Voluntary Exchange by Matt Taylor

Author:Matt Taylor [Taylor, Matt]
Language: eng
Format: epub
ISBN: 9781839756078
Published: 2021-04-04T16:00:00+00:00

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More about Money

One sad consequence of introducing fiat currency has been to leave many people confused about money. We are given fiat currency and told it is money. They are not the same thing. Many important facts that are true about money are not true about fiat currency.

A quick reminder on what the words mean. Money is a commodity, normally gold, which became ‘money’ through the voluntary choices of people preferring the most exchangeable commodity. Currency is bank notes (including alternatives like base metal coins and electronic account balances), which certify that the bank is holding money equal to the amount printed on the note. Fiat currency is currency where the bank does not hold the money apparently represented by the currency.

Fiat currency is not a commodity but is exchanged as if it were. Fiat currency is, in fact, more exchangeable nowadays than money (gold) within a country, because the State uses force to make it so, but fiat currency is not a good way to store savings, because it has value only through State force.

Money emerged bottom-up from the decisions of ordinary people, but fiat currency was created by law, giving rise to the false idea that money was created by law. Money is useful as a unifying measure of prices and as a way to store savings, but these are ‘free extras’, accidental attributes of money, not functions that have been designed by some benevolent lawmaker.

Money is sometimes thought of as a ‘token’ that can be traded-in later for someone else’s labour. This is wrong. Money is an exchangeable commodity. If people want it, they will give you something in return. What you can get for it depends on what people will give you for it, which can never be known in advance, and is certainly not a fixed amount of someone else’s labour. Fiat currency is nothing but a token.

The money unit that so simplifies economic calculation has been replaced by fiat currency units, whose price is undermined by currency printing. As a result, all economic calculation is less reliable. If entrepreneurs can’t reliably calculate profit and loss, they can’t hear what society is telling them about the best use of resources.

Fiat currency ‘grows on the magic tree’, but money does not. Much government policy is based on the idea that printing fiat currency can improve the economy, an imaginary magic power to ‘stimulate growth’. There is much said about managing the ‘money supply’, when what they mean is the ‘fiat currency supply’. The central bank manages the fiat currency supply, but it has no influence on money. It can mislead entrepreneurs into making the wrong things, but it cannot increase the supply of things people really want.

Let’s look again at the so-called ‘money supply’. It is said that the ‘money supply’ needs to increase, because otherwise growth in the economy would lead to falling prices. It is true that increasing productivity tends to reduce prices. Surely that is why we want increasing productivity, so we can all live better? The idea that the quantity of money can somehow hold back the economy is nonsense.

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