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Commodity Money
vs Fiat Money,
A Unified View
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Commodity money and fiat money are commonly viewed as
two quite different
kinds of money. The transition from commodity to fiat money
occurred
in the mid-20th century when the State ended the gold backing of its
notes.
But are they really as different as most people think? In the
following
we abstract from the analysis of the Swedish economist Per Berglund to
show how the two kinds of money actually fit into a single framework,
based
on the State theory of money.
Money as a Claim on the State
When the State declares what kind of asset it accepts in
payment of
taxes, it assumes a liability equal to the outstanding stock of those
assets.
At the same time, the declaration creates financial claims on the State
by the holders of the assets. Those claims exist as tokens known
as money. The tokens may
have
a material value as in precious metal coins, or may simply be paper
certificates
with no intrinsic value. The former is referred to as commodity
money, and the latter as fiat money.
The Seigniorage Gap
The State sets the face value
of
the tokens, and accepts them in payment of taxes at that value.
The
difference between the face value and the material value of a token is
normally positive, and known as the seigniorage
gap. A positive gap will exist only if the production
of the tokens is brought under State control and limited in
quantity.
In the case of fiat money, the gap is large. In the case of
commodity
money, the gap is small and may even be negative. A negative gap
means the token is more valuable as a commodity than it is as
money.
If the gap becomes too negative, the public will hoard the tokens, or
it
will convert them to their material use and thus end their role as
money.
The Material Value of Commodity
Money
The material value of a token is a real asset without a
corresponding
liability. An important question then is: who actually
owns
the real asset? Surprisingly, we will see that it should be
credited
it to the State. By agreeing to accept the tokens in payment of
taxes,
the State automatically assumes a liability equal to their face
value.
But if the State has a liability of that amount, then the bearer must
have
a claim on the State of the same amount. However the bearer
cannot
simultaneously have a claim on the State and the material use of the
real
asset. That would clearly be double-counting.
Real versus Financial Assets
The claim on the State is inextricably tied to its
token, e.g. the coin.
No records are kept of who owes what to whom, so there is only one way
of exercising the claim, and that is to surrender the coin. If
one
melts the coin instead, the claim is gone, and so is the State's
liability.
All that remains is a lump of metal whose material value obviously
belongs
to the bearer. Melting thus transforms a financial asset into a
real
asset from the bearer's point of view. From the State's point of
view, melting cancels a financial liability but also eliminates the
prospect
of recapturing the real asset.
Resolving the Accounting Dilemma
The logical way to reconcile the accounting then is to
credit the material
value of the token to the State's balance sheet, even though the bearer
has physical possession of the token. The State retains title to
its material value as long as the token exists as a liability of the
State.
Keynes once defined the rupee, the Indian currency, as a "note
printed
on silver" implying that the holder of the rupee could either use
it as money or as silver, but not both.
Melting then involves two things: (1) cancellation of
the financial
asset-liability relation, and (2) transfer of the real asset from the
State's
balance sheet to the bearer's. The State loses the real asset but
also the liability. The bearer gains a real asset but loses the
financial
claim. The net gain or loss depends on the size and sign of the
seigniorage
gap between face value and material value.
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