Not worth a Confederate Dollar
Rlbell writes and says:
The advantage of a fiat currency in the face of a trade deficit is that there is a tendency to self correction– as money leaves the country, the exporters sell it to convert it into money that they can spend at home. This excess depresses the value of the currency, imports in the imbalanced market cost more, and local substitutes are found. As a currency devalues, potential exports become more attractive to foreign buyers. A fiat currency with a market driven value, by increasing the cost of imports and decreasing the cost to foreign buyers, will revalue the currency towards balancing the trade accounts. This process gets hamstrung if the people that are exporting peg their currency to that of the importing country (like the chinese had been doing to the US [and may still be, for all that I know])
With all due respect, what I was taught was the opposite. Here is my understanding of the dismal science as regard to fiat currency:
Money is a good that holds value over time, is fungible, divisible, identifiable, and always in demand. If I hold a good, not to consume it, but to use in later trades or to pass to my heirs for them to hold for trades, the good has to be something that does not rot or rust. If I place this good in a stonghouse or bank, for ease of currency circulation, the bank can print IOU’s called banknotes to represent the good being stored.
Hence, money represent or symbolizes work. It represents the value of some labor done, some natural resource, or some other good. In theory, money could be anything: sterling silver or pounds of gold or cans of beans, but it has to be something.
Fiat currency, on the other hand, is not something. It is nothing. The whole point of fiat currency is that it is nothing.
Suppose I had five pounds of gold and suppose I found creditors willing to accept my IOU. The first creditor I give my IOU for five pounds can be pretty sure I might pay him back. The second creditor, if I wrote an IOU for five pounds, has to take me on faith. The third creditor is taking a risk. The ninth creditor for whom I write the same IOU against the same five pounds of gold is a fool, or I am a fraud. The one hundredth creditor is merely a victim: at that point, I am lying, since there is no way I am paying that same five pounds of gold to one hundred creditors. My IOU’s are worthless: they represent my unsupported promise.
Hence "Fiat money" is a contradiction in terms. Money is money insofar as it stores value over time. Fiat currency is ‘fiat’ precisely because it does not store value over time. When a fiat currency banknotes are sitting in a bank, or stuffed in your matress, their value can be raided by the state and transfered. The whole point if fiat currency is that it cannot be protected from raiding: it cannot hold value.
Here is what I mean by raiding. When the state prints up fiat currency, it does not put any real money into the economy. It does not add any goods or services. No work has been done. No object on the surface of the earth has been taken from a state where it is not pleasing to some human need or want and put into a state satisfying to some need or want. Fiat currency represents no labor.
Economically, all that happens when the Prince prints up five fiat currency banknotes is that, before the printing pressed rolled, those banknotes represented something: five pounds of silver sterling, five talents of gold, five cans of beans, whatever. After the printing presses roll, the banknote still has the number 5 printed on it, but now the note represents less: it is worth four cans of beans. When the prince buys some good or service or settles a debt, two things happen:
First, any creditor owed five banknotes gets repaid a banknote that has a 5 on it, but the note is only worth four cans of beans. This is a transfer payment. It is as if the prince crept into his wallet, extracted one can of beans worth of value, and gave it to the debtor.
Second, it takes time, either a long time or a short time, for the merchants to realize that the currency has been counterfeited: that there are now five banknotes floating around for every four cans of beans. Any merchant dealing with the prince gets paid full value. When he buys some good or service from some other poor sap who is still buying and selling at the old price, however, that sap is in the same position as the creditor in our last example: he sells a good or service worth five cans of beans for four cans of beans. He is defrauded of the value of a can of beans. The process of adjusting the height of wages and the price of goods to the new ratio of banknotes to beans is called inflation.
So then: suppose I buy my bread from a baker who lives across the border in Maryland, but he does not buy a science fiction book from world famous sciffy hack John C. Wright. I have what you call a ‘trade imbalance’. If the House of Burgesses in Virginia, alarmed at the trade imbalance, runs the printing presses and churns out what is basically counterfeit banknotes, there are no new cans of beans in Virginia: it is merely that one can of beans worth of wealth is transferred from creditors to debtors, and one can of beans worth of wealth is transferred from merchants who buy from the state to saps who do not raise their prices in anticipation of an unexpected inflation of the currency. Since wages are usually negotiated at hiring or promotion, wage-earners are almost always the saps. Indeed, Keynesian economics, when boiled down to its simplest principles, is the idea that wage earners are saps, whose wages will be transferred, via inflation of the currency, to the state.
Now then, what, in economic terms, is the difference between John C. Wright, hack, buying his bread from Maryland, Virginia, or Canada? The only difference is if the goods service and labor cannot freely pass the borders. If Maryland makes a law that says Maryland gold cannot be spent on Virginia SF books, and if I buy my Maryland bread in gold coin, then more gold will tend to end up on the Maryland side of the border, and Marylanders have to use some other trade good to swap for SF books. This imbalance is aggravated, not ameliorated, by the presence of fiat currency, because either government can, at will, inflate the value of its goods and services against foreign trade, which creates an incentive first for protective tariffs against effected goods, and second, creates an incentive for the other state to retaliate by inflating its currency as well. This tendency of inflation is checked by a political desire to maintain a strong currency against foreign trade, but, of course, if strong currency is what is desired, then use gold. If a currency that is not inflated much is a good thing, then gold, which cannot be inflated at all, is better.
With a hard currency, in finite supply, each dollar in unbalanced trade is gone from the money supply.
I am not sure how to interpret this comment. Are we assuming the states involved do not allow banks to lend and borrow across international borders? My gold is gone from my wallet when I buy a loaf of bread. If I buy my loaf of bread in Maryland, then some Marlyand baker has my gold coin. I do not see why this makes a difference if I trade him an SF book rather than a gold coin for his loaf of bread. If I pass him fiat currency, and I can raid the value thereof once the baker puts it under his matress, then all I am is a cunning theif. I give him an IOU that I do not intend to honor. Is that a bad thing or a good thing?
I admit that my intro to macroeconomics did not fully explain that scenario, but in the extreme case of the Roman empire, it led to a lack of sufficient coinage to meet the financial demands of administering the empire and forced the system of requisitioning to pay the costs of the army, among other public services.
Well, no. Not at all. Not even close. The Roman Empire got into fiscal difficulty because it debased it currency, minting slugs of lead covered with gold paint rather than gold coins. There was hardly a booming business in foreign trade in the Empire. What did the German tribesmen have to swap? Rather, the wage and price controls instituted by Diocletian, and the regulations preventing men from working at any task other than their father’s profession introduced grotesque inefficiencies and strangled commerce.
If the US was on a gold standard, there would be a massive export of the certificates, to the point that the US would have to revalue the currency to have enough currency to keep the economy lubricated. While foreign exporters might put up with this once, or twice, they would eventually only accept american gold.
I don’t understand the comment. If you are on a gold standard, no one has the power or authority to revalue (you mean "debase") the currency.
Without a fiat currency, no financial instrument can increase in value; except by devaluing something else, as there is a fixed amount of money. However, I will accept the possibility of being wrong about no capital gains without a fiat currency.
I do not understand this line of argument. If we believe that there is no capital gains without fiat currency, then we would have to believe that there was no capital gains during the 1920’s. In reality, this was the period of greatest economic growth in the world in history. We would also have to believe that there was no capital gains during the entire 1800’s. We would have to believe that the sum of the value of all goods and services in the world was the same in AD 1700 as it was in AD 500.
Obviously, when a group of monks in the Dark Ages clearforest and drain swamp and turn it into useful land, value is added. Any stock owned in the land would increase in value. When Henry Ford invents a more efficient way of making horseless carriages, there is an increase in value. When Marco Polo carries a ship load of spices from Cathay to Florence, there is an increase in value: because the Italian gold is of no use to the Chinese merchant when it is sitting in Italy, and the Oriental spices are of no value to the Italians when they are sitting back in the Middle Kingdom.
I suspect you have been taught Keynesian economics, which is a pack of lies. Real economics can be explained in simple terms, using simple examples, like cans of beans. Keynesian verbal hoodoo requires complex terminology that tends to evaporate on close inspection.
About John C Wright
John C. Wright is a practicing philosopher, a retired attorney, newspaperman, and newspaper editor, and a published author of science fiction. Once a Houyhnhnm, he was expelled from the august ranks of purely rational beings when he fell in love; but retains an honorary title.
