money has been issued. “

If “The 1000 checking account dollars, which used to be backed by the 1000 paper dollars, are now backed by the $1000 IOU”, then this 1 000 $ contract loan is no more backing the 1 000 $ issued to the borrower, which money has now no backing at all.

So the bank has issued money without holding any asset against that money.

Jacob Steelman April 28, 2010 at 4:15 pm

Yuri Kuznetsov describes a prison system which is in fact a description of the state at the totalitarian level.

Mike Sproul April 28, 2010 at 9:34 pm

Peter Surda:
“I think the most important is the inability to refuse them as debt settlement.”

That matters if you agreed to be paid 1 oz of silver, and the government declares that you now have to accept $1. But in a normal modern contract, you would have agreed to accept $1, and the government will force you to accept $1. There’s nothing wrong with that.

Gerry Flaychy:
The 1000 checking account dollars, which used to be backed by the 1000 paper dollars, are now backed by the $1000 IOU. The original paper dollars were, and still are, backed by the third party that issued them. No unbacked money has been issued.

Peter Surda April 29, 2010 at 2:38 am

I think you are missing the point of my argument. It is not about price fixing, but about granting debtors the ability to shift the negative effects of inflation to creditors. It is less costly for the debtors to use the legal tender as opposed to competing currencies. That is why they are crowded out. If the creditors try to hedge against inflation of legal tender (e.g. by attaching the value of the debt owed to a price index), that increases their costs even more, as they have to pay more taxes. So they can never mitigate the effect of legal tender laws to the extent when it is eliminated.

Peter Surda April 29, 2010 at 3:57 am

I thought about this a bit more, and it looks like the crowding-out effect is only present if the rate of inflation of legal tender is below the income tax rate. While I doubt I am the first one to realise this, just in case I call dibs on Gresham-Šurda law :-).

curious April 29, 2010 at 7:37 am

There is just one point I want to raise. I do not see how fiat money can originate by the government’s threat of the use of violence on citizens. My main objection is that people who adopt this view neglect the fact that to be in positions of power requires money itself. The governemnt does not have goods and services, everything it has it extracts from society, so to suggest they give us money ignores the chronological order of how government develops. I hope I have made myself clear.

Robert April 29, 2010 at 5:05 pm

Mike Sproul:
“The dollar is backed by the issuers’ assets, but physically inconvertible. That is not the same thing as being fiat money.”

Issuer is the Federal Reserve (a private banking cartel) at the behest of Treasury, legitimized by “law” taken in Congress. Please explain a couple of situations, Mike:

1. Under a balanced Federal budget, what assets does the Fed “have” beyond the confiscation of wealth through taxation.
2. Under a deficit laden Federal budget (spending more than confiscated), what assets the Fed “have” beyond confiscation of wealth through taxation and inflation.

Mike Sproul April 29, 2010 at 9:49 pm

Robert:

The Fed’s assets mainly consist of government bonds, which are backed by the tax-collecting ability of the US government. It’s similar to a landowner who collects rent in silver, but buys groceries by issuing his own silver IOU’s, which he accepts for his rent. The landowner’s IOU’s are ultimately backed by his land, and the US government’s IOU’s (which are also the Fed’s IOU’s) are ultimately backed by the assets owned (or confiscated) by the US government.

Gerry Flaychy May 1, 2010 at 6:01 pm

Here is how I see the comparison of Mike Sproul.

The landowner is issuing promissory notes redeemable in silver (on demand), and the US government is issuing promissory notes redeemable in money (at maturity).

Thus landowner is (more or less) equivalent to US government, and silver is equivalent to money. The Fed is equivalent to the producer of silver.

The Fed doesn’t issue promissory notes.

The US government doesn’t buy groceries or any other goods with its promissory notes, and neither the Fed with the government promissory notes, while the landowner does. The US government buys goods with money, wich is equivalent to buy goods with silver for the landowner.

Silver and money are generally accepted in the market, while US government promissory notes are not, and while landowner promissory notes surely have a very limited acceptance in the market.

I doesn’t see very much similarity in this comparison.

Stephanie July 6, 2010 at 10:47 am

They have the assets to support their claims and with their new vans for the 2010/11 registration period predicted to sell really well I think they can keep it up in the future. I hope so anyway, lots of jobs and cute cars at stake!

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