#36 The Coercion of Fiat

There seem to be some misconceptions surrounding what constitutes a “fiat currency”. I’ve seen people wrongly call a whole number of things fiat, but in order to distill any argument, you should always start with the definition of the words.

By its own definition, a fiat money, is a money who’s value and acceptance is ordered by decree. Nation states achieve this via two means. Firstly, all taxes payable to the state are in the form of the sovereign’s fiat money and secondly is by the way of Legal Tender legislation.

Legal Tender laws decree the acceptance of the underlying money as the accepted form of payment in the settlement of debts. It’s actually written right onto the money.

Recall, we have discussed the extrajudicial nature of paper fiat monies in the past. You should be able to see here, quite clearly, that there isn’t much room left for debate. A fiat money is any money who’s value is determined by decree. Gold and silver can be fiat monies as well, just because they have an inherent commodity value does not exclude them.

We discussed this particular topic previously as well. The important distinction between a free market money and a fiat money, is whether or not the coupon value of the money is set by the governing authority or by the market. To some degree, the market will always set the relative purchasing power, even of a fiat money, but it is the government which denominates the nominal value of the debts which can be owed and settled using its currency of choice.

This is why an exchange ratio of silver to gold or vice versa, under bimetallism, is a fiat monetary system, and as we know, prone to plenty of the same problems as paper fiat.

What makes paper fiat a unique beast though, is that the markets would likely never choose paper over precious metal or some other form of hard money. These currencies only circulate because of the laws that enforce them as a legal settlement of debt in trade and tax.

Have you been keeping up with the Jorg Hulsmann quotes everyday? He tells the story plainly.

-Collin

Book of the Month:

The Ethics of Money Production by Jorg Guido Huulsman

-“The precious metals would have become monies even if coinage had never been invented, because even in the form of bullion their physical advantages outweigh those of all alternatives”

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