I thought maybe it would be a good idea to transfer the discussion of fiat money over here.
Defining fiat money is important, otherwise we may be talking about different things. If fiat money is defined as something that isn't backed by hard assets, whether gold or a mortgage or chattel mortgage, and you define money as something which IS backed by hard assets, then by definition fiat money isn't really money.
So if you believe in the gold standard, or in real bills doctrine, then fiat money isn't money.
But if you don't define money as something which is backed by hard assets then fiat money is money.
As I've mentioned, I am working on a history of the Great Depression with one question in mind, where did the money go? There are several easy answers. When the stock market crashed, a lot of it went to money heaven. When the investors defaulted on margin loans, the brokers and the banks couldn't collect. We talked yesterday about the farm land bubble and someone mentioned the Florida land bubble. That money went to money heaven, too, and the banks couldn't collect on those loans, either. When the banks crashed, the depositors lost money, too. After the receivorships for the failed banks were completed, the depositors were paid about 50 cents on the dollar - and lost the time value of their money, too, while the economy lost the benefit of that money. These are all well known.
One of the things I am wondering about is how much money was lost due to the definition of money. The founders of the Federal Reserve system believed in the gold standard and real bills doctrine. How much of what you call fiat money and I call money was defined out of existence?
Another unrelated question intriguing me is whether stock prices in 1929 really were in a bubble. The Fed thought the economy was in inflation because of the way inflation was defined. The way we define inflation now, this was not true. I don't know whether anyone has actually looked at the balance sheets of all the companies traded on the New York stock exchange to see whether the prices were unrealistically high. There was an expectation of increased future earnings which was realistic - the economy was in great shape. But the Fed defined inflation by the number of loans outstanding and stepped on the brakes. |
