It may come as a surprise to many, but the relative size of the US commercial-banking industry has not declined following the so-called credit-market crisis, which developed in the second half of 2007. FULL ARTICLE by Thorsten Polleit
Source link: http://archive.mises.org/13890/the-curse-of-fiat-money/
The Curse of Fiat Money
Previous post: The 3-D Printing Revolution
Next post: Another Kind of Liberalism
{ 49 comments }
The progressive theory of history reminds me of the mindless optimism of Pangloss in Voltaire’s Candide.
the equilibrium level of fiat money is zero
“In today’s fiat-money system, however, the inflated money stock cannot be brought back toward any rightful level, as fiat money is created out of thin air via circulation credit, not backed by any commodity whatsoever.”
Since Austrians are split over this “money from thin air” idea, it would have been nice to see at least some mention of that controversy. But just as the Keynesians never seem to read anything but other Keynesians, “thin air” types like Polleit must only be reading other thin air types.
Meh, seems like you’re just looking for reasons to complain to me. The article was an opinion piece, not a full out evaluation on the Austrian School of Economics.
This explains, partly, the long time to recovery. If the Feds refuse to allow credit to shrink as it naturally would, then prices must bear all of the burden of the adjustment process in order to bring the quantity of money and prices into alignment. Prices must rise, but excess capacity prevents that. The economy can not begin to recover until prices and money are in the correct relationship to each other. Either credit must contract or prices must rise. Until then, the depressions will continue.
Most likely due to the fact that I simply do not have enough experience — or reading — on the topic, but I too have difficulty accepting the notion that in a fiat money regime the “equilibrium” point in the money supply is effectively zero. Nevertheless, I recognize that most Austrians — I don’t speak for monetary equilibrium theorists, as I don’t know their position on the subject — believe this to be true.
Professor Polleit writes,
What makes fiat money different? The only difference is that fiat money really has no nonmonetary purpose, and as such simply ceases to exist when it is taken out of circulation. However, fiat money and commodity money are effectively the same thing; they are both valueless objects which are subjectively given value (“objectively” manifested through the price mechanism) thanks to their roles as mediums of exchange. I would go as far as to say that in a world where paper was very difficult to reproduce, paper money could conceivably be used as a sort of commodity standard.
The problem with fiat money is that it was introduced as a medium of exchange by means of government fiat. Therefore, it doesn’t necessarily follow that it has all of the separate qualities of money — most importantly, the fact that it is easily reproducible and in a monopoly environment is not subject to production costs (in a competitive environment, the production cost of paper money is the possibility of having greater liabilities than actual assets).
In any case, as long as fiat money is accepted as a medium of exchange, I don’t see why the “equilibrium” point, in the event of deflation, wouldn’t be above zero — just like gold. Namely, deflation in a fiat environment would occur for as long as,
1. Banks reduce the amount of outstanding loans.
2. Existing loans are defaulted upon.
3. Demand for money rises.
So, it seems to me that the equilibrium point would be where unhealthy outstanding loans are liquidated, and where there is equilibrium in the price mechanism — in other words, where the price level of different goods in an economy (both consumer and capital goods) have fallen to a point where economic growth is once again affordable and viable.
Fiat money does have a base level. In fact the “monetary base” is that level. The monetary base is currency held by the public plus bank reserves, which are held in bank vaults and in their reserve accounts. Reserve balances can be thought of as having the potential and/or right to be converted into currency. So it is possible for the money supply to collapse to base money. George Reisman has advocated that the Fed issue banks enough reserves to back their demand deposits (probably immediately redeemable savings deposits, too) 100%, then require that they maintain 100% fiat money reserves. The Fed would not be allowed to expand reserves. So base money would be fixed. He says that this is a first step to stopping the destruction of money and then proceeding to the next phase of returning to a more sound monetary system.
Patrick,
I basically agree with both you and Reisman. Although, I wouldn’t go as far as to claim that all reserves represent this “base level”. For instance, in Monetary Theory and the Trade Cycle Hayek describes a fractional reserve system where bank A extends to individual A fractionally a certain amount of money. Individual A then deposits this back into bank A (or maybe even bank B) and then bank A/B uses this deposit to further fractionally lend out another sum of money to individual B, and as such the system pyramids on itself.
Taking this into consideration, I think the money supply would fall to a point under current bank reserves and currency held by public.
Mr. Catalan says it nicer than I can:
“What makes fiat money different? The only difference is that fiat money really has no nonmonetary purpose, and as such simply ceases to exist when it is taken out of circulation. However, fiat money and commodity money are effectively the same thing; they are both valueless objects which are subjectively given value (“objectively” manifested through the price mechanism) thanks to their roles as mediums of exchange.”
Money should no longer be considered a store of value but as a government countersigned IOU for goods and services. Money functions as a means of comparing the economic value of otherwise non-comparable things, adding apples to oranges, comparing the value of my time to the value of consumer items. You may have the only gold in town but if I have the only food in town and sufficient arms to defend it . . . you can keep your gold.
“What makes fiat money different?”
It seems to me that the issue is that of being redeemable. If (at a point in time) everyone wants to turn in real money for an equivalent amount of goods & services, they can do so. However fiat money is different in that there aren’t the amount of goods & services that they indicate. Note that if you provided an IOU for your car, it can be traded in, but if you have given more than one IOU they cannot be fully redeemed.
Allen,
The issue of redeemability seems to be ingrained in the fallacy of the objective value of gold. Whether or not a paper bank note is redeemable matters only in a commodity money system, where the value of the bank note to the consumer is only the notion that it is backed by what the market really uses as a medium of exchange — gold.
Our current monetary system, however, is not based on a commodity standard. Bank note exchangers, or consumers, do not value the dollar because they know it’s redeemable in gold. They value the dollar because society has been accepted the dollar as a medium of exchange.
So, in this case, redemability is for all intents and purposes irrelevant. The dollar is the medium of exchange, not gold, and as such the dollar has become money, not money substitute (which is what a bank note would be in a commodity standard).
Of course, one of the disadvantages of this fiat system is that it’s difficult to distinguish between what is “real” money and what is fiduciary media. This is why in a free market in money the dollar probably wouldn’t exist for very long. Nevertheless, given our current system, the dollar is money.
What do you mean? Like gold, the relative scarcity of goods is transmitted through the price system. This is the fundamental principle of inflation. This highlights another issue with some business cycle theory as presented on Mises Daily — can the business cycle occur under the gold standard? If you were to drastically increase the supply of gold that is lent and invested, this would cause relative price inflation and would cause the business cycle.
The difference is that gold is much more difficult to reproduce than paper money is, and that is where the notion that gold is therefore a much stable currency than fiat paper money comes from. However, gold does not “represent” anything more than fiat currency does.
Finally, the dollar at its most basic level is not an IOU. The dollar, like gold, represents the final payment. The value of gold in a gold standard is not the gold itself, but the goods it can buy. The dollar works under the same principle: the value is the amount of goods the dollar can buy.
The intrinsic weakness in fiat currency is that as fiat currency was not introduced into the market voluntarily. This means that more likely than not it does not have the qualities money should have, as outlined by Mises and Menger. The lack of these qualities makes it more prone to inflation. But, for all intents and purposes, the dollar is still money.
Jonathan, the issue is not whether the money is in gold, but whether it is redeemable in goods & services. Given that one receives gold (or other specie) it can be exchanged for goods & service; but fiat money lacks that property. Note that the example I gave of whether someone has one or more IOUs determines whether or not they are fully redeemable (and is not a matter of gold).
Let’s start from basics. Do you believe that under a barter system all is fully redeemable? If so, do you acknowledge that there can be monetary transactions that maintain being redeemable? If so, is it not evident that fiat money lacks that property, such as when a bank with $10 of holdings, loans out $30 for it?
Allen,
I’m pretty sure I just exchanged my money for goods and services at the grocery store.
How is fiat money an “IOU”?
I’m not sure what you mean? Redeemable in what sense? What does reedemability have to do with a barter system?
That’s not a problem of fiat currency, per sé, that is a problem of the creation of fiat currency. Like I suggested in a prior post, the situation would be the same if a bank held $10 worth of gold, and then mined another $30 worth of gold and lent it out. The inflationary problems of money creation are the same with both fiat and commodity standards, it’s just that the cost of money creation is much lower in a fiat currency regime (which I have continuously acknowledged).
Just because the method of creating more money is different with fiat currency than it is with a commodity standard (in one case you can change numbers electronically or just print more of it, and the other you have to create more of that commodity), doesn’t mean that the two types of moneys function fundamentally different (it just means that one is worse at being money than the other).
I would argue that your points about fiat money not necessarily deflating to zero are in some ways valid. To me, it seems like it should reduce to the real value of the collateral backing the loans that created it.
The problem that you are overlooking though is the massive credit expansion that was enabled by the existence of the fractional reserve system it operates in.
In a 100% gold backed system (assuming there is no fraud), such a credit expansion would be HIGHLY unlikely. It should literally be impossible. The whole point of gold is to avoid the deflationary period all together by never getting into a boom in the first place.
In that respect, gold makes a mockery of fiat currencies.
Michael,
I haven’t overlooked the credit expansion, and in fact in the first post in this blog I describe the different types of monetary deflation which may take place as a result of the previous credit expansion. I suggest that the equilibrium point is therefore the point at which bad loans have been liquidated, banks have sufficiently retracted credit from the market to restore financial stability (as perceived by their owners), and prices have fallen to a sufficient enough degree to allow for renewed profit (which goes hand in hand with a reduction in uncertainty caused by the financial crisis).
I agree. I have consistently touted gold as a superior currency throughout my posts here. In fact, in the post you respond to I allude to the fact that money creation is much more difficult and costly in a gold standard. But, this is largely besides the point I am trying to make.
Jonathan, you exchanged your money at the grocery store, so it was redeemed, but the issue is whether all of the money can be fully redeemed.
In a barter system, every exchange of goods is fully redeemed in terms of what people have agreed to. If you do not accept that as a goal, we cannot communicate about money.
Allen,
That’s not the issue. You are conflating fiat currency with fiduciary media. Fiduciary media can be fiat currency, but not all fiat currency is fiduciary media. Fiat currency simply refers to a type of money. This is the same mistake this article makes.
Reedemability in this case doesn’t make sense. In a barter economy the people exchanging goods already get what they want. They aren’t looking for redeemability. Redeemability is an issue which arises with indirect exchange.
Mr. Catalan, “Finally, the dollar at its most basic level is not an IOU. The dollar, like gold, represents the final payment. The value of gold in a gold standard is not the gold itself, but the goods it can buy. The dollar works under the same principle: the value is the amount of goods the dollar can buy.”
The best explanation is that the value of various currencies is by the money traders so that it is immaterial which currency is used to purchase a commodity (oil, whatever) in any port. In other words, at any given time, the value of a tanker load of oil is about the same in London or NYC in dollars or pounds. Once the oil is in the ship the owner doesn’t care where it is off loaded (except for political reasons).
Re: billwald,
Food spoils . . .
http://www.economagic.com/em-cgi/daychart.exe/form
the above link states that m1 increased a little less than 200 billion dollars since jan 2009.
i dont know if its true or not.
i guess that mean dollars that are paper and coin currency and a currency element that isnt somehow paper dollars or coins. but dollars increased a little less than 200 billion.
would it have mattered much if the 200 billion increase was all paper doillars and coin??
is 200 billion an exorbitant figure in the us economy over a year and a half time period?
is it moreso a problem with or a difference if the portion of the 200 billion that is the credit expansion part as you claim it be was just 200 billion paper dollars??
is money entering an barter economy a good thing?? is more money entering a money economy as good a thing??
I agree. I have consistently touted gold as a superior currency throughout my posts here.
that reads like a point. but i dont see how you make it.
It is bank-credit expansion that has brought about the trouble in the first place…..
does bank credit expansion actually occur??? if so, is it bank credit expansion or the stoppig of bank credit expansion that brings about so-called trouble???
It is clearly the expansion of fiduciary media, because if you were to continue said expansion then the ultimate consequence would be hyperinflation and, also, the collapse of the structure of production. The malinvestment is created by fiduciary expansion. It is revealed by a deceleration of fiduciary expansion, or by a loss in confidence in the medium of exchange.
why would it be hyperinflation?? i dont think thats true at all. and i dont think you do either.
the structure of production as you claim may adjust very well to more flexible structures of production..better able to cope.
sad, dishonest people.
James,
I forgot the other names you’ve posted here under. Same style of writing (and trolling?).
If you increase the quantity of money, regardless of relative inflation, new money is bound to finally trickle down to workers’s wages, which will tend to bid up the price of consumer goods, and therefore finally the general price level. If you do this for a sufficient amount of time then people will lose confidence in the currency, when they see that inflation will not end within a foreseeable amount of time.
I can’t make sense of this, sorry.
He means that the producers goods/consumers goods ratio will adjust to the effect of intervention and socialism, which is true. When govt counterfeiting of money and bank credit destroys producers goods, we will return to a hand-to-mouth, hunting-gathering culture with a minimum of roundabout production. The chief will redistribute the berries equally (except, as Orwell taught, some equalities are more equal than others).
I agree.
Fiat Money along with Fractional Reserve Commercial Banking and our central banks enables Money-pulation of a very damaging and disorder-creating kind.
We are all victims of this Witches’ Brew.
Here, at the bottom, are some examples that arise from such Money-pulation.
Just one “Empty City” and Just a ‘few’ empty mall stories, one even on The Golden Mile in Chicago (there may be other reasons for that one, I do not know).
So much for human intervention in knowing how to properly and beneficially “spend Fiat Money”.
One error that Keynesians make today, is that they equate Saving with “Cash Hoarding”. Truly, some people in the Great Depression did keep their dough under mattresses or their silver dollars in jars buried in the backyard, but most people today put their savings into financial paper, like bonds and money market instruments. That money is not lost to the Economy —— it is available for borrowing. If borrowers cannot make use of that money, then it is not a ‘solution’ for Government to spend it on behalf of the Economy (IMHO).
Today, the Economy cannot use More Debt efficaciously and, if you like, the Economy is “trying” to save more (to anthropomorphize The Economy for a moment).
Please refer to a recent essay at
America Has a Structural Problem
Is money just a “missing element” in what is preventing Recovery?
Sounds almost like “The Fifth Element”?!? Just like the original Fifth Element, money is very critical to all of us. I don’t mean in the store-of-value sense, though that too is important.
This “Missing Element” is identified by Keynesians, and by other ‘mercantilist’ economists, as being Money. Hey, if it is “missing-in-action” we can just borrow or print some more, right? Well, it is not that simple in reality.
http://en.wikipedia.org/wiki/Mercantilism
While it can be argued that more Money, whether borrowed or just net-new printed, can inflate more Bubble-Economy-distortions (and appear, in the very short run, to create ‘good times’), “more” Money cannot bring prosperity in any sustainable way.
At same point, “more” Money even becomes completely ineffectual and entirely damaging to an Economy. Witness the Weimar Republic of Germany in 1922 or Zimbabwe more recently. But this damage at lower levels of intervention (apparently at non-price-inflationary levels) is still damaging.
The insidious effect of introducing distorting amounts of net-new fiat Money into an Economy can be more completely understood by referring to the Science of Physics, specifically to the branch of physics known as Thermodynamics.
Our Money System —— I won’t use the plural as in “systems” due to the current interrelated nature of all the separate national fiat money systems in our arguably now-economically-integrated World Economy —— depends for the manifestation of the Best Effects on an unfettered and free flow (and storage in times and places) of that money.
This is not equivalent to suggesting that some business activities should not be regulated. Monopolies and other cartels do require “Trust-busting” on occasion especially when those conglomerates stifle business activity. Don’t let anyone ever fool you —— we would all rather prefer no competition to the alternative. In fact, therein is one true case where what may appear to be “good for the individual, or for the individual enterprise” is not good for the aggregate society. We all, even individually, benefit more when there is choice and competition.
But Money is different. It does not require, nor does it benefit from the Money-pulations of our Central Banks and other authorities.
Here, what Physics and Information Theory can help us appreciate, is that the beneficial Invisible Hand of Adam Smith acts through Money. Money is a conveyer of information.
If governments act in ways that break that useful conduit, they do so at peril to all of us and our economic wellbeing. Decision-making is made perilous and is made on shifting ground. An infirm and non-undergirded process of resource allocation begins in such an Economy.
Distorted information will result. Resources cannot be allocated in a way that optimizes the effective use of those (always limited) resources (even, if those resources, appear not to be limited in a downturn, they nevertheless are —— used today, they can not be used again).
This applies to what appears to be Unused Capacity —— using that capacity in a way that would not be allocated by the Invisible Hand is still diminishing that capacity —— thus is how depreciation and amortization came to be understood.
What behooves all of us to understand that lack of, or distortion of, information is at the heart of Entropy. When governments redirect resources as they are doing today to address the supposed Lack of Aggregate Demand ‘problem’ they are introducing more Entropy to the Money, Financial and Economic System, than need be introduced.
Nevertheless, Entropy is always present. Just the act of living causes Life to increase Entropy. We, and all Life, use energy (from the sun=food, from oil, — these 2 are somewhat equivalent in our technological economy — from other Life, including from our family and friends and our businesses).
Using energy is what all life does. It is the cost of living. In fact you could argue biologically, that Life arose with the free energy that was not being utilized, as this Energy degraded, unused, from higher-useable forms to lower ones.
What happens IMO is that governments see “waste of unused capacity and energy” during downturns, especially like the one we are in currently. Governments incorrectly conclude that they are capable of knowing how to make use of that unused capacity and energy. So they distort the flow of money (information) and decide on behalf of the Invisible Hand.
But no economist has every proven that this theory is valid. It is simply assumed to be valid. In fact Austrian Economics proves that the opposite is true. It is just that it is so seductive to politicians who are by nature True Interventionists. If they cannot “do something” then in their own eyes (and in the eyes of voters) they lose their very raison d’être. The political imperative practically forces the Act of Intervention.
But just like Hypnosis was incorrectly (even by the court system, for a long time) “simply” assumed to “uncover suppressed memories” it did no such thing —— in fact, Hypnosis is very effective at planting False Memories. So the analysts who were uncovering memories in their opinion, were doing the opposite. So it is with our tendency to treat Money so cavalierly.
So we end up with a Broken Money System. Information is distorted. Resources are misdirected. Optimal results will not be obtained. Resources once used up can not be brought back. Energy converted from a more usable form to a lesser one cannot be reconstituted (for free).
In other words Good Information (via an undistorted money flow) results in the best economic outcomes. Bad Information results in unnecessarily greater Entropy (= economic disorder) than the alternative —— Information in essence relates to Entropy in a way that the more our governments (with good intentions of course) break the free and unfettered flow-of-money-process, the more they diminish the economic good.
The Soviet Union became unglued because of decades of misdirected allocation of economic resources. But that historical example is a good one to show how long such misallocation can persist, even seemingly sometimes creating “good conditions”. But the rot was always there as were the hidden human costs (well, some not so hidden).
When we introduce “noise” into an Information System, which The Money System in essence is, then we force the parts of that system to ‘play by’ the rules that this noisy information seems to convey. No one inside a Financial Bubble for example really knows for sure that they are inside such a bubble. Maybe they are not. All the information they have appears to suggest that things are ‘normal’. And so that is how we made our tragic misallocating decisions in large part during the manmade Housing Boom for example.
It is much like the Human Mind. If your mind tells you that you have just heard a sound or seen a light, have you? Sure you have.
The only problem is, that such a sound or light might not actually be there inside “Real Reality”.
China –
http://www.youtube.com/watch?v=uQGrxfzqSCI
http://www.youtube.com/watch?v=emzKAa9rKgU
http://www.youtube.com/watch?v=iaPYgzbqUKc&feature=related
Chicago –
http://www.youtube.com/watch?v=u16Hq-wPVDI&feature=related
The only chance to prevent the exchange value of fiat money from collapsing altogether is a return to sound money
Rather than money based on the gold standard the better alternative would be anchoring the currency to an index of commodity prices, so that, for example, $1000 can always purchase a basket of goods with a pre-determined composition on the open market.
Commodity money works because it has a natural restriction on the growth of the money supply, in which state prices have a natural tendency to fall; inflation to maintain price stability is still inflation and, in an environment of powerful economic growth, would still cause a business cycle.
why a basket of goods?? why wouldnt a few metals that can actually be used in direct ‘indirect exchange be better? especially with the history they have and not subject to say pests or floods or heat waves.
INCOMING !!!
From Economic Stability.
An Irving Fisher and Friends Proposal…..
http://www.economicstability.org/history/a-program-for-monetary-reform-the-1939-document
Very thoughtful heresy.
Thanks.
> $1000 can always purchase a basket of goods with a pre-determined composition on the open market.
Sounds good on the face of it.
But how is this accounting suppose to be maintained?
I mean how are you going to force your money to always amount to the X composition of commodity stuff? Are you going to have a bunch of bankers that will expand and contract the amount of money based on the cost of these commodities?
Gold-backed paper currency works because you maintain a gold reserve. That is you maintain gold in some vault somewhere that is redeemable for money. Without a government-backed fractional banking system then having a paper note is just pure convenience. Just so you don’t have to carry around a bunch of gold with you all over the place. Paper money is more like a check in a check book then the current fiat money scheme we have.
I don’t understand how a index can be used as money. And I doubt that commodity futures-as-currency will lend itself to stable money supply.
When do you start to call money “fiat money”? When it’s backed by 100% gold reserves? When it’s backed by fractional reserves? When convertibility into gold is suspended for a weekend and then resumed? When convertibility is suspended for 24 years and then resumed? When the bank stops redeeming in gold, but starts redeeming the money by selling bonds and retiring the money? When the government stops accepting the money for tax payments?
Presumably when the government tells everyone what the national currency is instead of allowing the market to have competing private currencies.
if teh govt decreed gold and silver to be money what would you call gold and silver money?? fiat money?? someting else??
if the govt taxes you in gold and silver money and then goes about spending that gold and silver on govt expenditures , but allows people to use any money amongst themselves until tax time what would you call gold and silver then??
The problem that we have with fiat money is not that the government tax us and then spend whatever they have collected. It is the fact that the goverment, in a fiat currency sistem, can spend unlimited amount of money created out of thin air, without correlation to whatever they can raise from taxes, that causes all the problems.
In a hard money sistem, the government could not spend more that it could tax.
I do not understand why do you have this fetish about vocabulary.
Why should there be a limitation of the government’s ability to buy goods and services that the people desire according to the government’s legislative and budgeting process?
The government could either tax the people for the revenue, or as now mandated, the government could BORROW the money, ostensibly from people who have the money to lend to the government, but also otherwise as banks create money and lend to the government.
In neither case is the government creating any money, just using the existing money, ALL created by the private sector, to fund public services.
If the government were not so mandated, and if the government chose to exercise its sovereign powers over the monetary system, then the government could actually “print” the money, so to speak.
Obviously it could also be any combination of those.
All of the money created is created out of thin air.
All of it. It seems axiomatic.
So, what’s the problem with the creation of money via a fiat of the government that controls the monetary system and is ultimately responsible for the national economy?
I see the problem with fractional-reserve banking and all that, but if the government buys goods and services with the money that it expends, either tax, debt or non-debt funded, I don’t see any inflation issue.
The money supply does not increase more than the amount of the goods and services produced and purchased, which seems like what money should do.
It seems a better idea than the bankers having the power to create unlimited quantities of money, the national circulating medium – in whatever form, – using fractional reserve banking, and then destroying the money in the debt-deflation stage.
I see the problem with fractional-reserve banking and all that,
does fractional reserve banking actually take place now??
if it does, what form is the currency/money that is the reserves??? is it a dollar bill of sorts or dollar bills and some other type of currency/money still called a dollar???
Inflation plays the same role in economics as entropy does in thermodynamics. The measure of the entropy is the price level.I have modified the Goodwin model and posted a study at A proof tha t inflation destroys the real economy I suggest you start at post #111.Thank you
are the goods you have unreal??
would any increase in money by any ‘group’ usher in unreal economies?? of jus tmalke them operate at less than optimal??
good job.
People have invented money – and I mean hard money – because it enabled them to cooperate better, by making possible the economic calculation and thus enhancing de division of labour.
Fiat money only works as far as it mimics the hard money, but it will never be able to replicate it.
Would it be possible to make fiat money that has all the properties of hard money? One might try to. But why bother?
if govt says money is to be silver and gold is that not a fiat money??
Of course not, it would be just an aknowlegdement from the part of government of the sound money choosed by the market.
well..if silver and gold wasnt being used and and a govt decreed that it should be used that would sound like making a fiat money. i dont know to what extent that has ever occurred though. i expec there have been cases where some citizens/subject lived more on barter than coin and if tax time came and they had no gold or silver other property was seized in some way.
some fiat money wake work better than others. i dont know if gold or silver would get goods to market any better than fiat currency…notes, etc.
One day people are talking about fiat money and how dollar is using its value, the next day suddenly dollar becomes safe haven even safer than gold. These are all relative. If people accept your dollar as payment than it has a backing of ordinary people. I does not really need tons of gold somewhere to back the value of the money if people are backing it without.
Refinance Home Mortgage Loan
what is all relative?
when you say dollar do you mean the dollar definition that isnt an amount of silver??
Thanks for this good read. I really appreciated it and I’ve bookmarked you to check out the fresh stuff you post.
Fiat money is backed by the power of the government, the nation state. They are both inter-related. When a government goes to war, it is a show of power besides a lot of other things. It means that the government has the capability to back up its promises, which also makes the fiat currency stronger, in a way. Gold has been traditionally backed by the free market because power was much more volatile – one dynasty goes and another comes in a matter of a few years. When the nation state emerged, power was held for longer.
Comments on this entry are closed.