4 ms·

Fiat currencies have value because of laws.

thaumasiotes 13y ago
This is only true if the relevant government sets prices by law. Every time that's been tried, it's been a complete disaster.
- betterunix 13y ago
  ...or if the law requires certain payments to be made (taxes, fines, etc.), provides legal protections for creditors when people default on their debts, and gives courts the legal power to require one person to pay another. This is what drives the demand for fiat currencies, and as long as the supply remains limited the currency will have value.
  - thaumasiotes 13y ago
    If you and I draw up a contract denominated in Bitcoin (or anything, really), and you default, the courts will protect me and require you to pay, in the form specified by the contract. Courts already have the power to require one person to pay another in any form; US courts routinely enforce judgments in foreign currency. It's true that US taxes get paid in US dollars, but, as I point out in another comment, that fails to distinguish "fiat currency" from metallic weights, which are universally considered "not fiat currency". So I'll put the question to you as well: if your taxes were assessed in silver, would that make silver, to you, a fiat currency? > as long as the supply remains limited the currency will have value. A technicality: e.g. Zimbabwe's money lost 100% of its value (it was abandoned by the population) long before an infinite quantity was available. I don't really disagree with the idea here, but the phrasing isn't right. EDIT: I might also point out that the Somali shilling (a paper currency) is widely used in transactions despite not being backed by any law or government at all. Since anyone can print them, they tend to trade at a value roughly equal to the cost of printing.
    - betterunix 13y ago
      "So I'll put the question to you as well: if your taxes were assessed in silver, would that make silver, to you, a fiat currency?" I would argue yes, because: (1) Under such a system, silver would be used as currency because people would need to acquire enough to pay their taxes (and other metals e.g. gold, platinum, copper would not be used as currency). (2) You would be hard-pressed to find a market where silver (by weight, not by "face value") is used as currency in today's world. Once upon a time silver was used as currency, and I would say that it is no coincidence that back then silver was a way to pay taxes (among other things). As for people saying that metal-based currencies are not fiat currencies, the subtle assumption hiding in there is that there is some other source of demand for metals that has nothing to do with the law. I am not a huge fan of this sort of idea, because to me it looks like this: Step 1: Metals have certain properties that are useful for currencies to have. Step 2: ??? Step 3: People use metals as currency (profit, at least if you can dig up some metal). Are you wondering what step 2 might be? Step 2 is the reason people use particular metals rather than wampum, geodes, or Somali shillings. Step 2 is usually ignored in these discussions, but it should not be. To bring things full circle, let's turn your question about silver around: if the government allowed taxes to be paid with wampum, would wampum be a fiat currency? If your answer is "yes" then the real question is, "What differentiates wampum from silver?" If your answer is "no" then the real question is, "What differentiates wampum from dollar bills?"
      - thaumasiotes 13y ago
        I agree that the argument that metals have intrinsic monetary value is rather strained. I tend to believe that the "metal has inherent value" mindset comes from the fact that you can take it anywhere in the world and you'll still be able to trade it for goods and services, which is not true of government-issued notes. That will also be the difference between silver and wampum, but it's entirely empirical; there's no theory that explains why one is inherently different from the other. > Under such a system, silver would be used as currency because people would need to acquire enough to pay their taxes (and other metals e.g. gold, platinum, copper would not be used as currency). This is false. Read some history. > Once upon a time silver was used as currency, and I would say that it is no coincidence that back then silver was a way to pay taxes (among other things). The history of Chinese taxation (and currency) is quite interesting. I'm only minorly informed, but here are some things that seem relevant: In what I'll call "phase 1" of the chinese economy, farmers conducted transactions in copper, merchants conducted transactions in silver, and taxes were assessed in kind (grain). This led to major logistical issues in collecting taxes; there was a point where the government announced a tax increase because the ships were arriving at the capital empty. (After a successful effort at reforming delivery, the increase was canceled!) In "phase 2", farmers still used copper, and merchants still used silver, but taxes were assessed in silver. This was an enormous boon to the logistics of collection, but occasionally beggared farmers when the exchange rate swung against them. At some point in all this, the government started issuing paper notes. (Notably, these were very common as "reciprocal gifts" to trade missions.) Merchants in the capital would accept these, but silver was far and away the dominant medium of exchange. It all suggests to me that silver was a way to pay taxes for the same reasons that it was used as a currency, but not because the government needed to have silver available to spend; clearly it didn't. Instead, silver was fairly dense (in terms of buying power per unit volume) and didn't spoil like grain does. I'm not clear on what you think the difference is between using silver by weight and using silver by face value. The whole idea of a mint is that coins have a standard weight. (Also potentially of interest: over the whole period I've described, China minted copper coins, but never silver ones. This didn't stop silver from being the metal of large-scale commerce and tax collection.)

This is only true if the relevant government sets prices by law. Every time that's been tried, it's been a complete disaster.

betterunix 13y ago
...or if the law requires certain payments to be made (taxes, fines, etc.), provides legal protections for creditors when people default on their debts, and gives courts the legal power to require one person to pay another. This is what drives the demand for fiat currencies, and as long as the supply remains limited the currency will have value.
- thaumasiotes 13y ago
  If you and I draw up a contract denominated in Bitcoin (or anything, really), and you default, the courts will protect me and require you to pay, in the form specified by the contract. Courts already have the power to require one person to pay another in any form; US courts routinely enforce judgments in foreign currency. It's true that US taxes get paid in US dollars, but, as I point out in another comment, that fails to distinguish "fiat currency" from metallic weights, which are universally considered "not fiat currency". So I'll put the question to you as well: if your taxes were assessed in silver, would that make silver, to you, a fiat currency? > as long as the supply remains limited the currency will have value. A technicality: e.g. Zimbabwe's money lost 100% of its value (it was abandoned by the population) long before an infinite quantity was available. I don't really disagree with the idea here, but the phrasing isn't right. EDIT: I might also point out that the Somali shilling (a paper currency) is widely used in transactions despite not being backed by any law or government at all. Since anyone can print them, they tend to trade at a value roughly equal to the cost of printing.
  - betterunix 13y ago
    "So I'll put the question to you as well: if your taxes were assessed in silver, would that make silver, to you, a fiat currency?" I would argue yes, because: (1) Under such a system, silver would be used as currency because people would need to acquire enough to pay their taxes (and other metals e.g. gold, platinum, copper would not be used as currency). (2) You would be hard-pressed to find a market where silver (by weight, not by "face value") is used as currency in today's world. Once upon a time silver was used as currency, and I would say that it is no coincidence that back then silver was a way to pay taxes (among other things). As for people saying that metal-based currencies are not fiat currencies, the subtle assumption hiding in there is that there is some other source of demand for metals that has nothing to do with the law. I am not a huge fan of this sort of idea, because to me it looks like this: Step 1: Metals have certain properties that are useful for currencies to have. Step 2: ??? Step 3: People use metals as currency (profit, at least if you can dig up some metal). Are you wondering what step 2 might be? Step 2 is the reason people use particular metals rather than wampum, geodes, or Somali shillings. Step 2 is usually ignored in these discussions, but it should not be. To bring things full circle, let's turn your question about silver around: if the government allowed taxes to be paid with wampum, would wampum be a fiat currency? If your answer is "yes" then the real question is, "What differentiates wampum from silver?" If your answer is "no" then the real question is, "What differentiates wampum from dollar bills?"
    - thaumasiotes 13y ago
      I agree that the argument that metals have intrinsic monetary value is rather strained. I tend to believe that the "metal has inherent value" mindset comes from the fact that you can take it anywhere in the world and you'll still be able to trade it for goods and services, which is not true of government-issued notes. That will also be the difference between silver and wampum, but it's entirely empirical; there's no theory that explains why one is inherently different from the other. > Under such a system, silver would be used as currency because people would need to acquire enough to pay their taxes (and other metals e.g. gold, platinum, copper would not be used as currency). This is false. Read some history. > Once upon a time silver was used as currency, and I would say that it is no coincidence that back then silver was a way to pay taxes (among other things). The history of Chinese taxation (and currency) is quite interesting. I'm only minorly informed, but here are some things that seem relevant: In what I'll call "phase 1" of the chinese economy, farmers conducted transactions in copper, merchants conducted transactions in silver, and taxes were assessed in kind (grain). This led to major logistical issues in collecting taxes; there was a point where the government announced a tax increase because the ships were arriving at the capital empty. (After a successful effort at reforming delivery, the increase was canceled!) In "phase 2", farmers still used copper, and merchants still used silver, but taxes were assessed in silver. This was an enormous boon to the logistics of collection, but occasionally beggared farmers when the exchange rate swung against them. At some point in all this, the government started issuing paper notes. (Notably, these were very common as "reciprocal gifts" to trade missions.) Merchants in the capital would accept these, but silver was far and away the dominant medium of exchange. It all suggests to me that silver was a way to pay taxes for the same reasons that it was used as a currency, but not because the government needed to have silver available to spend; clearly it didn't. Instead, silver was fairly dense (in terms of buying power per unit volume) and didn't spoil like grain does. I'm not clear on what you think the difference is between using silver by weight and using silver by face value. The whole idea of a mint is that coins have a standard weight. (Also potentially of interest: over the whole period I've described, China minted copper coins, but never silver ones. This didn't stop silver from being the metal of large-scale commerce and tax collection.)