What gives a fiat currency its initial value? - page 3.

hugolp

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Quote from: BubbleBoy on June 30, 2011, 08:16:53 AM

I guess it depend on whether you believe democracy is a valid way to agree on societal issues.

Wrong again. Fiat currency is a currency imposed by force. That is its definition. What you are arguing now is the morality of the use of force, but whatever your opinion on this moral issue, your statement saying that fiat currency can appear without force is still wrong.

Quote from: hugolp on June 30, 2011, 07:32:47 AM

Taxation is a process, not an event. If the govt. wants 50% of the potatoes you produce at your ranch, they will get it, and it makes absolutely no difference if those potatoes cost 1 govt monetary unit or 1 billion. Sure, taken in isolation, the act of you selling potatoes and paying tax will create demand. But since throughout history the supply of govt money was always higher than the demand, we can safely conclude that the tax process, the process by which govt derives wealth from the productive society, does not give value to tax money. That's why I'm saying "being acceptable for tax" is an incomplete explanation for the value.

You are trying to justify the unjustificable. Government spending creates supply. Government taxation creates demand. Then there is a process with relations and consequences, as you say, but it does not change the fact that government spending creates supply and government taxation creates demand.

BubbleBoy

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Quote from: hugolp on June 30, 2011, 07:32:47 AM

Quote from: BubbleBoy on June 30, 2011, 07:14:23 AM

The full faith of the government, which provides a useful service to the society: a commodity specifically designed to facilitate trade. Fiat money is in theory superior to precious metals and societies should switch to fiat currency naturally, not due to coercion.

Sorry, this is nonsense by definition. If a currency is not imposed by force its not a fiat currency. Its the definition of fiat currency.

I guess it depend on whether you believe democracy is a valid way to agree on societal issues. Libertarians and anarcho-capitalists reject democracy as violence, and I don't want to open that old debate. The use of a stable fiat currency sure does seem to correlate well with being a successful society, and in the end people will vote with their feet - and that too is a form of democracy. I hear Somalis put good price and gold these days Wink

Quote from: hugolp on June 30, 2011, 07:32:47 AM

Quote from: BubbleBoy

Denominating taxes in a specific monetary unit creates supply of that unit, usually oversupply (inflation), not demand.

Wrong again. People need the currency to pay for taxes, therefore creating a demand for the currency. The fact that governments abuse the currency and supply overcomes demand does not mean that taxation creates supply and does not create demand.

Taxation is a process, not an event. If the govt. wants 50% of the potatoes you produce at your ranch, they will get it, and it makes absolutely no difference if those potatoes cost 1 govt monetary unit or 1 billion. Sure, taken in isolation, the act of you selling potatoes and paying tax will create demand. But since throughout history the supply of govt money was always higher than the demand, we can safely conclude that the tax process, the process by which govt derives wealth from the productive society, does not give value to tax money. That's why I'm saying "being acceptable for tax" is an incomplete explanation for the value.

hugolp

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Here you seem to be saying anyone who doesn't agree with you is a troll, and anyone whose arguments you find challenging to your own position is merely an interesting troll.

I have never called you a troll.

Challenging? Saying that fiat currency, defined as a currency imposed by force, can exists without force? That is challenging? You know you are on the wrong and you are just trying to make it personal (and derail the conversation talking about property rights). Answer to my arguments.

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Quote from: hugolp on June 30, 2011, 07:32:47 AM

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Acceptable for paying tax.

Not only acceptable for payint tax. Also, legal tender laws, which is basically a violation of the right to contract.

But even if you believe in taxes, why should the government only accept one currency for paying taxes? Why not charge 30% of your wage, whatever that wage is payed on? History is full of examples of governments payed in different types of currencies.

The requirement of having taxes payed in only one currency, the government one, comes from the same objective as legal tender laws: create a currency monopolly.

Quote

All this barrel of a gun stuff is exactly the same as what protects private property. Law.

Defending yourself, is not the same as agression.

Indeed. As the state is its taxes, it will defend itself should anyone attempt to deprive it of taxes. I have a problem with taxes when the state imposes itself overmuch upon the citizen, and when the state spunks itself on bombing foreign nations or serving the interests of powerful cliques that have co-opted it to their own purposes. For this reason democracy, education, individual rights and the devotion of the state to all those that would pay taxes are important to me.

Furthermore if a person deprived of opportunities and dis-enfranchised from the economy were to engage in theft to support themselves, the agents charged with the protection of private property can come down very hard on that person. I consider this aggression, in a system were people have no other recourse to survive.

Quote from: hugolp on June 30, 2011, 07:32:47 AM

BubbleBoy if you continue this way I might have to take away from you the title of most interesting troll of the forum.

Here you seem to be saying anyone who doesn't agree with you is a troll, and anyone whose arguments you find challenging to your own position is merely an interesting troll.

hugolp

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Quote from: BubbleBoy on June 30, 2011, 07:14:23 AM

The full faith of the government, which provides a useful service to the society: a commodity specifically designed to facilitate trade. Fiat money is in theory superior to precious metals and societies should switch to fiat currency naturally, not due to coercion.

Sorry, this is nonsense by definition. If a currency is not imposed by force its not a fiat currency. Its the definition of fiat currency.

Quote from: BubbleBoy

Denominating taxes in a specific monetary unit creates supply of that unit, usually oversupply (inflation), not demand.

Wrong again. People need the currency to pay for taxes, therefore creating a demand for the currency. The fact that governments abuse the currency and supply overcomes demand does not mean that taxation creates supply and does not create demand.

BubbleBoy if you continue this way I might have to take away from you the title of most interesting troll of the forum.

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Quote from: shady financier on June 30, 2011, 07:13:26 AM

Acceptable for paying tax.

I believe this is an incomplete explanation. In order to survive the government has no use for pieces of paper, it needs to derive wealth and resources from the society it controls. The government will always trade your taxes for goods and services at least as fast as you can pay them.
Denominating taxes in a specific monetary unit creates supply of that unit, usually oversupply (inflation), not demand. As any good with oversupply the value falls fast, so being acceptable for paying tax does not give value to fiat. If you have goods and services, say denominated in another, better, currency, you can always buy the tax currency on the cheap.

To actually give value to it's currency the government needs to refrain from spending it, it's not enough to require it for taxes.

Grant

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Quote from: Rage on June 29, 2011, 11:20:37 PM

What gives a fiat currency its initial value?

Interest rates.

shady financier

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Quote from: BubbleBoy on June 30, 2011, 07:14:23 AM

The full faith of the government, which provides a useful service to the society: a commodity specifically designed to facilitate trade. Fiat money is in theory superior to precious metals and societies should switch to fiat currency naturally, not due to coercion.
As all things related to government, it can go wrong in two main ways:
- democracy fails because access to power is severely limited, say by a closed plutocracy that derives wealth from monetary control
- democracy works but the average voters don't understand economics

In most societies these days a combination of the two problems make fiat money fail to meet it's theoretical potential.

I concur.

BubbleBoy

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The full faith of the government, which provides a useful service to the society: a commodity specifically designed to facilitate trade. Fiat money is in theory superior to precious metals and societies should switch to fiat currency naturally, not due to coercion.
As all things related to government, it can go wrong in two main ways:
- democracy fails because access to power is severely limited, say by a closed plutocracy that derives wealth from monetary control
- democracy works but the average voters don't understand economics

In most societies these days a combination of the two problems make fiat money fail to meet it's theoretical potential.

shady financier

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etcetera

Acceptable for paying tax.

All this barrel of a gun stuff is exactly the same as what protects private property. Law.

hugolp

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Quote from: Raulo on June 30, 2011, 05:35:16 AM

Contrary to the posters above, it is always the market the sets the value.

Historically, during gold/silver standard, currencies were just a title to some weight of gold or silver. The value of currency was linked to commodities value.

Currently, when currencies are not backed by any commodity, it is also the demand and supply of money that sets the price. The supply of money is to some extent (but not completely) controlled (one may say "manipulated") by the central bank, by the demand is not and the market entities decide whether it is worth to hold the currency given this price or not based on interest rates, central bank/government trustworthiness, economy situation, etc. Sometimes central banks try to fix the value of currency (or rather fix it relative to something else). That can be successful if the supply side of the money is carefully controlled. But if the market value would have been different, quickly a black market will appear with a different price.

This is false. The demand for government currency is not a voluntary act, but due to the regulations imposed by force by the government.

There is some market action that set the value of the currency, but certainly is not a free market outcome, it a completely regulated outcome.

Raulo

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Contrary to the posters above, it is always the market the sets the value.

Historically, during gold/silver standard, currencies were just a title to some weight of gold or silver. The value of currency was linked to commodities value.

Currently, when currencies are not backed by any commodity, it is also the demand and supply of money that sets the price. The supply of money is to some extent (but not completely) controlled (one may say "manipulated") by the central bank, by the demand is not and the market entities decide whether it is worth to hold the currency given this price or not based on interest rates, central bank/government trustworthiness, economy situation, etc. Sometimes central banks try to fix the value of currency (or rather fix it relative to something else). That can be successful if the supply side of the money is carefully controlled. But if the market value would have been different, quickly a black market will appear with a different price.

killer2021

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the barrel of a gun, unfortunately.

hugolp

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Just to add to Jack of Diamonds response, fiat currencies are backed by coercion and thread of violence, like he said. But usually the population does not accept a monopolly on money easily (we do because we are very used to it and have not seen anything different, hopefully Bitcoin will change that), so what governments usually do to impose a fiat currency is to slowly regulate and ultimately monopolize the existing majoritary currency.

Usually gold and silver is used as currency spontaniously, so the government starts by declaring gold and silver legal tender. Then they start emiting notes supposedly backed by gold and silver, until people is used to the paper and they can break the link with gold and silver. This sequence is a extreme simplification and there are particular variations in every case, but still its quite accurate of what usually happens over decades.

Rage

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Thank you! That basically answers my question and is actually what I suspected.

Jack of Diamonds

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Coercion and credible threat of force/violence.

Bitcoin is not backed by any state or entity with access to taxing power, central authority or a military,
so there is nobody to protect it or forcing people to use it.

BTC price against fiat currency is solely determined by demand (and speculation).

Rage

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So I'm slowly working to a solid understanding of economics and I've got most of it down except one thing that I can't seem to answer:

What gives a fiat currency its initial value?

Let's take the US dollar for example. When the dollar was first issues after the founding of the Federal Reserve, what decided what its purchasing power was? Was it some arbitrary number set by the Federal Reserve? Was it a collusion between the US central bank and others around the world?

Thanks!
Rage

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