Bottom line: gold, silver, sea shells etc. became money because they had some other intrinsic value. The liquidity services they then provided surely increased the value but I think it is silly to imagine that they just materialized for the sole purpose of providing liquidity when nobody cared about them for any other reason.2. Paper money
With paper money, we have the issue that the actual paper it is printed on is (at least practically) worthless. That is undeniable. But here the issue is different. The deed to your house is printed on paper as well. Is that intrinsically worthless? ...
With fiat money, there is no contract obligating someone to redeem it for gold or silver at a fixed rate. But there are still contracts requiring people to redeem it for real goods....
These dollars are not just floating around, unconnected to any real assets in any contractual way. The contracts are right there. They are easy to see. You just have to look for them....
...they do have intrinsic value, or at least they are contractually connected to things with intrinsic value. We don’t need to look for magical network effects.Monetary and financial instruments are second order "derivatives" (legal, customary), with value traceable to first order "stuff" (real).
The Money Contract
Free Radical
6 comments:
But there are still contracts requiring people to redeem it for real goods....
Right. But bad idea to call this "intinsic value." It is clearly a case of instrumental value, which is extrinsic.
Free Radical is a Libertarian, who thinks in terms of "intrinsic value," which only "commodity money" is supposed to have. So it's a step forward in thinking to admit that there is institutional basis for money's value based on contract law. It's contracts that connect the monetary and financial to the real. First, this is was customary and then formalized into positive law, which developed into contract law as the basis of modern commerce and capitalist economic systems.
The important point he is making from the MMT POV is that paper money is not "funny money" or "counterfeit money" and just worthless paper. It is convertible into real stuff on demand by law.
He doesn't point out that much of the money supply is constituted of deposits created by lending and the value of the money created lies in the obligation of the lender to accept it in repayment of the loan that created the money, as well as legal obligations to the state in the form of taxes, fines, fees, tariffs, etc.
Nor does he point out that the state provides its currency as credits for future payment of obligations to the state.
There are not "just legal obligations." If the loans is defaulted on or obligations to the state not met, then one can be forced to forfeit ownership of real stuff in the present and future, e.g., garnishee.
The ability to enforce legal obligations makes legal obligations very real. This is why most Libertarians want to end such enforcement, which would cut the cord between fiat and the real. They only want to deal directly with the real and the use of "commodity money" (bullion) is really barter in which the coincidence of wants is provided for by a universal lust for gold as "intrinsically valuable." What is subjective, then, is the amount of gold bullion accepted in exchange for other goods.
So Free Radical is departing from Libertarian orthodoxy.
"Free Radical is departing from Libertarian orthodoxy."
Perhaps a bit Tom... rsp,
Gold is intrinsically worthless. Until the modern electronics era, you couldn't really do anything truly useful with it. It only had value because humans are stupid irrational creatures that are attracted to shiny things.
@Joe
Exactly, couldn't agree with you more. It had no intrinsic value, only an imposed value, like any other form of money.
re attraction to shiny things, by either crows or humans
One addicts intrinsic is a another person's extrinsic? :)
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