A fiat regime is entirely consistent with a free market in money.
That was the part of the post that I hoped someone might comment upon, at it is built on shaky ground. I do agree that a fiat regime is not likely to have developed through a pure market process, nor would markets unaccustomed to fiat regimes likely accept it. However, we do have experience with a fiat regime - and just as the circumstances that caused the creation of a good, once produced, have little to do with its value in the market, so the circumstances of the acceptance (or imposition by law) of a fiat regime has little to do with its expected value in the future. Consequently, I do not believe that the rule of law is necessary to maintain a fiat regime, once accepted. That may seem like a slight of hand, but it is consistent with the Austrian emphasis on subjective value, and the Hayekian view that the market disseminates knowledge and processes it to its highest valued use, no matter the accident of its creation.
That being said, I do not want to leave anyone with the impression that I am advocating for a fiat regime, nor that I believe that a free market would choose a fiat regime. It is true, however, that a fiat regime has the advantage that the marginal cost of producing the next “dollar” can be wholly determined by endonegenous monetary and economic factors, while that of a commodity based system is determined in part by exogenous factors. Consequently, the price level is in part determined outside of the economic system. For most, with respect to our “great inflation” experience, this is the best feature of a commodity-based system – it takes the discretion out of monetary policy.
By the way, I’d be most surprised if Heinz didn’t favour an entirely free market in money and banking, as do I. What he objects to, I would imagine, is that in a fractional reserve system (fiat or otherwise) underpinned by various explicit and implicit government guarantees, money and credit will in due course expand in an “unnatural” fashion with all the insidious long term effects that follow. Moral hazard in other words.
I would accept that view as theoretically sound, as long as we are clear that what you view as wrong with the system is not fractional reserve, fiat regime, etc., but rather the various explicit and implicit government guarantees that create moral hazard.
I don’t know Heinz. He seems like a reasonable person, but some of his views have no theoretical underpinning and are mutually exclusive, but they all do seem to point to the same conclusion - fiat money is worthless – so you better buy gold. What I attemted to point out, moral hazard aside, is that if one looks at the perfomance of fiat regimes since 1986 - they have operated approximately as if reserves were fixed, and that is consistent with what one would expect from a commodity standard. |
