“Fiat Money” has two definitions – let’s not talk past each other!

In Gold Does Not Have Intrinsic Value, I decried, “such so-called ‘libertarians’ as Murray Rothbard and Jesús Huerta de Soto [who] pay no more attention to how the government is going to enforce a 100% reserve requirement than gun-control advocates pay to how the government is going to seize all the firearms in society.”

In this thread, I denounce so-called “libertarians” who assume that paper currencies with no backing in gold are valued because the government orders people to value them. That is impossible; value is subjective.

The following was originally posted at www.dailypaul.com/node/58374 in response to a request by Atrickpay to define the term “fiat money:”

According to Percy Greaves’ Mises Made Easier, fiat money is defined as (I re-ordered and numbered the sentences for reference):

1) A coin or piece of paper of insignificant commodity value that a government has declared to be money and to which the government has given "legal tender" quality. The value of fiat money rests on the acceptance of political law or fiat.

2) Fiat money neither represents nor is a claim for commodity money. Fiat money is issued without any set intention to redeem it and consequently no reserves are set aside for that purpose.

I agree with (2) only.

I do not agree with (1) because, as I said to Acala at www.dailypaul.com/node/58374,

"You are wrong when you write, 'Fiat money has value because it is mandated by law.'

"It is impossible to mandate value by law. Value is subjective.

"Fiat money has value because it had value yesterday and people assume that it still has value today. It had value yesterday because it had value the day before yesterday, and so on. This is described by Mises' Regression Theorem."

In (1) Greaves writes, "the value of fiat money rests on the acceptance of political law." If that remark doesn't raise your hackles, then you're not a libertarian! Value is subjective. It does not rest on political laws, whether or not those laws are accepted or reviled.

What if a bank stops redeeming their notes, but the notes continue to circulate? What is that currency called? The government is not involved: They didn't prevent the bank from forsaking its obligation, but neither did they force the people to continue using the notes.

I would call this "fiat money."

Admittedly, the word "fiat" does tend to denote government involvement, which is unfortunate, but that is the traditional term for what Greaves has described in (2), so that was the term I used. Frankly, it think it was badly coined, but that's water under the bridge. Perhaps, for clarity, I should have coined a new term for just (2) without making any mention of (1), but I did not. Incidentally, I did not use the term in my 1999 book, as I considered it too colloquial for academic writing.

"Fiduciary money," which I discuss in my book, is really the only term needed. It refers to there being more notes in circulation than there is commodity money in reserve. It's not like bells toll when those reserves hit zero - most people don't even notice. People just keep using the same notes that they have always used. Most people in the 70's - though not future DPers! - were unaware that Nixon had gone off the gold standard.

So, to answer your question, Atrickpay, I define "fiat money" using only the second part of Greaves' definition:

"Fiat money neither represents nor is a claim for commodity money. Fiat money is issued without any set intention to redeem it and consequently no reserves are set aside for that purpose."

The first part of Greaves' definition is pure BS.

To argue that fiat money is "bad" because its value rests on the acceptance of political law is like saying that Jason is a bad ghost because he cuts people up, unlike Beetlejuice, who makes them laugh. Debating the character of Jason and Beetlejuice is just mental masturbation - ghosts don't exist.

If we are going to assume that value can be mandated by law, as Acala argues, then why not declare leaves to be money? After all, once we've untethered ourselves from economic laws, like the subjective theory of value, then why not make it a fun fantasy?

Note: I will research the history of the term "fiat money" but, as far as I know, Greaves coined it in 1974 when he published Mises Made Easier. He was attempting to translate Mises' pre-WWII German-language journal articles for Mises on the Manipulation of Money and Credit, which he was editing. I do not believe that Mises himself ever used definition (1) in his own English-language writing. However, Mises published some low-quality papers at the end of his life (which I was polite enough to ignore in my Critique, www.axiomaticeconomics.com/critiques.php) and he might have slipped up.