The Modern State Cannot Exist without Fiat Money
The emergence of money is a market phenomenon. By surrendering fewer marketable goods for more marketable goods, individuals move closer to the goods they ultimately wish to consume but cannot acquire through direct exchange. The most marketable goods become common media of exchange (i.e., money).
With money on one side of every transaction, the number of relevant prices is reduced, the division of labor expands, and specialization in the stages of production becomes possible. The basic function of money, then, is to facilitate exchange. Contrary to this purpose, the substitution of national paper currencies for commodity money has made trade more difficult.
Hans-Hermann Hoppe has described this as a system of partial barter. With this understood, the purpose of global fiat money may be said to be entirely different.
Under a commodity money standard, such as gold, the state’s power is limited. Ludwig von Mises explains that
the excellence of the gold standard is to be seen in the fact that it renders the determination of the monetary unit’s purchasing power independent of the policies of governments and political parties. Furthermore, it prevents rulers from eluding the financial and budgetary prerogatives of the representative assemblies.
However, once the state controls the monetary system, it can issue its own paper notes. The paper notes are accepted because they represent a claim to commodity money with established purchasing power. While the state is obliged to redeem its notes, its inflationary power is ostensibly limited.
The purpose of fiat money is to remove this limitation in order to increase government spending. To illustrate this, we will review some of the major events that transformed the US from a limited, decentralized confederation into a large, centralized state. As we shall see, these events coincided with steps toward a pure fiat currency.
Thomas DiLorenzo has convincingly argued that Lincoln’s presidency laid the foundation for the modern welfare-warfare state. Most significantly, the War Between the States crushed the right of secession, thereby removing the means by which the states could check federal power. In order to fund the war, however, new sources of revenue were needed. To this end, the Revenue Acts of 1861 and 1862 imposed the first federal income tax on Americans and established
Article from Mises Wire