Is Bitcoin a Fiat Currency? FEE vs FEE
I have no problem with a lot of the specifics in this post by Demelza Hays (who’s my friend), but she is aghast that economists might classify Bitcoin as a fiat currency.
Well, that’s how I classified it (in my guide to Bitcoin co-authored with Silas Barta), and I think it’s consistent with Misesian monetary theory, as I explained in this earlier FEE post.
I don’t this is mere pedantic quibbling over definitions. I think many libertarians give the State too much credit when they say that it causes the dollar to be money “at gunpoint” or some such language. Here is me, discussing a quote from Mises:
Finally, we should guard against a mistake that is all too common in libertarian discussions of money. The term “fiat money” sometimes leads critics to declare that the State can turn something into money “by fiat.” At first glance, this assertion seems to follow naturally enough from Mises’s definition of fiat money. But accompanying his definition in The Theory of Money and Credit, Mises also wrote:
“In order to avoid every possible misunderstanding, let it be expressly stated that all that the law can do is to regulate the issue of the coins and that it is beyond the power of the State to ensure in addition that they actually shall become money, that is, that they actually shall be employed as a common medium of exchange. All that the State can do by means of its official stamp is to single out certain pieces of metal or paper from all the other things of the same kind so that they can be subjected to a process of valuation independent of that of the rest….These commodities can never become money just because the State commands it; money can be created only by the usage of those who take part in commercial transactions.” –Ludwig von Mises
To illustrate Mises’s point we can use the modern case of the US dollar. The US government can announce rules telling Americans which pieces of paper are and are not authentic US dollars. For example, there are rules (that the tellers at banks know very well) governing how much of a paper dollar can be ripped off, and periodically the dollars are redesigned to stay ahead of counterfeiters.
Even though the US government can tell Americans which pieces of paper are dollars, it cannot tell Americans that dollars are the money that they will use economically. The existence of legal-tender laws and other regulations complicates the issue, but nonetheless it is possible that next Tuesday, nobody will want to hold US dollars anymore and so their purchasing power will collapse, with prices quoted in US dollars skyrocketing upward without limit. This has happened with various fiat currencies throughout history, and these episodes did not occur because the State in question repealed a regulation that had previously ensured its currency would be the money of the region. Instead, the people using that currency simply abandoned it in spite of the government’s desires, resorting either to barter or adopting an alternative money.
Bob, what about the fact that government requires that taxes are paid in dollars? That’s what Steve Landsburg suggests gives value to the dollar, in the comment section here:
http://www.thebigquestions.com/2013/05/13/whats-a-bitcoin-worth-wonkish/
I’ll check it out Keshav. Pls remind me if you don’t hear from me, because I’m about to get on the road for Mises U etc. and this might slip through. But I definitely want to read this and respond.
Those laws ensure that the money has value at all, not that it will have a specific desired value.
That is more correct.
However I don’t think it is the money per se that is being valued, but rather wanting to not be kidnapped and not be thrown into a cage, and to at least be able to do that which can only be done outside of handcuffs and prison.
“US dollars are a ‘second-order good’. The first-order good would be non-kidnapping. As dollars are instrumental to achieving that goal …”
Silas,
If tax laws are sufficient to ensure that that the money has value at all then the monetary authorities can control the value by adjusting the supply of money relative to that demand.
Yeah, that’s basically the Warren Mosler 9mm theory of money.
Mind you, the implication is government does need to impose taxes in order to spend and the MMT’ers refuses to accept this logical conclusion… but let’s just ignore that and presume the local audience has got these basic point under control.
I think MMTers believe that taxation is needed to ensure that fiat value has money, but is not needed to finance govt spending (except when it is actually needed to prevent the inflation that would result in normal times when govt spending is financed by money creation!).
When the Somali government collapsed, people in Somalia continued to use the (fiat) Somali shilling as money.
Fiat money doesn’t need government once it has already become money.
Even the absence of an authority to fight counterfeiting didn’t cause people to stop accepting Somali shillings, they just accepted the “fake” shillings at par (as long as the denomination of the fake shillings was an actual denomination that the central bank had actually issued. You couldn’t get something obviously fake to pass.
I would put forward that Bitcoin is backed by stealth, while traditional government printed fiat currency is backed by violence. There’s an important difference.
The main thing that gives value to the US FRN is that the US population must pay tax with those (bad things happen if you don’t pay tax), and this is a large compulsory turnover every year.
Which basically means that the government has created more fiat currency than they have capacity for violence to force people to use that currency. Provided government has both the means and the will to keep applying force, the citizens will just have to keep using the fiat currency. Of course, in a democratic country this will be curtailed (eventually) by an election and the removal of that particular government.
Dear professor Murphy,
this is actually basically the only objection that I have to “Understanding Bitcoin”. You write, paraphrased, that according to Mises, fiat money is defined by having a special legal characteristic. Say a special piece of paper printed by the central bank has a different legal status than a piece of paper written by you or me, even if they do not have physical differences. In other words, it is provenance combined with special laws that define fiat money.
I tend to agree with this definition. We see for example that when the legal status is abolished, competition arises (like it did in Somalia) and it starts behaving more like commodity money (market price falls towards production costs etc).
If we agree on this (your & Mises’) definition, then it’s clear that Bitcoin is not a fiat money, because it does not have a special legal characteristic. Some countries do now have special legal classification of Bitcoin, but this was made after Bitcoin already was a medium of exchange, and with the purpose of penalising, rather than supporting, Bitcoin (so you could with a bit of exaggeration say that bitcoin is anti-fiat money). There are some exceptions, for example the ECJ VAT ruling from last year is seen as supportive of Bitcoin. Russia, for example, has been trying to classify Bitcoin for about 3 years now, with different branches of the state disagreeing with each other and proposed new laws changing several times, and there is still nothing enforceable.
The question of why fiat money arises is separate from the question of whether Bitcoin is or isn’t fiat money. Fiat money arises because the state takes measures to increase its liquidity and penalise the liquidity of other media of exchange, and the special legal status is one of the means in its arsenal to achieve that goal.
If you disagree, please point me to where Bitcoin had a special legal status at the time when it became a medium of exchange.
Bitcoin, totally fiat.
High quality fiat, but still fiat.
At the end of the Napoleonic wars, silver coins were legal tender in France only if they were officially minted. Wellington could not get hold of these when he invaded France, but he did have a good stock of Spanish silver coins. He did not simply use the Spanish coins as they were, but had them made into forged “French” coins. These were generally accepted since they contained the right amount of silver. Not sure what the point is, but an interesting snippet. Although Napoleon (or Frederick the Great, or Galen) said “an army marches on its stomach”, it was Wellington that had a superior supply and logistics system.
I would have thought that the flexibility of supply was the crucial criterion. Governments can create new currency at will, but you cannot simply create more gold. My simplistic understanding is that you cannot simply create more bitcoin, so it resembles gold more than it resembles dollars.
Bob, you said,
“This has happened with various fiat currencies throughout history, and these episodes did not occur because the State in question repealed a regulation that had previously ensured its currency would be the money of the region. Instead, the people using that currency simply abandoned it in spite of the government’s desires, resorting either to barter or adopting an alternative money.”
Can you provide an example and source or several please? I find this to be important and interesting.
Thank you.
Weimar Germany and Zimbabwe.