Throughout history, efforts have been attempted to replace commodity money with currencies that cost nearly nothing to generate and have no survival value. Artificial money, sometimes known as “fiat cash,” has a fictitious “value” simply because a government or central bank declares it to have one.
Fiat currency systems substitute a mere medium of exchange for natural commodity money, replacing the survival value of commodity money with subjective worth.
The United States dollar, the British pound, the euro, and the Japanese yen are all examples of fiat currency schemes. A fiat currency unit is worth whatever it can buy in practice, but it is not a metric by which value can be quantified because its purchasing power is limited.
Fiat currencies are characterized by coercion since most people would not accept them unless they were compelled to. The replacement of gold-backed money in the United States, for example, necessitated the use of legal force (criminal penalties of $10,000, ten years in jail, or both) to compel Americans to accept irredeemable Federal Reserve Notes in exchange for gold certificates in 1933.
Rent-seeking
Fiat currency schemes collect economic rents by requiring all transactions to take place in fiat money. Because humans must trade to survive, the ability to freely exchange value for value is a natural right with the same moral foundation as the right to life, liberty, and the pursuit of happiness.
Immorality
Fiat money schemes are immoral since they rely heavily on force to function. It is wrong to force individuals to accept artificial money with no objective value against their will and self-interest. Furthermore, fiat currency schemes allow those in charge of the currency to redistribute wealth by changing the currency’s availability, quantity, and distribution, which is essentially legalized robbery.
Central Planning
Because fiat currencies are founded on coercion rather than voluntary market connections, a central authority with the power to remove competing currencies, i.e., to create a monopoly, is essential.
Central economic planning is not only anti-democratic and anti-market, but it also Fails miserably.
Price Instability
Fiat currencies have no direct relevance to the survival necessities of human life because they require relatively minor physical-economic inputs.
The quantity of currency under a fiat currency arrangement is always and inevitably erroneous since it is determined by central planners. As a result of how much currency is produced and dispersed, this generates price instability and artificially promotes or depresses economic activity.
Price stability can never be attained in a fiat currency regime in practice.
Economic Volatility
Because fiat currencies are only loosely linked to physical, economic activity in the objective world, they tend to decouple and finally “untethered” over time. An economy is the result of millions of independent, individual human actors, and those in charge of a fiat currency have no way of knowing the correct quantity, even if they can recognize incorrect quantities after the fact by their consequences, such as credit booms, recessions, large-scale price bubbles, and economic collapses, such as the Great Depression, which began only sixteen years after the Federal Reserve was established. Naturally, economies can be volatile for a variety of reasons.
Fiat currencies, on the other hand, have the effect of amplifying economic volatility.
Currency Debasement
“Paper money finally returns to its intrinsic value—zero,” wrote Voltaire famously. Governments and central banks produce fiat currencies to symbolize nebulous, subjective conceptions of value such as “full faith and credit,” but the currency itself has no long-term worth.
Particularly in fractional reserve and debt-based fiat currency schemes, fiat currencies have a built-in tendency to lose purchasing power over time as more currency is generated.
In debt-based fiat currency schemes, the currency must be continuously inflated to avoid a deflationary vicious spiral (debt collapse).
Wealth redistribution
Increasing the amount of currency in circulation arbitrarily alters the distribution of money and, as a result, redistributes purchasing power, essentially taking wealth from the majority, such as savers and wage employees, to suit the interests of a privileged minority. When wealth is redistributed rather than created, society loses money. Even if it is driven by good intentions, government deficit spending alters the supply of currency and causes debasement.
As a result, government deficit spending is a deceptive, disguised tax on savers and wage earners.
Money Concentration
Over time, fiat currency schemes encourage wealth and property to flow to those who have the extraordinary privilege of producing the currency, hence promoting wealth concentration in society.
Extreme wealth concentration is both economically and politically problematic. A person with a million-dollar income, for example, will not purchase as many consumer goods, automobiles, or appliances as ten households with a hundred thousand dollar income.
Moral Danger
Fiat currencies give a legal means of obtaining something for almost nothing because they are created ex nihilo by monetary monopolies, such as through loan arrangements. As a result, individuals in charge of fiat currency have nearly unrestricted power over economic and, thus, political life.
Unfortunately, humans will never be excellent stewards of a money system that allows one group in society to get something for nothing.
In fact, civilizations controlled by unethical fiat money schemes gradually develop a “something-for-nothing” culture, in which, rather than earning wealth, everyone tries to live off the backs of others.
Corruption and Cronyism
As a result of moral hazard, fiat currencies encourage cronyism and corruption, eventually resulting in a corrupt culture. In the last century, just as democide has been a significant source of death, fiat currencies have been a leading cause of poverty.
Fiat currency systems redistribute and concentrate money, creating a small but extremely affluent minority, but they do not create wealth.
Confidence Failure
Because the worth of fiat currencies is largely subjective, it can be difficult to sustain a sense of “value” in the face of economic collapse and rising prices. Fiat currencies rely on the confidence and trust of people in charge of the currency in the end. When fiat currencies are abused, people lose faith in them, and they revert to their true value (zero).
As a result, in a fiat currency system, monetary policy is primarily concerned with sustaining confidence. Behavioral economics, for example, has emerged as a key tool for implementing monetary and economic policies. As a result, economic reporting by governments and central banks, as well as by the news media, lacks objectivity.
