Martin Armstrong — Money vs. Fiat

Matin Armstrong gets this one right.

A currency is backed by the productive capacity of its people like a share in a corporation. If this were not true then Germany, Japan, and China would never have been able to rise from the ashes without gold. Obviously, it was the productive ability of their people.…

The wealth of a nation is not its gold, land, or natural resources, for it still takes labor to bring any commodity to market. The wealth of a nation is its people. Look at Germany. Its productive capacity was the highest in Europe and it rightly rose to the top. In Africa and places in South America, the people are not educated as a whole or productive from an international trade perspective, and consequently those countries have been unable to rise to the top at any point in their history.…

Not every [fiat] system has collapsed. It is always dependent upon the integrity of government. That is the distinguishing factor.

Demand for any kind of money is created by some reasons to obtain it and hold it for future use. Every seller is a saver of either a token like a note or coin or a receivable extended as a credit and receivable as a debt.

This includes all kinds of credit based money. Demand for chartal money is created by the state imposing an obligation that can only be met with that which it declares acceptable for the purpose.

Some confuse the demand for money with the value of money. The value of money is dependent on additional factors, notably the capacity of the issuer. In the final analysis, this boils down to productive capacity with a human basis. While natural resources are needed, it is the human contribution that adds value to available resources.

Governments can influence value by the prices they set, e.g., the own rate of the currency as a policy rate, and the prices that government is willing to pay in markets. But government only shape value and it cannot create value.

Economic value arises from human factors like ingenuity and industry, coupled with availability of natural resources including energy sources. Nominal value, that is, prices that manifest the value of money arise from a relationship of the financial to the non-financial, which is established in markets in market economies based on supply and demand as influenced by a variety of factors.

Since money is not a commodity, its value is dependent on its use as a medium of exchange for something else that is desirable enough to overcome indifference to holding money. Since money only exists as a store of value for future us, the confidence in the relative stability of it value must is also required.

The use of money as medium of exchange, store of value and record of credit-debt is made possible by money being a unit of account. In a theoretical barter economy, a numeraire as a commodity used to compute the relative value of other commodities serves as the unit, for example, so many grains of wheat. In a monetary economy, money serves that purpose even though it has no use value as a commodity itself.

Money is an idea used as social construct. Money as a physical token has no value beyond that idea and specific context. I have a collection of loose change I brought home after numerous trips abroad over the years and a good deal of it is no longer in use, for instance, the French old and new francs, and the DM. The idea persists but the context is gone. 

Once this is realized it becomes obvious that hoarding money or a commodity formerly used as a numeraire in international trade, like gold, is fruitless. Everyone with any sense at least seeks to put out money at interest greater than the expected inflation rate. Borrower must use the funds to create value in excess of the interest to make it worthwhile.

It also becomes obvious that societies must choose to invest in their human resources to build the foundation for high functionality and relative prosperity.

Fiat currency provides policy space for public purpose and enables governments to commit resources to building that foundation, limited only by available resources, natural and human. Expanding human resources increases efficiency and effectiveness in the use of natural resources and leverages human resources through technology and innovation.

Focusing on gold and running a mercantilist policy to hoard it, or running a policy based on austerity for reasons of "affordability" are equally ill-advised.

Martin Armstrong
Money vs. Fiat