He was argueing that it is created by decree. That governments tax an item, which gives it value, which causes people to use it as money.
Of course, anything exchanged has value. So he still hasn’t explained why people choose items with fiat value over items with true market value for use as money.
Even those were nothing but bank notes, used in place of gold.
Does it matter though? For Mises’s argument to be shown to be false, he’d have to show money could arise independently of barter. Forcing people to pay me for my “protection” services in a given commodity will make the commodity highly valued if they take the threat seriously, but this still takes place within the confines of a barter economy, until at some point the commodity becomes money. I don’t think the source of the good’s value is of relevance to Mises’s argument.
-Jon
Nope.
I fail at Austrian Economics. I forgot to apply praxeology to the tax collector. We must ask, what type of commodity does he want to be payed in?
First, he is collecting taxes because he wants to improve his standard of living. If he were to collect taxes as a percentage of production(ie 10% of all eggs laid) it is unlikely that goods he collected would match his personal consumption, meaning he would have to engage in barter. First to sell his surplus and then to buy the goods he seeks.
So the tax collector would, if possible, seek to be paid in a commodity widely accepted in exchange. This would reduce the numbers of transactions he has to make by forcing the tax payers to exchange their goods into this single commodity themselves; allowing the tax collector to purchase what he wants without having to ever find a buyer for his surplus.
In other words the tax collector wants to be paid in money.
Which is why I said that he’s stood reality upon its head.
Ok, gents - now I have plenty counter-arguments to work with! I’ll try to answer just two points that several of you have raised with a very schematic historical scenario (or fairy-tale, if you prefer not believe it):
How can a monetary system be created without the prior existence of a system of exchange?
How can the creation of a taxation system precede the creation of a system of exchange, or even a monetary system?
Once upon a time, somewhere in the near-east, there were two tribes - A and B.
Tribe A lived in the valley, close to the river. They were a pretty sedentary bunch, although they raised a few cattle and sheep they lived mostly from agriculture.
Tribe B lived up on the mountain. They were a more active and mobile bunch, raising mostly cattle and sheep, tilling the occasional plot of land.
Occasionally Tribe A would trade the odd sheep for some grain from Tribe B, but this never amounted to much - mostly they just argued about who got to use the side of the valley. Tribe B claimed it was part of the mountain and wanted to graze it, Tribe B that it was part of the valley and wanted to plough it. One day this conflict escalated and B ended up getting the upper-hand, and that’s how the story begins.
Having conquered Tribe A the first thing that B does is to start taking things from A that are useful. This would usually start with food and would probably be by direct personal extortion under the threat of violence. But pretty soon two things start to happen:1. B will stop producing the things it can just take from A, which means that B becomes dependent on A for these. 2. Direct personal extortion is a pretty unstable way to obtain these things, so B will enforce some kind of formal tribute system to try and stabilize this relationship.
A tribute system usually involves a specified delivery at specified time. B can’t consume all of this stuff at once, so it will start to demand tribute in some kind of storable form - typically grain.
This tribute system is now a system of domination that B needs to perpetuate - in the long run, to do this it’s going to need to monopolize the use of weapons. So B starts to also demand the raw materials to manufacture weapons from A, and metals (to start with copper and tin, but this might easily be extended to gold once our system gets going, as described below) get added to the tribute list.
So now every member of A has to deliver so much wheat and so much metal to B, say once a year. But the problem with metal - as against wheat - is that the amount easily available in any given area is pretty much fixed and finite, so soon the members of A start to have difficulty laying their hands on the required metal to pay the tribute. The only source of the metal demanded by B is B itself (is this starting to sound horribly familiar), so A has to exchange a yet further amount of wheat with B, in return for the metal required to meet B’s demands.
Notice that at this point the system is entirely self-sustaining - the exchange is motivated purely by the tribute system, and B is guaranteed to get back the metal it gave A. In principle B could dispense entirely with the wheat tribute and simply demand the metal. B can exchange the metal for wheat (or potentially anything else B needs) any time it needs it. I concede that historically this would happen gradually.
Note also the possibility of loaning the metal at the time the tribute is required for even more wheat at a later date. One of the peculiarities of near-eastern monetary history is the emergence of interest payments prior to an obvious commercial need for the loan of capital.
Note also that a weapon-making metal like copper (which incidentally was the earliest known metallic currency in the near-east) might easily be substituted for something with similar properties of scarcity and durability. Ideally yet scarcer and more durable - like gold.
So we now have a rudimentary gold-based monetary and taxation system, without anything more than the incidental exchange a few sheep!
Just a fairy story? If you read a few books on early near-eastern history you might be surprised how familiar they seem!
M.
Yes, how can there be. So please: show it. Your fairy tale didn’t actually demonstrate anything, so if you wouldn’t mind actually getting around to showing the veracity of your claims…
Great series of comments. Im not as knowledgeable as this group, but I am “listening.” I do have a question perhaps someone may have some insight about. Years ago I read something-a book or article-relating to the problem with fiat money and the inflation that it causes. This authors solution or obsrvation of the 'State" solution was for the creation of several “world owned/controlled” lands-such as Yellowstone/Rainforeest’s etc. that would be the basis (the gold standard if you will) for electronic money, and hince a limited resource. What do you think would this work? Is this what the “world monetary system” is attempting?
Yeah, I have to concur that it is a fairy-tale.
The biggest problem I have with it is that it assumes there was no division of labor or mutually beneficial exchange (barter) within either tribe before this commodity fiat money was introduced.
Everyone mines their own copper, smelts it and makes their own weapons while also making their own armor and growing all their own food and clothing, that seems highly unlikely.
The next assumption is that neither tribe were plagued with the double coincidence of wants problem so never needed to establish money prior to the taxes which is a bit more likely for the most primitive tribes.
I’m not too sure I would take some pet theory of a historian on the creation of a money system over Mises’ theory based on your main objection that he never gave a concrete example of this happening while the historian’s pure speculation on the subject also fails this test. Unless, of course, you can present hard evidence of this ever having happened.
More than likely the conquered tribe just assimilated the pre-existing monetary system of the other tribe and this was seen as the ‘creation event’ of money in this society.
It’s great you also decided to join in! Welcome! [:)]
With legal tender laws, anything can work. If you don’t use legal tender, you will be beaten and kidnapped. So most people will use whatever violence pushes them to.
The market should determine what is money, not the state. Using land through legal tender is still fiat. The word fiat roughly means, “to make so”. As long as someone or someones are abitrarily deciding what single or basket of goods will constitute money, represented by electronic or paper credit, it is a fiat system. There is nothing limited about electronic money, unless I can exchange my credits for a fixed amount of the rainforest, and believe me, such a system is unsustainable, because everyone would rather own a chunk of the rainforest, than some electronic credits on a card. Gresham’s Law if you will.
What “World Monetary System” are you referring to?
Which history books would these be, exactly? Because so far, you’re the one telling fairy tales. You still have not addressed the problem I mentioned, nor have you addressed JonBostwick’s challenge of explaining the emergence of money in areas free from the payment of tribute. Why would the market be limited to a few sheep? Humans have multiple needs, meaning there will be multiple goods exchanged at any given time. Whether or not a commodity is valued because the intervener demands payment in it, the problem remains. The issue is not so much compelling individuals to pay tribute in a given commodity - that is easy. The difficulty lies in setting it up to begin with, independently of a barter system; demanding tribute simply means forcefully providing a service in exchange for a given commodity. It’s still within the context of barter, and thus under Mises’s theory.
-Jon
I have to concede that you have a good point. Logically some kind of division of labour would have had to have existed within these communities prior to the process I describe, to account for their material level of culture.
However, I am not convinced that this necessarily contradicts my argument.
Firstly, it’s not absolutely necessary that this division of labour would require barter, or even an exchange of goods at all, which I would take to imply a concept of individual ownership and an individual perception of interests. Within a primitive tribal organization it’s possible to imagine a division of labour on the basis of a communal arrangement - the community basically operating as an extended family group.
Secondly, even if such an exchange of goods did occur, this is only required to sustain the necessary level of material culture. The process I describe could still take place, and the resulting system could not be said to have evolved directly from a barter system. Albeit that a barter system would exist in parallel, and these systems would probably merge quite quickly in practice (which is kind of what you suggest in your last sentence).
I’d concede that neither theory can be demonstrated directly, and that we could only reason by analogy from primitive tribal systems of which we do direct knowledge.
An objection that you don’t mention directly, is the case where the community in question did not have direct access to some required good (metal or metal ore would be the obvious historical example). Given the level of material culture we are talking about this seems quite plausible. Here I would have to concede that exchange of goods - at least between communities - would be absolutely necessary. I could even imagine that such exchanges could even trigger a process with an outcome similar to that I described, in that competition for such a resource might cause B to extort the required resource from A, the remainder of the process following similar lines to before (but starting with a recognized exchange value) .
Monetary systems show an extraordinary affinity to metals. I don’t think arguments of fungibility, durability and convenience entirely explain this, as a number of primitive metal currencies have been very unwieldy. Interestingly, the form of a number of these currencies were standardized in the shape of weapons.
M.
Jon,
Let me try another tack.
My contention is that monetary value can plausibly be derived historically from a coercively imposed value (fiat) rather than a pre-existing exchange value.
Look at the US monetary system: Money is created by banks delivering debt-based securities to the FED in exchange for cash balances. Not just any old securities, but mostly securities guaranteed by future government tax revenues. Securities that must be purchased using cash balances held by the banking system and originating from the FED. Tax revenues to be extracted coercively by the government, and to be paid with cash balances held by the banking system and originating from the FED.
Of course, it’s the same thing dressed in a suit! Now I suspect you, I and a lot of other participants in this thread are attracted to the idea of commodity money precisely because it seems to offer the possibility of escaping from this cycle of coercion and dependency. But I’m trying to suggest that this cycle might have been there all along - and might even be at the root of commodity money systems. Suspend your disbelief for a moment, and imagine that what I claim were true - what would be the implications?
M.
There’s a proverb: “Only two things in life are inevitable: Death and Taxes”
Wouldn’t the inevitable (and therefore universally desired) taxed item command universal acceptance in exchange?
M.
How does something get value from being taxed? Rather, the government is taxing the value. If an item had no value from which to derive taxable revenue, government wouldn’t tax it.
The phenomenon is actually the opposite: if you want less of something, tax it.
Even assuming that it happened once or twice, that still would mean that he’s got a tiny sample size and projecting that for all. I think we can see the problem in that.
The US is a bad example. Its current system was originally linked to a commodity system, whence it evolved. And anyway, why should I suspend “disbelief”? There has been no good argument so far to the effect that a fiat system can simply arise de novo. Whether or not demand for tribute or its sheer marketability made gold the chosen commodity, Mises’s arguments apply.
-Jon
You beg the question, then why aren’t coffins money?
Water is universally desired, but its not used in indirect exchange. Money does not come in existance because of universal desire.
Thanks for the response and info on Greshams Law. Im guessing that the point would not be that the “land” would be actual “legal tender” that the electronic money “stood for”-but more along the line of the electronic money being the legal tender (ultimately the only legal tender left). The property value (of the set aside land) would set the limit of how much electronic money would be allowed to be produced.
World monetary system from my perspective is one in which all “soveriegn nations” et al would subscribe for the benefit of internal and external commodity exchange-the one legal tender.