Fiat Currency

Fiat currency is currency declared by a government to be legal tender. The term derives from the Latin fiat, meaning “let it be done”. Fiat currency achieves value because a government accepts it in payment of taxes and decrees it can be used within the country as a “tender” in payment of all debts both public and private. This allows it to be used to buy goods, services, pay taxes and satisfy judgments rendered by courts. The most widely-held reserve currency, the FRN$, is a fiat currency.

Historically, societies have relied on monetary systems where currency used in trade was a commodity money composed of a physical commodity such as gold or silver.  For example, under the Coinage Act of 1792 the United States Congress defined a Dollar as 371.25 grains of fine silver.  Eventually substitutes for commodity money, such as bank notes, began to circulate as currency.

Fiat currency is neither essential for large countries nor is it always used.  For example, during the times when the most wealth was generated in the United States there was no fiat currency because Article 1 Section 10 Clause 1 of the United States Constitution was being enforced.  This prohibited any type of legal tender except for either gold or silver coin.

TENDER IN PAYMENT OF DEBTS

One of the standard methods for creating fiat currency has been for the government to declare the banknotes of particular government-backed banks, such as the Federal Reserve, to be “legal tender” (tender means “offering”) for debts.  Such laws typically require that the notes may be legally offered as settlement for all debts, and if refused, the debt is not required to be paid with other kinds of money. Such laws force legal tender notes to function as currency in the settlement of ordinary daily transactions.

INFLATION

Inflation is an increase in the currency supply.  Usually, a fiat currency loses value as the government either prints additional currency or, in the digital age, just pushes buttons on a computer adding digits to the account.  When abused this can result in hyperinflation where the fiat currency becomes worthless.

CHARTALISM

Chartalism is a monetary theory that states currency has value because government decrees it.  This is in contrast to the market theory of money which is that money derives its value because of the individual human action of market participants.

AMERICAN HATRED OF FIAT CURRENCY

Fiat currency was anathema to American Presidents Thomas Jefferson, Andrew Jackson and others. Jackson went so far as to pass the Specie Circular in 1836 which required all payment for government lands to be in gold or silver coin. The Austrian School of Economics has long held that no sound economy can ultimately endure under fiat currency.

For example, prominent Austrian Economist Ludwig von Mises argued in his book Human Action that, “What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit boom is built on the sands of banknotes and deposits. It must collapse.”

Fiat currency in conjunction with fractional reserve banking greatly increases the number and severity of boom-bust economic cycles, causing inflation, and allowing nations to initiate or prolong war.

FIAT CURRENCY ATTACKS CIVIL LIBERTIES

Alan Greenspan, Federal Reserve Chairman from 1987 to 2006, was an early critic of fiat money arguing in his essay, Gold and Economic Freedom, that “This is the shabby secret of the welfare statists’ tirades against gold.  Deficit spending is simply a scheme for the confiscation of wealth.  Gold stands in the way of this insidious process.  It stands as a protector of property rights.  If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.”

Ludwig von Mises also wrote in The Theory of Money and Credit that, “It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”

This is a major reason why contract and property law are so important in prosecuting fraud and enforcing bailment contracts.