All Money Is ‘Fiat Money,’ Most Money Is ‘Credit Money’

Pounds and pence are British currency.
courtesy of Getty Images
There appears to be some misunderstanding about what ‘fiat currencies’ are, whether the dollar is one, and whether it should or should not be. Much of this may be traced back to modern-day gold enthusiasts like Peter Schiff and, ironically, his Cryptopian adversaries. Goldbugs despise the term “fiat,” implying that money created by decree is a threat to liberty and currency value due to the authority granted to the state or its representative, the central banker. Cryptopians all talk the same language, which irritates people like Schiff.
Schiff’s problem with the Cryptopians is that they replace one valueless instrument, the fiat currency, with another, the crypto asset, neither of which has any ‘intrinsic’ value. Only gold, according to Schiff, in his garb as a modern proponent of ‘commodity money,’ preserves this.
In this debate, we should credit Schiff as the questionable ‘winner,’ since, unlike the Cryptopians, he recognizes that scarcity alone, while fundamental to what political economists call exchange value, is insufficient. A secondary source of value is also required.
If we unpack ‘intrinsic’ as ‘usage’ of a specific kind, it could work here. Unfortunately, Peter becomes disoriented at this point. Gold’s use in jewelry and the like does not make it ‘intrinsically’ monetary, any more than diamonds’ like properties make them fit for use as currency in current countries.
ADDITIONAL INFORMATION FOR YOU
Gold did not become a monetary commodity because it was valuable. It became valuable when it became monetary, and it remained valuable during, but less so after, its time as money. Both were created monetary for different reasons, particularly their malleability for stamping with sovereign iconography (‘minting’), as well as their corrosion resistance.
And therein lies the problem. First, there was the fiat, which was a decree specifying the form in which legal tender would be issued (coins, bullion, etc.). Then came the’specs for the specie,’ or the material that was best suited to fitting to that form. Gold was, in this sense, as ‘fiat’ as paper and bank drafts are now – and as gold/dollar exchange rates were in the early twentieth century. (After all, the ‘gold standard’ was just that: a standard.)
In light of this, I can somewhat support Brendan Greeley’s recent request for us to cease calling our money “fiat money.” Unfortunately, I am unable to support his specific reasons for doing so. In effect, I’ve merely suggested my own justifications. To refer to it as fiat money is to simply refer to it as money.
The grounds for Greeley’s rejection of the phrase ‘fiat money,’ at least as applied to the US dollar, are less clear. He appears to believe that the credit character of bank and central bank money rules out its fiat character. If that’s the case, I’m afraid he’s fallen victim to category error. ‘Robert is tall rather than human,’ for example.
It appears to me that Greeley’s blunder stems from his apparent mash-up of (a) how a would-be politician should act and (b) how a would-be politician should act and (c) how a would-be politician should act and (d) how a would- (a) Whether or whether a monetary instrument is legally or traditionally recognized monetary, and (b) how that instrument is legally or commonly issued The term ‘fiat’ usually refers to (a), whereas the term ‘credit’ usually refers to (b) (b).
Both (a) and (b) entail the application of law, convention, or both. Despite Greeley’s apparent desire to treat contractually provided credit as something less legal or conventional in nature than ‘fiat money,’ credit instruments are certainly fiat-reminiscent (in Greeley’s preferred YouTube parlance,’memes’).
In truth, both (a) and (b) are concerned with what is regarded to ‘count’ for some societal purpose or purposes. But what counts here, and what Greeley appears to overlook, is that the social objectives to which (a) and (b) react are conceptually separate – we might modify how we do (a) or (b) but not the other.
In practice, all transferable assets, such as those mentioned in (b) above, include credit. (Therefore, most of ‘the money supply’ is endogenous, necessitating central bank modulation and allocation.) That is evidenced by the widespread use of liability-redolent legal terms of art like ‘note’ (‘Federal Reserve Notes,’ ‘Treasury Notes,’ private sector ‘promissory notes,’ etc. ), ‘bills’ (‘Treasury Bills,’ Fed ‘dollar bills,’ private sector ‘bills of exchange,’ ‘bills of sale’ tradable as’receivable
Only the central bank’s liabilities are socially deemed ‘legal tender’ in today’s commercial and financial systems, and this is pretty much all that calling them ‘fiat money’ presently means. (As a result, the Fed, investors, or both must’monetize’ non-monetary credit instruments (e.g., US Treasury promissory instruments and, indirectly, borrower promissory notes) by exchanging Fed promissory notes for them.)
Accordingly, the practical relationship between functions (a) and (b) as discharged in contemporary financial systems appears to me to be best seen as a suitable subset to set, rather than a set to disjoint set: … Under current systems, what socially ‘counts’ as legal tender in payment – that is, in discharge of a liability, therefore as monetary – also counts as an asset; but, not all assets count in payment, hence as monetary. (They could theoretically confine money to non-credit instruments, such as shiny bricks or cryptowhatsits, as we formerly did; but thankfully, we have legislation to prevent this.)
Please see this, this, this, and this, as well as many of my prior articles in this forum, for more on the “hows” and “whys” here.
One last point: The J.S. Mill statement that Greeley mentions, in which Mill… pardon me… coined the phrase ‘fiat,’ is a great catch. Leon Walras is another famous 19th-century thinker whose ideas on fiat and fiduciary money have been lost, and hence come as a surprise when they are discovered.
We… pardon me again… credit the classicals with far better understanding of how money works than we give them credit for. Some of their less encyclopedic followers are the ones that make them appear dumb. Could I advise that we’return to the source[s]’?/nRead More