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It's a zombie idea that fiat currencies are somehow "backed" by tax collection, or the military, or the "legal tender" text on the banknote. No matter how many

It's a zombie idea that fiat currencies are somehow "backed" by tax collection, or the military, or the "legal tender" text on the banknote. No matter how many times we go through the refutation, zombie ideas like this just never die. Money is purely a social construct. It only has value because people collectively find it useful. There is no backing.

tim333 8y ago
I'm not convinced it's a zombie. Name a currency that's existed a few decades and does not have backing from any of those.
- chipotle_coyote 8y ago
  I think the point being made is that the exchange rates of any currency -- whether from currency A to currency B, or currency B to "hot dog, fries and soda" -- are essentially set by shared belief, not by some kind of intrinsic value, no matter what the currency is ostensibly backed by. The idea that currency needs to be backed by anything in the sense it's being used here (e.g., a tether backed by a dollar, or a dollar backed by a fixed amount of metal) is a convenient fiction that requires trusting all the entities explicitly or implicitly involved in the transaction. I'm aware bitcoin and other blockchain-based "currency" tries to expunge the need for trust, but in practice it seems like most of them succeed more in expunging accountability. The argument that state-issued currencies have value because they're the only currency you can use to pay taxes back to the state is true in some sense, but the value is still essentially arbitrary and the trust is still required. (e.g., if I owe money come April 15th, I have to trust my bank, Visa, and TurboTax, probably, even before it gets to the IRS).
- johnrgrace 8y ago
  The one exception would be the Canadian Tire dollar, it existed for 40 years with only the backing of a major retailer. I've read a few academic economics papers on the Canadian Tire dollar because it's an exception.
  - tim333 8y ago
    Although Wikipedia has "but is not considered a private currency" for that. But you are backing up the point that there isn't much that's existed a while that isn't backed by something. The other thing I thought of as a well known non backed currency was literally monopoly money. Though that "can also be used as a derisive term to refer to money not really worth anything" It'll be interesting to see how the cryptos work out. I'm optimistic that bitcoin will still be valuable in decades to come due to scarcity and fame. Bit like Van Goghs and that kind of stuff.
notahacker 8y ago
The ability to settle taxes and debts with money is a rather large part of why it's useful, especially relative to things which pretend to be equivalent but are not possible to settle tax bills or debts with...
- saalweachter 8y ago
  I'd wager landlords and grocery stores do more to provide inertia to the value of money in nearly every case than any country's tax system.
  - notahacker 8y ago
    Landlords and grocery stores have mortgages, supplier debts and taxes to pay. There's usually only one thing they can be settled in...
    - jjoonathan 8y ago
      Right, and all of it at every level contributes inertia to the dollar, and the cumulative total inertia "backs" the dollar.
roenxi 8y ago
One of the explicit major purposes of fiat currency is to make currency a hot potato so that if you try to hoard it you lose wealth. This is almost precisely counter to what the people who desire money want; so why would they accept fiat if they weren't forced to? You'd also get pressure from workers who don't want to be paid in tokens that lose 2.5% of their value each year. Who can say with a straight face that they will accept a default 2.5% pay cut each year built in to their wages, no questions asked? That would verge on crazy. If fiat isn't backed by some sort of government compulsion it is difficult to justify why savers or workers would deal in it. It isn't stable enough - it's value declines too quickly. The people who benefit are borrowers, the big banks and to some degree employers - powerful players, but not enough to force fiat in a battle where government isn't involved. The uniform acceptance of fiat is strong evidence that compulsion is involved.
- JetSpiegel 8y ago
  > You'd also get pressure from workers who don't want to be paid in tokens that lose 2.5% of their value each year. Who can say with a straight face that they will accept a default 2.5% pay cut each year built in to their wages, no questions asked? That would verge on crazy. Getting no raises is a pay cut, yes. But most workers spend their wages in the same year, inflation is not a problem here.
  - roenxi 8y ago
    Here is an analogy in real terms just to make sure we are on the same page: Contract A: I'll give you 1,000 warm meals in the first year, 980 warm meals in the second year and 960.4 in the third year, progressing according to meals = 1000 ^ (year - 1). There is an understanding that I'll maybe give you a raise every year or maybe not depending on market conditions. Contract B: I'll give you 1,000 warm meals a year. We'll renegotiate next year. If market conditions have changed I might offer you less. Now, in principle these two contracts are not that different and market conditions should force the employer to pay market wages. But if you offered a worker the choice between the two options they'd pick B. The structure of contract A is clearly not in the workers interest because it involves a lot of bureaucratic foolishness just to get offered a steady real income. It can only encourage shenanigans. If I were on Contract A (which, since I'm payed in fiat when I work, I am) then I have to semi-regularly run figures against a diverse array of facts to figure out if I'm making or losing against my starting salary and I have to fight my employer for a wage raise if inflation is 4% but they offer a 2% increase. In addition there is opaqueness about what inflation really is; the government agencies do their best to measure it but it isn't a perfectly distributed phenomenon. I don't think I can accurately estimate what wage increase would be maintaining a fair wage when I am working. I don't have enough information about, eg, inflation by postcode or asset class vs my consumption. I don't accept that that compensation structure is good for me as an employee. And more broadly the incentives for workers is to be paid in something that looks almost exactly like currency but does not inflate away year on year.
rsync 8y ago
"Money is purely a social construct. It only has value because people collectively find it useful. There is no backing." You're missing a very important point: US dollars are special because they are the only thing accepted to pay US taxes. No matter how valuable of a thing you own - gold, euros, a truck full of mona lisas, shares in TSLA ... it will not be accepted as payment for US taxes. Understanding where the value of money comes from and what it is actually used for and what the nexus is between financial entities and physical force ... it all starts with understanding what it means that the government will not accept anything from you, no matter how valuable, for payment of taxes other than the currency it issues.
- panarky 8y ago
  Let's try a thought experiment. The government starts accepting any asset for tax payments. You can now sign over fractional ownership in your factory, or your rental real estate, or your Mona Lisa to pay your tax bill. Are dollars now worthless, because they're not required to pay taxes? Do you abandon your bank accounts because the dollars have no value? Certainly not! It's too inefficient for the grocery store to appraise your Mona Lisa and negotiate a 1e-8 share of it. Dollars are still useful, and they still have value even if they don't have a monopoly on tax payments.
  - tim333 8y ago
    The point with taxes is they are denominated in dollars or similar so if you conduct your US business in French Franks or Bitcoins or whatever, converting each transaction to dollars on the return would be a pain in the arse which is why most businesses don't do that. Paying isn't a problem - send Franks or whatever to your accountant and they'll sort it.
  - jerf 8y ago
    Let's try something that isn't a thought experiment, but a natural experiment, that is, something that has happened dozens of times throughout history. Why is it that when governments collapse, their fiat currency simultaneously goes with them? If money is just a social agreement, why do those two things always happen together? If money is just a matter of convenience, why isn't that money still useful even after the government collapses, if nothing about the state of that money has changed? Why aren't people still accepting Confederate State Dollars somewhere? The answer is that the state has changed. The backing of the currency collapsed, and it turns out that currencies collapse hours, if not minutes, after that news gets out. In the modern era, probably minutes. There's an irony to cryptocurrency advocates claiming money doesn't have backing, which is that the only reason you can claim that is precisely that you're so casually used to fiat currency being rock solid, to the point that you literally can't imagine it collapsing, that it leads you to misunderstand the nature of currency.

tim333 8y ago

I'm not convinced it's a zombie. Name a currency that's existed a few decades and does not have backing from any of those.

chipotle_coyote 8y ago
I think the point being made is that the exchange rates of any currency -- whether from currency A to currency B, or currency B to "hot dog, fries and soda" -- are essentially set by shared belief, not by some kind of intrinsic value, no matter what the currency is ostensibly backed by. The idea that currency needs to be backed by anything in the sense it's being used here (e.g., a tether backed by a dollar, or a dollar backed by a fixed amount of metal) is a convenient fiction that requires trusting all the entities explicitly or implicitly involved in the transaction. I'm aware bitcoin and other blockchain-based "currency" tries to expunge the need for trust, but in practice it seems like most of them succeed more in expunging accountability. The argument that state-issued currencies have value because they're the only currency you can use to pay taxes back to the state is true in some sense, but the value is still essentially arbitrary and the trust is still required. (e.g., if I owe money come April 15th, I have to trust my bank, Visa, and TurboTax, probably, even before it gets to the IRS).
johnrgrace 8y ago
The one exception would be the Canadian Tire dollar, it existed for 40 years with only the backing of a major retailer. I've read a few academic economics papers on the Canadian Tire dollar because it's an exception.
- tim333 8y ago
  Although Wikipedia has "but is not considered a private currency" for that. But you are backing up the point that there isn't much that's existed a while that isn't backed by something. The other thing I thought of as a well known non backed currency was literally monopoly money. Though that "can also be used as a derisive term to refer to money not really worth anything" It'll be interesting to see how the cryptos work out. I'm optimistic that bitcoin will still be valuable in decades to come due to scarcity and fame. Bit like Van Goghs and that kind of stuff.

notahacker 8y ago

The ability to settle taxes and debts with money is a rather large part of why it's useful, especially relative to things which pretend to be equivalent but are not possible to settle tax bills or debts with...

saalweachter 8y ago
I'd wager landlords and grocery stores do more to provide inertia to the value of money in nearly every case than any country's tax system.
- notahacker 8y ago
  Landlords and grocery stores have mortgages, supplier debts and taxes to pay. There's usually only one thing they can be settled in...
  - jjoonathan 8y ago
    Right, and all of it at every level contributes inertia to the dollar, and the cumulative total inertia "backs" the dollar.

roenxi 8y ago

One of the explicit major purposes of fiat currency is to make currency a hot potato so that if you try to hoard it you lose wealth. This is almost precisely counter to what the people who desire money want; so why would they accept fiat if they weren't forced to? You'd also get pressure from workers who don't want to be paid in tokens that lose 2.5% of their value each year. Who can say with a straight face that they will accept a default 2.5% pay cut each year built in to their wages, no questions asked? That would verge on crazy. If fiat isn't backed by some sort of government compulsion it is difficult to justify why savers or workers would deal in it. It isn't stable enough - it's value declines too quickly. The people who benefit are borrowers, the big banks and to some degree employers - powerful players, but not enough to force fiat in a battle where government isn't involved. The uniform acceptance of fiat is strong evidence that compulsion is involved.

JetSpiegel 8y ago
> You'd also get pressure from workers who don't want to be paid in tokens that lose 2.5% of their value each year. Who can say with a straight face that they will accept a default 2.5% pay cut each year built in to their wages, no questions asked? That would verge on crazy. Getting no raises is a pay cut, yes. But most workers spend their wages in the same year, inflation is not a problem here.
- roenxi 8y ago
  Here is an analogy in real terms just to make sure we are on the same page: Contract A: I'll give you 1,000 warm meals in the first year, 980 warm meals in the second year and 960.4 in the third year, progressing according to meals = 1000 ^ (year - 1). There is an understanding that I'll maybe give you a raise every year or maybe not depending on market conditions. Contract B: I'll give you 1,000 warm meals a year. We'll renegotiate next year. If market conditions have changed I might offer you less. Now, in principle these two contracts are not that different and market conditions should force the employer to pay market wages. But if you offered a worker the choice between the two options they'd pick B. The structure of contract A is clearly not in the workers interest because it involves a lot of bureaucratic foolishness just to get offered a steady real income. It can only encourage shenanigans. If I were on Contract A (which, since I'm payed in fiat when I work, I am) then I have to semi-regularly run figures against a diverse array of facts to figure out if I'm making or losing against my starting salary and I have to fight my employer for a wage raise if inflation is 4% but they offer a 2% increase. In addition there is opaqueness about what inflation really is; the government agencies do their best to measure it but it isn't a perfectly distributed phenomenon. I don't think I can accurately estimate what wage increase would be maintaining a fair wage when I am working. I don't have enough information about, eg, inflation by postcode or asset class vs my consumption. I don't accept that that compensation structure is good for me as an employee. And more broadly the incentives for workers is to be paid in something that looks almost exactly like currency but does not inflate away year on year.

rsync 8y ago

"Money is purely a social construct. It only has value because people collectively find it useful. There is no backing." You're missing a very important point: US dollars are special because they are the only thing accepted to pay US taxes. No matter how valuable of a thing you own - gold, euros, a truck full of mona lisas, shares in TSLA ... it will not be accepted as payment for US taxes. Understanding where the value of money comes from and what it is actually used for and what the nexus is between financial entities and physical force ... it all starts with understanding what it means that the government will not accept anything from you, no matter how valuable, for payment of taxes other than the currency it issues.

panarky 8y ago
Let's try a thought experiment. The government starts accepting any asset for tax payments. You can now sign over fractional ownership in your factory, or your rental real estate, or your Mona Lisa to pay your tax bill. Are dollars now worthless, because they're not required to pay taxes? Do you abandon your bank accounts because the dollars have no value? Certainly not! It's too inefficient for the grocery store to appraise your Mona Lisa and negotiate a 1e-8 share of it. Dollars are still useful, and they still have value even if they don't have a monopoly on tax payments.
- tim333 8y ago
  The point with taxes is they are denominated in dollars or similar so if you conduct your US business in French Franks or Bitcoins or whatever, converting each transaction to dollars on the return would be a pain in the arse which is why most businesses don't do that. Paying isn't a problem - send Franks or whatever to your accountant and they'll sort it.
- jerf 8y ago
  Let's try something that isn't a thought experiment, but a natural experiment, that is, something that has happened dozens of times throughout history. Why is it that when governments collapse, their fiat currency simultaneously goes with them? If money is just a social agreement, why do those two things always happen together? If money is just a matter of convenience, why isn't that money still useful even after the government collapses, if nothing about the state of that money has changed? Why aren't people still accepting Confederate State Dollars somewhere? The answer is that the state has changed. The backing of the currency collapsed, and it turns out that currencies collapse hours, if not minutes, after that news gets out. In the modern era, probably minutes. There's an irony to cryptocurrency advocates claiming money doesn't have backing, which is that the only reason you can claim that is precisely that you're so casually used to fiat currency being rock solid, to the point that you literally can't imagine it collapsing, that it leads you to misunderstand the nature of currency.