What gives a fiat currency its initial value?

[Rage]

So I'm slowly working to a solid understanding of economics and I've got most of it down except one thing that I can't seem to answer:

What gives a fiat currency its initial value?

Let's take the US dollar for example. When the dollar was first issues after the founding of the Federal Reserve, what decided what its purchasing power was? Was it some arbitrary number set by the Federal Reserve? Was it a collusion between the US central bank and others around the world?

Thanks!
Rage

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[Jack of Diamonds]

Coercion and credible threat of force/violence.

Bitcoin is not backed by any state or entity with access to taxing power, central authority or a military,
so there is nobody to protect it or forcing people to use it.

BTC price against fiat currency is solely determined by demand (and speculation).

[Rage]

Thank you! That basically answers my question and is actually what I suspected.

[hugolp]

Just to add to Jack of Diamonds response, fiat currencies are backed by coercion and thread of violence, like he said. But usually the population does not accept a monopolly on money easily (we do because we are very used to it and have not seen anything different, hopefully Bitcoin will change that), so what governments usually do to impose a fiat currency is to slowly regulate and ultimately monopolize the existing majoritary currency.

Usually gold and silver is used as currency spontaniously, so the government starts by declaring gold and silver legal tender. Then they start emiting notes supposedly backed by gold and silver, until people is used to the paper and they can break the link with gold and silver. This sequence is a extreme simplification and there are particular variations in every case, but still its quite accurate of what usually happens over decades.

[killer2021]

the barrel of a gun, unfortunately.

[Raulo]

Contrary to the posters above, it is always the market the sets the value.

Historically, during gold/silver standard, currencies were just a title to some weight of gold or silver. The value of currency was linked to commodities value.

Currently, when currencies are not backed by any commodity, it is also the demand and supply of money that sets the price. The supply of money is to some extent (but not completely) controlled (one may say "manipulated") by the central bank, by the demand is not and the market entities decide whether it is worth to hold the currency given this price or not based on interest rates, central bank/government trustworthiness, economy situation, etc. Sometimes central banks try to fix the value of currency (or rather fix it relative to something else). That can be successful if the supply side of the money is carefully controlled. But if the market value would have been different, quickly a black market will appear with a different price.

[hugolp]

Contrary to the posters above, it is always the market the sets the value.

Historically, during gold/silver standard, currencies were just a title to some weight of gold or silver. The value of currency was linked to commodities value.

Currently, when currencies are not backed by any commodity, it is also the demand and supply of money that sets the price. The supply of money is to some extent (but not completely) controlled (one may say "manipulated") by the central bank, by the demand is not and the market entities decide whether it is worth to hold the currency given this price or not based on interest rates, central bank/government trustworthiness, economy situation, etc. Sometimes central banks try to fix the value of currency (or rather fix it relative to something else). That can be successful if the supply side of the money is carefully controlled. But if the market value would have been different, quickly a black market will appear with a different price.

This is false. The demand for government currency is not a voluntary act, but due to the regulations imposed by force by the government.

There is some market action that set the value of the currency, but certainly is not a free market outcome, it a completely regulated outcome.

[shady financier]

Acceptable for paying tax.

All this barrel of a gun stuff is exactly the same as what protects private property. Law.

[BubbleBoy]

The full faith of the government, which provides a useful service to the society: a commodity specifically designed to facilitate trade. Fiat money is in theory superior to precious metals and societies should switch to fiat currency naturally, not due to coercion.
As all things related to government, it can go wrong in two main ways:
- democracy fails because access to power is severely limited, say by a closed plutocracy that derives wealth from monetary control
- democracy works but the average voters don't understand economics

In most societies these days a combination of the two problems make fiat money fail to meet it's theoretical potential.

[shady financier]

The full faith of the government, which provides a useful service to the society: a commodity specifically designed to facilitate trade. Fiat money is in theory superior to precious metals and societies should switch to fiat currency naturally, not due to coercion.
As all things related to government, it can go wrong in two main ways:
- democracy fails because access to power is severely limited, say by a closed plutocracy that derives wealth from monetary control
- democracy works but the average voters don't understand economics

In most societies these days a combination of the two problems make fiat money fail to meet it's theoretical potential.

I concur.

[Grant]

What gives a fiat currency its initial value?

Interest rates.

[BubbleBoy]

Acceptable for paying tax.

I believe this is an incomplete explanation. In order to survive the government has no use for pieces of paper, it needs to derive wealth and resources from the society  it controls. The government will always trade your taxes for goods and services at least as fast as you can pay them.
Denominating taxes in a specific monetary unit creates supply of that unit, usually oversupply (inflation), not demand. As any good with oversupply the value falls fast, so being acceptable for paying tax does not give value to fiat. If you have goods and services, say denominated in another, better, currency, you can always buy the tax currency on the cheap.

To actually give value to it's currency the government needs to refrain from spending it, it's not enough to require it for taxes.

[hugolp]

Acceptable for paying tax.

Not only acceptable for payint tax. Also, legal tender laws, which is basically a violation of the right to contract.

But even if you believe in taxes, why should the government only accept one currency for paying taxes? Why not charge 30% of your wage, whatever that wage is payed on? History is full of examples of governments payed in different types of currencies.

The requirement of having taxes payed in only one currency, the government one, comes from the same objective as legal tender laws: create a currency monopolly.

All this barrel of a gun stuff is exactly the same as what protects private property. Law.

Defending yourself, is not the same as agression.

The full faith of the government, which provides a useful service to the society: a commodity specifically designed to facilitate trade. Fiat money is in theory superior to precious metals and societies should switch to fiat currency naturally, not due to coercion.

Sorry, this is nonsense by definition. If a currency is not imposed by force its not a fiat currency. Its the definition of fiat currency.

Denominating taxes in a specific monetary unit creates supply of that unit, usually oversupply (inflation), not demand.

Wrong again. People need the currency to pay for taxes, therefore creating a demand for the currency. The fact that governments abuse the currency and supply overcomes demand does not mean that taxation creates supply and does not create demand.

BubbleBoy if you continue this way I might have to take away from you the title of most interesting troll of the forum.

[shady financier]

Acceptable for paying tax.

Not only acceptable for payint tax. Also, legal tender laws, which is basically a violation of the right to contract.

But even if you believe in taxes, why should the government only accept one currency for paying taxes? Why not charge 30% of your wage, whatever that wage is payed on? History is full of examples of governments payed in different types of currencies.

The requirement of having taxes payed in only one currency, the government one, comes from the same objective as legal tender laws: create a currency monopolly.

All this barrel of a gun stuff is exactly the same as what protects private property. Law.

Defending yourself, is not the same as agression.

Indeed. As the state is its taxes, it will defend itself should anyone attempt to deprive it of taxes. I have a problem with taxes when the state imposes itself overmuch upon the citizen, and when the state spunks itself on bombing foreign nations or serving the interests of powerful cliques that have co-opted it to their own purposes. For this reason democracy, education, individual rights and the devotion of the state to all those that would pay taxes are important to me.

Furthermore if a person deprived of opportunities and dis-enfranchised from the economy were to engage in theft to support themselves, the agents charged with the protection of private property can come down very hard on that person. I consider this aggression, in a system were people have no other recourse to survive.

BubbleBoy if you continue this way I might have to take away from you the title of most interesting troll of the forum.

Here you seem to be saying anyone who doesn't agree with you is a troll, and anyone whose arguments you find challenging to your own position is merely an interesting troll.

[hugolp]

Here you seem to be saying anyone who doesn't agree with you is a troll, and anyone whose arguments you find challenging to your own position is merely an interesting troll.

I have never called you a troll.

Challenging? Saying that fiat currency, defined as a currency imposed by force, can exists without force? That is challenging? You know you are on the wrong and you are just trying to make it personal (and derail the conversation talking about property rights). Answer to my arguments.

[BubbleBoy]

The full faith of the government, which provides a useful service to the society: a commodity specifically designed to facilitate trade. Fiat money is in theory superior to precious metals and societies should switch to fiat currency naturally, not due to coercion.

Sorry, this is nonsense by definition. If a currency is not imposed by force its not a fiat currency. Its the definition of fiat currency.

I guess it depend on whether you believe democracy is a valid way to agree on societal issues. Libertarians and anarcho-capitalists reject democracy as violence, and I don't want to open that old debate. The use of a stable fiat currency sure does seem to correlate well with being a successful society, and in the end people will vote with their feet - and that too is a form of democracy. I hear Somalis put good price and gold these days

Denominating taxes in a specific monetary unit creates supply of that unit, usually oversupply (inflation), not demand.

Wrong again. People need the currency to pay for taxes, therefore creating a demand for the currency. The fact that governments abuse the currency and supply overcomes demand does not mean that taxation creates supply and does not create demand.

Taxation is a process, not an event. If the govt. wants 50% of the potatoes you produce at your ranch, they will get it, and it makes absolutely no difference if those potatoes cost 1 govt monetary unit or 1 billion. Sure, taken in isolation, the act of you selling potatoes and paying tax will create demand. But since throughout history the supply of govt money was always higher than the demand, we can safely conclude that the tax process, the process by which govt derives wealth from the productive society, does not give value to tax money. That's why I'm saying "being acceptable for tax" is an incomplete explanation for the value.

[hugolp]

I guess it depend on whether you believe democracy is a valid way to agree on societal issues.

Wrong again. Fiat currency is a currency imposed by force. That is its definition. What you are arguing now is the morality of the use of force, but whatever your opinion on this moral issue, your statement saying that fiat currency can appear without force is still wrong.

Libertarians and anarcho-capitalists reject democracy as violence, and I don't want to open that old debate. The use of a stable fiat currency sure does seem to correlate well with being a successful society, and in the end people will vote with their feet - and that too is a form of democracy.

Its the other way around. Fiat currency (and also democracy) always happens at the end of civilizations. And sadly, history shows that societies almost never scape from the collapse that fiat currency brings about. Once the inflationary forces are in motion its very hard to scape. The collapse can last decades or even centuries in the case of something as big as the Roman empire, but almost never there is a way back.

I hear Somalis put good price and gold these days

Well, Somalies are better off by a big difference in anarchy than with the previous socialist government they had. And you can check this with the data from the ONU and other international organizations.

Taxation is a process, not an event. If the govt. wants 50% of the potatoes you produce at your ranch, they will get it, and it makes absolutely no difference if those potatoes cost 1 govt monetary unit or 1 billion. Sure, taken in isolation, the act of you selling potatoes and paying tax will create demand. But since throughout history the supply of govt money was always higher than the demand, we can safely conclude that the tax process, the process by which govt derives wealth from the productive society, does not give value to tax money. That's why I'm saying "being acceptable for tax" is an incomplete explanation for the value.

You are trying to justify the unjustificable. 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.

[BubbleBoy]

Democracy is not use of force.
Supply and demand does not give value. Only certain relationships between supply and demand give value.

[shady financier]

Here you seem to be saying anyone who doesn't agree with you is a troll, and anyone whose arguments you find challenging to your own position is merely an interesting troll.

I have never called you a troll.

Challenging? Saying that fiat currency, defined as a currency imposed by force, can exists without force? That is challenging? You know you are on the wrong and you are just trying to make it personal (and derail the conversation talking about property rights). Answer to my arguments.

It's not personal, just telling you how you come across with the troll statement. Indeed, answer to the arguments.

If you think force is the defining element of a societies laws, then your outlook strikes me as overly reductionist to say the least. To me, libertarians, an-caps and people with even worse political ideologies often sound as if they would like the world to be far simpler and less complex then it is, so that their arguments can seem to make sense.

[hugolp]

Democracy is not use of force.

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.

Supply and demand does not give value. Only certain relationships between supply and demand give value.

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

It's not personal, just telling you how you come across with the troll statement. Indeed, answer to the arguments.

If you think force is the defining element of a societies laws, then your outlook strikes me as overly reductionist to say the least. To me, libertarians, an-caps and people with even worse political ideologies often sound as if they would like the world to be far simpler and less complex then it is, so that their arguments can seem to make sense.

Yes, this personal opinion is your default mental refuge when a logical argument that contradict your views is presented. You are still not answering. And btw, I dont think force is the defining element of a society law. 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.