4 ms·

You are talking about slightly different things. A lot of the reason why fiat money has value is obviously circular logic: You can use it to buy money at the st

You are talking about slightly different things. A lot of the reason why fiat money has value is obviously circular logic: You can use it to buy money at the store, because the store needs to pay its suppliers in the same currency, who needs to pay its employees in the same currency, who are happy (more or less) to work for the same currency because they can use it to buy the things that they need. The vast volume of why the value is there is clearly because of such thinking, so you are right. But the parent post is also right, because circular logic tends to be awfully inadequate at explaining things. This is where taxation comes in, because it serves as the "induction base case", so to speak. Taxation is what sets the wheel in motion initially; the additional momentum then builds gradually, but the continued existence of the base case is what gives it stability. Take taxation away, and the wheel will still continue because loan repayment acts as a "secondary base case". But once that secondary base case disappears as well, it is just a matter of time until collapse - kind of like the cartoon characters that keep running over the edge of the cliff, until they look down and notice gravity. So if you want to understand why money has value in the first place, the parent comment gives the better answer. But that doesn't mean your reply is wrong, either.

jessriedel 14y ago
OK, I kind of agree. I think "circular logic" is a very bad term here, because it suggests a mistake in logical reasoning, when in fact you just mean that the Nash equilibrium is only meta stable. Similarly, "induction base case" is bad because it again suggests reasoning, but I think here you recognize that and put it in quotes to show that it's just an analogy (and a neat one at that). But I disagree that you need taxation as a bootstrap to get you to the equilibrium. Indeed, in the actual history of the US it was the backing by gold that established the dollar; initial taxation was minimal. Now that backing has been removed, and the dollar still functions. Then, I infer, you would argue that taxation has replaced gold-backing as the stabilizer. Your penultimate paragraph is an interesting suggestion, but I'm not convinced. Could you point me toward some place where it was fleshed out? I can easily imagine a world where people keep writing new contracts denominated in dollars, whose street value is set by the process that I described. Where is the motivation for people to defect? One answer is that a new currency (like Bitcoin) comes along that has special properties that make it useful enough for people to absorb transaction costs and to start exchanging alongside the original fiat currency. Then things could unravel. And indeed, taxation could suppress this by providing additional friction like I mentioned in my original comment. But in the absence of such a new currency I don't expect the dollar to spontaneously start to unravel on its own simply because there are no taxes. People would continue to need a medium of exchange and the dollar is very good.

jessriedel 14y ago

OK, I kind of agree. I think "circular logic" is a very bad term here, because it suggests a mistake in logical reasoning, when in fact you just mean that the Nash equilibrium is only meta stable. Similarly, "induction base case" is bad because it again suggests reasoning, but I think here you recognize that and put it in quotes to show that it's just an analogy (and a neat one at that). But I disagree that you need taxation as a bootstrap to get you to the equilibrium. Indeed, in the actual history of the US it was the backing by gold that established the dollar; initial taxation was minimal. Now that backing has been removed, and the dollar still functions. Then, I infer, you would argue that taxation has replaced gold-backing as the stabilizer. Your penultimate paragraph is an interesting suggestion, but I'm not convinced. Could you point me toward some place where it was fleshed out? I can easily imagine a world where people keep writing new contracts denominated in dollars, whose street value is set by the process that I described. Where is the motivation for people to defect? One answer is that a new currency (like Bitcoin) comes along that has special properties that make it useful enough for people to absorb transaction costs and to start exchanging alongside the original fiat currency. Then things could unravel. And indeed, taxation could suppress this by providing additional friction like I mentioned in my original comment. But in the absence of such a new currency I don't expect the dollar to spontaneously start to unravel on its own simply because there are no taxes. People would continue to need a medium of exchange and the dollar is very good.