QUESTION: Mr. Armstrong
People seem to just equate any non commodity form of money as being fiat. But fiat means a value dictated by government. There seems to be a foot-loose use of the word fiat to the point I am not sure what people are yelling about. Bitcoin fluctuates wildly so where is the difference between that and paper money which also is not fixed?
Confused
Thanks
ANSWER: No you are correct. The term “fiat” is actually not applicable to money today for it floats and thus has no value decreed by law. the definition is specific that Fiat money is a currency which derives its value from government regulation or law. That is more akin to Bretton Woods attempting to fix money’s value to $35 worth of gold perpetually.
This idea of “fiat” money is typically mixed up with confidence and acceptance. This illustration is actually correct the only difference is that people believe the dollar is money and will then accept it. This is the core step between barter and a medium of exchange. Those who say only gold is money are biased for that is what they believe is money, which is clearly not the present accepted norm. The first widely accepted money was cattle. When St Patrick first went to Ireland he was shocked that money was regarded as slave girls. He even wrote that his expenses were about the value of 15 humans.
The first globally accepted metal as a medium of exchange was bronze. Why? Because it had a practical use as a weapon or a tool. Money always had to have a utilitarian value and that was in fact its belief that someone else would accept it in payment. China never minted gold or silver coins for money there became fiat since 246BC. It was a bronze coin that the state declared had a value that was not related to its utilitarian value. Japan issued the same fiat coins and each emperor devalued what was in circulation making his now worth 10 times those of previous emperors. That destroyed the “belief” in Japanese money so they turned to importing Chinese coins and using a bag of rice. Japan was forced to stop issuing its own money for 600 years. So yes, the value of money has ALWAYS been the belief regardless of what it might be.
Gold became desirable and was first believed to be the tears of the sun. It was restricted exclusively for use by kings. Only when gold became more common with discoveries in Turkey (Anatolia) did it move down from jewelry to becoming a medium of exchange. Why did it become a medium of exchange when it had no practical value beyond adornment? Simply back to “belief” that someone else would desire it so you would accept it in exchange for something else.
Anything used as money must have a belief that someone else will accept it. Without that “belief” not even gold would have any value as a medium of exchange. So the difference between the dollar and monopoly money is simply “belief”. The key is acceptability for whatever emerges as money must be by broad acceptance.
To the extent money is “legal tender” means that the government will accept it for all payments due to them. The dollar is the most recognized form of money in the world not by the design of government, but by pure “belief” and demand. Of course many Americans who are pro-gold will not agree with that statement because they are too domestic in the focus. It is not that the USA is trustworthy, but insofar as other governments are even less like the Euro, Ruble, Yen, and Yuan. This is why we will eventually be driven into a representative form of an electronic reserve currency as a political compromise, not that this would be the ultimate solution. There is a difference between PRACTICAL ideas and LOFTY THEORIES of a perfect world to which you can never reach. The medium of exchange is purely a representative form of money which in that sense gold, diamonds, bitcoin, and paper money all share that commonality. None of these objects have a consistent value. So what is actually money? That has always been the total productive capacity of a person and a nation. This is why taxation is important for the higher the tax, the lower the productivity of a nation and the poorer it will become. The wealth of a nation is not its tangible objects, but its people’s productive capacity. You earn a wage for your labor and you accept money knowing someone else will take it from you “belief”. So is it the money or your labor that has the value?
The key to any currency is its acceptability both public and private. In Roman times, the state routinely reduced weight of gold coins to the point that they were not actually “legal tender” for the taxes owed were imposed by weight, not denomination. Furthermore, they would impose taxes also in kind. So if you did not have gold or silver, they would take livestock and food. Here is a Roman tax collector bar illustrating that the coins were not “legal tender” and were melted down to pay your tax by weight.
Clearly, money can be “fiat money” even when it is a commodity if the state declares its value by regulation and accepts it at that standard. Of course, that was the case in China. Fiat money is currency which derives its value from government regulation or law. The term derives from the Latin fiat (“let it be done”, “it shall be”). It differs from commodity money and representative money. Commodity money is based on some object or commodity, which has been cattle, sea shells, land, rice, wheat, bronze, or a precious metal such as gold or silver. The key was that the object had some utilitarian value or it was desirable and in sufficient quantity to provide a medium of exchange.
So to throw this term around loosely really confuses the issue for it misleads people into thing that somehow a gold standard will solve all problems. Our problem is not what is money, it is government and its endless historical evolution toward corruption. There is nothing new under the sun. We can come up with a solution for now, but eventually the cycle will kick in and we will return to where we are once again. The wheel of fortune always returns to where it began. Because of cycles, there will never be a permanent solution and only a fool would think so like Karl Marx.
