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Author Topic: What gives a fiat currency its initial value?  (Read 5619 times)
shady financier
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June 30, 2011, 01:37:21 PM
 #21

Tradition or emergent social arrangements (however you want to call it) are an important part of law. But all of this does not answer the issue of the currency.

Emergent social arrangements, like state, government and taxes for instance...

By the way, I beleive there was a time when something called the Tally Stick was fiat, and used to pay taxes. Eventually the bankers managed to overturn the Tally Stick system and replace it with gold fiat instead. The bankers like gold and always have done, because it's easier to control than notches on sticks I guess, warehousing the stuff is after all how bankers started out...

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The value of goods, expressed in money, is called “price”, while the value of money, expressed in goods, is called “value”. C. Quigley
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June 30, 2011, 01:45:40 PM
 #22

Dont try to redefine force. Democracy includes the use of force. But this is not about democracy. Its as simple as saying that you were wrong when you said that fiat money, that is defined as a currency imposed by force, could appear without force. Its false by definition.

Your definition is wrong. Fiat money is the rational choice of democratic societies (*. Democracy does not require the use force, take for example consensus. Therefore, fiat money is not imposed by force.
If I and my beer buddies agree to settle our drinking debt by marking it in a notebook, we've just created a rudimentary form of fiat. No force required. The notebook has no intrinsic value and is not a binding contract, yet the full faith of the participants give it value.

(* that is, if your renounce 100 year old economic fallacies, and come to accept mainstream economics; I have't expanded on this point and don't intend to in this thread.


Government spending creates supply. Government taxation creates demand. Then there is a process with relations and consequences, as you say, but it does not change the fact that government spending creates supply and government taxation creates demand.

Yes, suply and demand does not give value to an object. That is correct. So?

So by connecting the two quotes, you are agreeing with what I said all along, that using a currency for tax purposes does not give it value.
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June 30, 2011, 03:07:04 PM
 #23

Dont try to redefine force. Democracy includes the use of force. But this is not about democracy. Its as simple as saying that you were wrong when you said that fiat money, that is defined as a currency imposed by force, could appear without force. Its false by definition.

Your definition is wrong. Fiat money is the rational choice of democratic societies (*. Democracy does not require the use force, take for example consensus. Therefore, fiat money is not imposed by force.
If I and my beer buddies agree to settle our drinking debt by marking it in a notebook, we've just created a rudimentary form of fiat. No force required. The notebook has no intrinsic value and is not a binding contract, yet the full faith of the participants give it value.

(* that is, if your renounce 100 year old economic fallacies, and come to accept mainstream economics; I have't expanded on this point and don't intend to in this thread.


Government spending creates supply. Government taxation creates demand. Then there is a process with relations and consequences, as you say, but it does not change the fact that government spending creates supply and government taxation creates demand.

Yes, suply and demand does not give value to an object. That is correct. So?

So by connecting the two quotes, you are agreeing with what I said all along, that using a currency for tax purposes does not give it value.

I had enough of your trolling for today. Another day more.
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June 30, 2011, 03:58:49 PM
 #24

The original poster is asking what gives fiat its initial value.

In the United States, the market set the initial value of currency. Originally, no force was used on the American people. They used British pounds and other currencies even after the revolution. Americans were not "forced" to use dollars. See A Midwife's Tale, a diary by Martha Ballard (1734-1812) who details among other things, every trade and purchase she made in the last 27 years of her life.

Other countries may have used force to initially impose currencies, but not in the United States.
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June 30, 2011, 05:33:14 PM
 #25

What gives a fiat currency its initial value is the legal and social infrastructure surrounding its use, including but not limited to taxes. Legal tender laws generally don't directly force you to actually use legal tender except in the case of a debt. If you offer to pay off a dollar denominated debt in something other that "legal tender", that party can successfully argue in court that you refused to pay. In some countries including mine, even small denominations of the national currency are not considered legal tender in larger amounts. You can opt to accept them but you don't legally have to.

I don't have a car, but if I did I would undoubtedly be incurring more dollar denominated debts at least temporarily, at minimum some recurring insurance cost which becomes mandatory for me to pay. Essentially this amounts to a private tax. If I was a good/lucky enough driver I could go decades without an accident and I would still have to pay towards others' claims and the company's operating costs and profits. Insurance companies could opt to accept something other than money (or credit) as payment but there seems to be nothing compelling them to do so at the moment.

Alternatively I could use gov't monopoly public transport, and pay fares that increase faster than inflation in spite of considerable subsidies because the union is constantly striking for more money and doesn't have to worry about competition from people who might do the job a lot cheaper. Or I could walk or bike for free aside from food and general wear and tear, but I'd better look out when using or crossing public roads because someone who kills me with a car through their own fault could quite easily get off with no legal penalty. Even in a small car I'm still at a safety disadvantage because essentially "might makes right" for heavier vehicles when law enforcement is not physically present.

In a real sense there is nothing forcing me to get a car, but anyone who drives their own vehicle in a country where insurance is mandatory incurs debts that pretty much have to be paid in legal tender or credit, unless they break the law and drive without insurance. To fuel the car, if you know somewhere you can buy gas with silver or something then great, but I know of no such place near me. Unless you arrange something before filling up at a gas station, you incur a debt that must be paid with legal tender.

Aside from transportation, it's certainly quite possible to eat without incurring any debts or making any form of payment to anyone. On the other hand, arranging shelter without owing rent or property taxes to anyone is likely to make life quite difficult for anyone who doesn't have some benefactor covering those costs, unless they are free to build somewhere on public land without anyone bothering them.

In some ways using the "coin of the realm" is optional, but in practice most people would find life quite difficult if they exercised their option to avoid using it whenever possible. Taxes are supposedly unavoidable but they can only really be enforced when you are documented to have earned or spent money, or if you own something subject to an ownership tax such as real estate. Owning as little as possible is one way around that but for many people the option is unappealing.

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June 30, 2011, 05:50:25 PM
 #26

If you profit on a stock sale you are forced to pay US dollars as tax.
If you profit on a gold bar sale you are forced to pay US dollars as tax.

If you generate any sort of economic activity involving any sort of tangible or intangible goods (such as Tibanne Ltd that exchanges bitcoins), you are forced to pay US dollars as tax (or in the case of Mt. Gox, Japanese yens).

Failure to pay those taxes gets you dragged out of your house at gunpoint if necessary, and imprisoned.
How is that not forcing people to transact in, and own fiat currency?

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June 30, 2011, 06:03:38 PM
 #27

If you profit on a stock sale you are forced to pay US dollars as tax.
Canadian dollars in my case, but ok.
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If you profit on a gold bar sale you are forced to pay US dollars as tax.
You can only be forced to do so if there is a record of the transaction taking place. You may be legally obligated to pay taxes after selling some gold to your buddy, but that doesn't necessarily mean the law is enforceable in that situation.

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andes
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July 01, 2011, 03:03:48 AM
 #28

You can only be forced to do so if there is a record of the transaction taking place. You may be legally obligated to pay taxes after selling some gold to your buddy, but that doesn't necessarily mean the law is enforceable in that situation.
So you basically say people are not forced to use fiat, because they can violate their "legal obligations" ?
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July 01, 2011, 08:21:27 AM
 #29

You may be legally obligated to pay taxes after selling some gold to your buddy, but that doesn't necessarily mean the law is enforceable in that situation.

You can also sell firearms off-the-record to a 'buddy' or a shady character, even if a license or transfer fee is required by the ATF.
You might grow pot at home, sell it to some friends and not tell anyone about it because it's 'harmless'.

You are still taking a risk of imprisonment every time no matter how small you perceive the risk to be.

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Fakeman
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July 01, 2011, 01:58:04 PM
 #30

You can only be forced to do so if there is a record of the transaction taking place. You may be legally obligated to pay taxes after selling some gold to your buddy, but that doesn't necessarily mean the law is enforceable in that situation.
So you basically say people are not forced to use fiat, because they can violate their "legal obligations" ?

I'm just drawing a distinction between being forced to do something and being potentially threatened with force. You could say that in 1933 all US citizens were "forced" to give up their gold, but in reality they did not all do so and the coins are still around to prove it. If you are a law abiding citizen and categorically refuse to pay capital gains taxes, you do have the option not to perform trades that would result in you owing such taxes.

You can also sell firearms off-the-record to a 'buddy' or a shady character, even if a license or transfer fee is required by the ATF.
You might grow pot at home, sell it to some friends and not tell anyone about it because it's 'harmless'.

You are still taking a risk of imprisonment every time no matter how small you perceive the risk to be.

No argument there. Life is full of risk though.

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July 01, 2011, 02:36:11 PM
 #31

Acceptable for paying tax.

Fiat currency is a currency imposed by force. That is its definition.

Before reading this topic, I was under the impression that taxes, collected by force if necessary, is what gives fiat money its value. However, it seems there is a debate about whether it is taxes or force that is most responsible for the value of fiat money. Anyway, I think it is possible to build hypothetical scenarios where either force is the reason a fiat currency has value or taxes are the reason for the value.

An example of force giving fiat money value is easy. Imagine a society where there are no taxes but the government can print up new fiat money at will. If the government forced everyone to use the currency for all transactions then the currency would have value purely by force without requiring any taxes.

An example of taxes giving fiat money value isn't so easy but perhaps it is possible. Imagine a society where the government decreed each citizen should pay a head tax using government issued head tax coins. Paying the head tax was completely voluntary, but people who didn't pay the head tax would have their name posted for everyone to see including voluntary government employees such as fire fighters, police, snow plow operators, pot hole repair people, etc. These voluntary government employees would receive head tax coins as payment for their public services. The public display of people who didn't pay the head tax would also be seen by family members, social organizations, places of businesses, patrons of business, employers, employees, etc.  In this example nobody would be forced to pay the head tax and nobody would be forced to us head tax coins as currency. However, I believe the head tax coins would be government issued and would be valued as a currency. Would the government issued head tax coins be considered fiat currency? If it were considered fiat currency, then it would be fiat currency that got its value without force.
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July 01, 2011, 02:51:45 PM
 #32

Before reading this topic, I was under the impression that taxes, collected by force if necessary, is what gives fiat money its value. However, it seems there is a debate about whether it is taxes or force that is most responsible for the value of fiat money. Anyway, I think it is possible to build hypothetical scenarios where either force is the reason a fiat currency has value or taxes are the reason for the value.

Both are the same thing. In the present system what gives fiat money its value is that they are the only means to pay taxes (collected by force or thread of) and legal tender laws (same).

In general fiat currency is defined as a currency imposed by force, usually by governments. In the present system the specific mechanism are the two noted above.

Quote
An example of taxes giving fiat money value isn't so easy but perhaps it is possible. Imagine a society where the government decreed each citizen should pay a head tax using government issued head tax coins. Paying the head tax was completely voluntary, but people who didn't pay the head tax would have their name posted for everyone to see including voluntary government employees such as fire fighters, police, snow plow operators, pot hole repair people, etc. These voluntary government employees would receive head tax coins as payment for their public services. The public display of people who didn't pay the head tax would also be seen by family members, social organizations, places of businesses, patrons of business, employers, employees, etc.  In this example nobody would be forced to pay the head tax and nobody would be forced to us head tax coins as currency. However, I believe the head tax coins would be government issued and would be valued as a currency. Would the government issued head tax coins be considered fiat currency? If it were considered fiat currency, then it would be fiat currency that got its value without force.

In this case said organization is not a government (it does not imose monpollies by force) and the currency is not a fiat currency.
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July 01, 2011, 03:24:51 PM
 #33

Both are the same thing. In the present system what gives fiat money its value is that they are the only means to pay taxes (collected by force or thread of) and legal tender laws (same).

In general fiat currency is defined as a currency imposed by force, usually by governments. In the present system the specific mechanism are the two noted above.

Aside from taxes and and certain types of debts that may not be strictly voluntary, how do legal tender laws impose anything on someone who hasn't willingly incurred a debt?

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hugolp
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July 01, 2011, 03:42:00 PM
 #34

Aside from taxes and and certain types of debts that may not be strictly voluntary, how do legal tender laws impose anything on someone who hasn't willingly incurred a debt?

It destroys your right to contract and makes it useless to create a contract in a currency that is not the legal tender one. Imagine that you sign a contract with me: You do some task in exchange for me paying you 3oz of silver. Now you do the task, and when I comes to pay you, I tell you that Im not going to pay you with silver, but with fiat currency. You dont agree and you demand silver because the contract specifies it. Your only option now is to take me to court where the judge will force you to accept fiat currency to settle my debt with you. You see there is no point on setting the contract in something that is not legal tender since you are going to be forced to accept it anyways.

This is a big incentive towards not using any other currency. Add that you can only pay taxes with fiat currency and you have a de facto monopolly.
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July 01, 2011, 04:56:31 PM
 #35

Quote
An example of taxes giving fiat money value isn't so easy but perhaps it is possible. Imagine a society where the government decreed each citizen should pay a head tax using government issued head tax coins. Paying the head tax was completely voluntary, but people who didn't pay the head tax would have their name posted for everyone to see including voluntary government employees such as fire fighters, police, snow plow operators, pot hole repair people, etc. These voluntary government employees would receive head tax coins as payment for their public services. The public display of people who didn't pay the head tax would also be seen by family members, social organizations, places of businesses, patrons of business, employers, employees, etc.  In this example nobody would be forced to pay the head tax and nobody would be forced to us head tax coins as currency. However, I believe the head tax coins would be government issued and would be valued as a currency. Would the government issued head tax coins be considered fiat currency? If it were considered fiat currency, then it would be fiat currency that got its value without force.

In this case said organization is not a government (it does not imose monpollies by force) and the currency is not a fiat currency.

I see the point you are making in this topic and agree that if you analyzed all fiat money around today you will ultimately find that force is ultimately the defining feature that gives today's fiat currencies value. However, pursuing my hypothetical scenario further, what if this same said organization also forced people to pay a different tax that was mandatory and that could only be paid in gold and the tax revenue paid in gold was used to fund the enforcement of various government imposed monopolies. This said organization which is clearly a government that imposed monopolies by force could also still issue the head tax coins that nobody was forced to pay, use, or accept. Would these head tax coins still not be considered fiat money?
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July 01, 2011, 05:15:37 PM
 #36

I see the point you are making in this topic and agree that if you analyzed all fiat money around today you will ultimately find that force is ultimately the defining feature that gives today's fiat currencies value. However, pursuing my hypothetical scenario further, what if this same said organization also forced people to pay a different tax that was mandatory and that could only be paid in gold and the tax revenue paid in gold was used to fund the enforcement of various government imposed monopolies. This said organization which is clearly a government that imposed monopolies by force could also still issue the head tax coins that nobody was forced to pay, use, or accept. Would these head tax coins still not be considered fiat money?

Yes. In that case, and only in that case, that gold money is fiat money.

The thing is governments try to avoid using gold as money because they can not print it. They only adopt gold as fiat money, because gold is what people was alreaady using and it is a way to get people used to a government money monpolly. Then later they go slowly breaking the tie with gold. History is a bit more complicated than this, but it is a good basic idea of what they do.
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July 01, 2011, 08:04:57 PM
 #37

Yes. In that case, and only in that case, that gold money is fiat money.

My question about something being fiat currency wasn't directed at the gold example, but instead at whether you thought "head tax coins" in my hypothetical scenerio were fiat currency. The only reason I brought the gold example into this hypothetical scenario was to convince you that my "said organization" was a government that clearly imposes monopolies by force. The government clearly uses force in the gold example, but the same government would not use any force for the head tax coins. Basically, I want to challenge your definition of fiat currency being a currency imposed by force by bringing up a counter example, the government issued and completely voluntary "head tax coins" that have no commodity value, no representative value, and the only value would be derived from them being able to be used to pay a voluntary tax to the government. Nobody would be forced to pay the head tax, use the head tax coins, or accept the head tax coins. Is the hypothetical scenario of head tax coins an example of a fiat currency that is an exception to your requirement of fiat currencies needing to be imposed by force or are these head tax coins viewed as something else by definition like merely government issued tokens that people happened to use as currency? I'm just trying to understand what makes something a fiat currency, and I am not convinced force is theoretically required 100% of the time by definition.
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July 01, 2011, 08:56:23 PM
 #38

Yes. In that case, and only in that case, that gold money is fiat money.

My question about something being fiat currency wasn't directed at the gold example, but instead at whether you thought "head tax coins" in my hypothetical scenerio were fiat currency. The only reason I brought the gold example into this hypothetical scenario was to convince you that my "said organization" was a government that clearly imposes monopolies by force. The government clearly uses force in the gold example, but the same government would not use any force for the head tax coins. Basically, I want to challenge your definition of fiat currency being a currency imposed by force by bringing up a counter example, the government issued and completely voluntary "head tax coins" that have no commodity value, no representative value, and the only value would be derived from them being able to be used to pay a voluntary tax to the government. Nobody would be forced to pay the head tax, use the head tax coins, or accept the head tax coins. Is the hypothetical scenario of head tax coins an example of a fiat currency that is an exception to your requirement of fiat currencies needing to be imposed by force or are these head tax coins viewed as something else by definition like merely government issued tokens that people happened to use as currency? I'm just trying to understand what makes something a fiat currency, and I am not convinced force is theoretically required 100% of the time by definition.

Then the answer is no, its not a fiat currency, but I think you wont find an example in history of such a thing because it does not make sense. Why would anyone would accept that currency? And why would the government create that currency if it does not benefit in any way?
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July 01, 2011, 09:56:06 PM
 #39

Yes. In that case, and only in that case, that gold money is fiat money.

My question about something being fiat currency wasn't directed at the gold example, but instead at whether you thought "head tax coins" in my hypothetical scenerio were fiat currency. The only reason I brought the gold example into this hypothetical scenario was to convince you that my "said organization" was a government that clearly imposes monopolies by force. The government clearly uses force in the gold example, but the same government would not use any force for the head tax coins. Basically, I want to challenge your definition of fiat currency being a currency imposed by force by bringing up a counter example, the government issued and completely voluntary "head tax coins" that have no commodity value, no representative value, and the only value would be derived from them being able to be used to pay a voluntary tax to the government. Nobody would be forced to pay the head tax, use the head tax coins, or accept the head tax coins. Is the hypothetical scenario of head tax coins an example of a fiat currency that is an exception to your requirement of fiat currencies needing to be imposed by force or are these head tax coins viewed as something else by definition like merely government issued tokens that people happened to use as currency? I'm just trying to understand what makes something a fiat currency, and I am not convinced force is theoretically required 100% of the time by definition.

Then the answer is no, its not a fiat currency, but I think you wont find an example in history of such a thing because it does not make sense. Why would anyone would accept that currency? And why would the government create that currency if it does not benefit in any way?

Thanks for following my hypothetical. I guess I'll go with the definition that fiat currency is "by definition" currency that is declared by government to be legal tender which ultimately goes back to your insistence that force is part of the definition. I guess it takes more for something to be a fiat currency than for it to be issued by government, not be redeemable for any commodity, and to be accepted as payment of taxes. I agree my hypothetical head tax coin currency is unlikely to happen, but I think social pressure has the potential to give something like head tax coins value. Of course, a publicly displayed list of who has paid or who hasn't paid their voluntary tax would be important.
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July 02, 2011, 05:26:43 PM
 #40

Aside from taxes and and certain types of debts that may not be strictly voluntary, how do legal tender laws impose anything on someone who hasn't willingly incurred a debt?

It destroys your right to contract and makes it useless to create a contract in a currency that is not the legal tender one. Imagine that you sign a contract with me: You do some task in exchange for me paying you 3oz of silver. Now you do the task, and when I comes to pay you, I tell you that Im not going to pay you with silver, but with fiat currency. You dont agree and you demand silver because the contract specifies it. Your only option now is to take me to court where the judge will force you to accept fiat currency to settle my debt with you. You see there is no point on setting the contract in something that is not legal tender since you are going to be forced to accept it anyways.

This is a big incentive towards not using any other currency. Add that you can only pay taxes with fiat currency and you have a de facto monopolly.

Valid points but additional clauses to a contract could assign a penalty to settling the debt in cash. Either way it's quite possible that, rather than getting paid in unwanted fiat, I might never get paid at all, even if I had the resources to take the matter to court. If all of a sudden you just disappear off the map and I have no way of locating you, the smartest thing for me to do may just be to eat the loss and try to be a better judge of character in my future dealings. It may not be fair but it's a reality whether or not we have the "safety net" of the court system.

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