There seems to be some confusion about what “fiat currencies” are, if the dollar is one of them, and whether or not it should or should not be. Much of this comes from today’s gold enthusiasts like Peter Schiff and, ironically, what I call its cryptopian antagonists.
Goldbugs using “fiat” as a term of disgrace, suggesting that money by decree is a threat to both freedom and the value of money thanks to the power vested in the state or its agent – the central banker . Cryptopians speak the same speech, exasperating the likes of Schiff.
Schiff’s beef with the Cryptopians is that they are replacing what he sees as a worthless instrument – the fiat dollar – with another, the so-called crypto asset – none of which has “intrinsic” value. Only substances like gold, argues Schiff in his guise of a modern exponent of ‘commodity money, ‘retains that.
In this dispute, we should regard Schiff as the dubious “winner”, because at least he recognizes in reverse, unlike Cryptopians, this one rarity, albeit necessary for what political economists have dubbed exchange value, It is insufficient. An additional form of value is also required.
“Intrinsic” could work here, if we unpacked it as “”use‘of a particular kind. Unfortunately, this is where Peter gets lost. For the use of gold in jewelry and the like is not sufficient, even in conjunction with its finiteness, to make it “inherently” monetary – any more than similar characteristics on the part of diamonds make them suitable for use. used as currency in contemporary economies.
Gold does not have became monetary because it was precious. He became precious when it became monetary – a bit like money throughout, but not so much after, his tenure as the money. Both were made monetary, in this case, for other reasons – namely their malleability for the purposes of stamping sovereign images (“coinage”), combined with their resistance to corrosion.
And there is the catch. First came the fiat – the decree of the form that legal tender would take (coins, ingots, etc.). Then came what I will call “the specifications for the cash‘- the material best suited to conform to this shape. In this sense, gold was as “fiat” as paper and bank drafts are today – and as gold / dollar exchange rates were at the turn of the last century. (The “gold standard” was a Standard, after all.)
With this in mind, I am able to partially approve a recent call by FT Brendan Greeley stop calling our money ‘trust money’. Unfortunately, I cannot endorse his specific reasons for doing so. My own reasons, I have indeed just suggested. Calling it fiat money is simply calling it… money.
Greeley’s reasons for rejecting the term “fiat currency”, at least as applied to the US dollar, are more obscure. He seems to think that the credit character of the bank and the central bank excludes its fiduciary character. If so, I’m afraid it fell into the category error. Like saying ‘Robert is tall rather than human.’
It seems to me that the source of Greeley’s error could be its relatedness (a) how a potential monetary instrument is legally or conventionally judge monetary, with (b) how this instrument is legally or conventionally Posted. The nickname “fiat” generally relates to (a), while the nickname “credit” generally relates to (b).
Both (a) and (b) imply law, convention or both. And in this sense, the instruments of credit are indeed also reminiscent of fiat (in YouTube jargon adopted by Greeley, “memes”) – despite the fact that Greeley apparently wants to treat contractually granted credit as something less legal or conventional than “fiat money”.
In fact both (a) and (b) imply what is socially considered “to count” for social purposes. But what matters here, and what Greeley seems to me to forget, is that the social goals to which (a) and (b) serve, while practically related, are analytically distinct – we could change the way we do (a) or (b). ) without changing our way of doing the other.
Indeed, all marketable assets – items in (b) above – involve credit. (Hence the endogeneity of most of the “money supply” and the associated need for modulation and allocation of the central bank.) This is evidenced by the ubiquity of legal terms such as “note” (” Federal Reserve Notes, “Treasury Notes”, “Private Sector Promissory Notes”, etc.), “Notes” (“Treasury Bills”, “Fed Dollar Bills”, “Bank Notes” ‘private sector’, ‘banknotes’ etc.), and ‘bonds’ (‘Treasury bonds’, ‘private sector corporate bonds’, etc.) in commercial and financial framework.
In contemporary business and financial systems, only the central bank’s liabilities, of all the liabilities sampled above, are socially considered “legal tender”, and that is about all that is now involved in calling them “fiat money”. (Hence the need for the Fed, investors, or both to ‘monetize’ – that is, buy – non-monetary credit instruments (e.g., US Treasury promissory notes and, indirectly, promissory notes of the borrower) by exchanging Fed promissory notes for them.)
The practical relation between functions (a) and (b) as they are fulfilled in contemporary financial systems therefore seems to me to be best considered not as that of a set to a disjoint set, but as that of a sub-set. set suitable for set:…
What “matters” socially as legal tender in payment – that is to say in payment of a liability, therefore as money – in the current provisions also counts as an asset; but all the things which count as assets do not count in the payment, therefore as monetary. (They could in theory, just as we could in theory restrict money to instruments other than credit – shiny bricks or cryptocurrencies – as we once did; but luckily we legislate otherwise.)
One last point: the JS Mill quote that Greeley Reports – in which Mill… forgive me… coined the term “fiat” – is a really nice take. Leon Walras is another classic 19e figure of the century whose reflections on fiat and fiat money are forgotten and therefore now unexpected when we find them.
The classics were much more useful to the way money works than we… forgive me again… credit them. It’s just a few of their less encyclopedic followers that make them stupid. May I suggest we go back to the source[s]’?