Fiat money: Difference between revisions
Pestergaines (talk | contribs) m Changed link. |
Pestergaines (talk | contribs) m →Legal Privilege: Internalized link and some words. |
||
| Line 18: | Line 18: | ||
''"Under a fiat money standard, governments (or their central banks) may obligate themselves to bail out, with increased issues of standard money, any [[bank]] or any major bank in distress. In the late nineteenth century, the principle became accepted that the [[central bank]] must act as the "lender of last resort", which will lend money freely to banks threatened with failure. Another recent American device to abolish the confidence limitation on bank credit is "deposit insurance", whereby the government guarantees to furnish paper money to redeem the banks’ demand liabilities. These and similar devices remove the market brakes on rampant credit expansion."''<ref name="Rothbard_fiat">Murray N. Rothbard [http://mises.org/rothbard/mes/chap12g.asp "E. The Government as Promoter of Credit Expansion"], Chapter 12—The Economics of Violent Intervention in the Market, ''[[Man, Economy and State]]'', online edition, referenced 2009-05-10.</ref> | ''"Under a fiat money standard, governments (or their central banks) may obligate themselves to bail out, with increased issues of standard money, any [[bank]] or any major bank in distress. In the late nineteenth century, the principle became accepted that the [[central bank]] must act as the "lender of last resort", which will lend money freely to banks threatened with failure. Another recent American device to abolish the confidence limitation on bank credit is "deposit insurance", whereby the government guarantees to furnish paper money to redeem the banks’ demand liabilities. These and similar devices remove the market brakes on rampant credit expansion."''<ref name="Rothbard_fiat">Murray N. Rothbard [http://mises.org/rothbard/mes/chap12g.asp "E. The Government as Promoter of Credit Expansion"], Chapter 12—The Economics of Violent Intervention in the Market, ''[[Man, Economy and State]]'', online edition, referenced 2009-05-10.</ref> | ||
According to Hülsmann<ref name="Hülsmann_fiat">Jörg Guido Hülsmann. [http://www.mises.org/books/moneyproduction.pdf "Ethics of Money Production"], online version, Chapter 7. Enters the State: Fiat Inflation through Legal Privileges, p. 108 and Chapters 8. - 11., referenced 2009-06-21.</ref>, there are four groups of legal privileges granted by the state (usually more | According to Hülsmann<ref name="Hülsmann_fiat">Jörg Guido Hülsmann. [http://www.mises.org/books/moneyproduction.pdf "Ethics of Money Production"], online version, Chapter 7. Enters the State: Fiat Inflation through Legal Privileges, p. 108 and Chapters 8. - 11., referenced 2009-06-21.</ref>, there are four groups of legal privileges granted by the state (usually more than one is granted): | ||
* '''legalized counterfeiting''' - the promises of banks are allowed to be more "elastic". For example, a coin marked "an ounce of gold" will be allowed to have any amount of gold or none, and can have any meaning. Banknotes were named "promises to pay", but were obscure on the details. | * '''legalized counterfeiting''' - the promises of banks are allowed to be more "elastic". For example, a coin marked "an ounce of gold" will be allowed to have any amount of [[gold]] or none, and can have any meaning. Banknotes were named "promises to pay", but were obscure on the details. | ||
* '''[[monopoly]]''' - only some monetary products may be produced by law, like a specific metal; or only the banknotes or coins of a certain bank. This limits the freedom of choice of users of money and benefits the producers and first recipients at the detriment of others. | * '''[[monopoly]]''' - only some monetary products may be produced by law, like a specific metal; or only the banknotes or coins of a certain bank. This limits the freedom of choice of users of money and benefits the producers and first recipients at the detriment of others. | ||
* '''[[Legal tender|legal tender]]''' is a money, that must be accepted in exchanges under a predefined price. Some monies may be driven out of the market due to [[Gresham's Law]]. | * '''[[Legal tender|legal tender]]''' is a money, that must be accepted in exchanges under a predefined price. Some monies may be driven out of the market due to [[Gresham's Law]]. | ||
Revision as of 13:35, 11 December 2009
Often called paper money, fiat money is in a wider sense any money declared to be legal tender by government fiat (ie law). In the narrower sense used here, fiat money is an intrinsically useless good used as a means of payment and a storable object.[1][2] All modern paper currencies are fiat money.
"In no period of human history has paper money spontaneously emerged on the free market. In all known historical cases, paper money has come into existence through government-sponsored breach of contract and other violations of private-property rights."[3]
Jörg Guido Hülsmann, Ethics of Money Production.
Properties
There are many reported advantages to fiat money as opposed to commodity-based money, among them:
- much lower costs of production
- the quantity can be easily modified to suit the needs of trade
- the quantity can be easily modified to stabilize the value of the money unit.
The main risk of this money is the possibility of a complete loss of value. See also For and against paper money.
Legal Privilege
"Under a fiat money standard, governments (or their central banks) may obligate themselves to bail out, with increased issues of standard money, any bank or any major bank in distress. In the late nineteenth century, the principle became accepted that the central bank must act as the "lender of last resort", which will lend money freely to banks threatened with failure. Another recent American device to abolish the confidence limitation on bank credit is "deposit insurance", whereby the government guarantees to furnish paper money to redeem the banks’ demand liabilities. These and similar devices remove the market brakes on rampant credit expansion."[4]
According to Hülsmann[5], there are four groups of legal privileges granted by the state (usually more than one is granted):
- legalized counterfeiting - the promises of banks are allowed to be more "elastic". For example, a coin marked "an ounce of gold" will be allowed to have any amount of gold or none, and can have any meaning. Banknotes were named "promises to pay", but were obscure on the details.
- monopoly - only some monetary products may be produced by law, like a specific metal; or only the banknotes or coins of a certain bank. This limits the freedom of choice of users of money and benefits the producers and first recipients at the detriment of others.
- legal tender is a money, that must be accepted in exchanges under a predefined price. Some monies may be driven out of the market due to Gresham's Law.
- legalized suspension of payments allows banks to avoid paying their obligations, while receiving payments from their debtors. If a bank is freed from contractual obligations to redeem its money and it is also legal tender, its banknotes become genuine paper money.
With legal privileges are the banks allowed to behave more irresponsibly, which increases moral hazard.
References
- ↑ Walsh, Carl E. Monetary Theory and Policy, The MIT Press 2003, ISBN 978-0-262-23231-9, online version, p.46 , referenced 2009-05-10.
- ↑ Dr. Pınar Yesin. [www.pinaryesin.com/VLSpring09/lecture1.pdf "Monetary Macroeconomics Lecture 1: A Simple Model of Fiat Money Part I"], referenced 2009-06-21.
- ↑ Jörg Guido Hülsmann. "Ethics of Money Production", online version, Chapter 1., 5. Paper Money and the Free Market p. 29-33, referenced 2009-05-10.
- ↑ Murray N. Rothbard "E. The Government as Promoter of Credit Expansion", Chapter 12—The Economics of Violent Intervention in the Market, Man, Economy and State, online edition, referenced 2009-05-10.
- ↑ Jörg Guido Hülsmann. "Ethics of Money Production", online version, Chapter 7. Enters the State: Fiat Inflation through Legal Privileges, p. 108 and Chapters 8. - 11., referenced 2009-06-21.
See also
External links
- Fiat money on Wikipedia