Money Comes From Society; The State Steals Credit
by Mark Horne
It is pretty common to hear conservatives or libertarians deride “fiat currency” as if it is worthless trash. They are absolutely right to insist that it is flawed. And those flaws will certainly lead to a bad end some day. But that is not the same as claiming it is “worthless.” If it were worthless, no one would give you anything in exchange for it. But they do.
The common claim is to say that money is “government created.” Supposedly, this leads to the conclusion that the money must not be really worth anything. But that is not the only way the argument could work. Many people hear that money is created by the state and then see how well it works for buying things and conclude that the state must be pretty competent in creating currency (I’d say, “making money,” but that would be confusing).
Claiming that the state has created our money, gives the state too much credit. Even if a monetary crisis is in our future, the fact remains that “Federal Reserve Notes” have worked well for decades. Nor do “legal tender” laws have much to do with anything. People use money because they find it valuable to do so. “Legal tender” laws are a marginal hedge that barely does anything. The day there really is a monetary crisis, no legal tender laws in the world will be draconian enough to make people use the money. Those laws are not why money is valuable now.
Why is money valuable? Money is valuable because everyone else wants it. Because everyone else wants it, everyone knows they can trade people for stuff in exchange for that money. And because they know they can trade with it; they want it too. It is a deep circular custom that has nothing to do with state power or “authority” or trustworthiness.
Money arises from trade. It is true that in some areas trade only arises when governments prevent theft and enforce contracts. But there has, throughout world history, been plenty of trade between people in different jurisdictions or without civil jurisdictions (just as there have been and are plenty of governments that interfere in trade and destroy contractual agreements). When people trade items, the exchange requires a “double coincidence” of wants. I have to want what you have more than what I have. And you have to want what I have more than what you have. When we trade, we both are happier for it.
But how often is the guy with a surplus of shoes likely to want a chicken at just the time when I need a new pair of shoes and have a surplus of chickens? As barter continues, people start making intermediary trades. That means they trade for things that they don’t want but which they predict that other people are likely to want so that they can trade again for the things they really want. Where precious metals are available, societies have naturally developed in a way that leads everyone to expect to use them as the best intermediary good. Not only does everyone tend to be attracted to gold and wish they could own some, but it can be divided up with each part having a proportionate fraction of the value. That would not be the case if someone were trying to “make change” with a fish during an exchange. Also, metals last (again, unlike fish and many other goods).
Of course, gold and silver are still heavy and somewhat bulky. Eventually societies learn to store their precious metals in safe places and carry warehouse receipts. This is the first paper money. At this point, legal shenanigans come into play. The state can start claiming that an inability to redeem the gold coins is not theft or fraud, but merely an inability to pay a debt. A promise to redeem paper bills in precious metal can allow the banks and/or states to create more money. They only need to redeem the bills of the minority in the population who demand the metal. Most people, being accustomed to trading paper and not wanting the hassle of storage, will not bother and trust the state. Eventually, the state can say that only foreigners may redeem currency for metal. And then they can, later, stop redeeming currency for metal at all.
In all of this, the state is not creating value. The state is not the reason for the value of the money. The value has been established long before through social tradition. The state is insinuating itself in the process. This will have consequences for the value of money, but the state is never the origin of it. The state may say calming words like, “backed by the full faith and credit of the United States.” But the reason people trust the words is because they already find the money trustworthy. They don’t trust the money because they trust the words.
To recap: money is a social tradition. It is simply what happens as a result of trade. It is a natural development of barter. The state takes this working social institution and damages it while taking credit for it. But the damage does not make the money worthless, and we shouldn’t give the state credit for the value of money. The fact that the state can conceivably damage money to the point of destroying its value, does not change the fact that fiat currency has value until that point.
Finally, we shouldn’t be surprised that money is as stable as it is despite state action. We all need each other. Exchange is how societies become more than the mere individuals within them. It should not surprise us that attempting to not use money or use a substitute usually does not end well. It is tantamount to trying to withdraw from the market network of social cooperation.