Fiat money

Explain to me how the increase in the amount of paper pieces can make a society richer. If that is the case, why is there still poverty in the world? — Hans-Hermann Hoppe.

The word "Fiat" originates in Latin, meaning decree, mandate, order.

Fiat money, also called Political Money or State Money, is any currency exclusively issued and privileged by the state. Governments establish decrees to impose its acceptance and to create costs to the adoption of other currencies; like legal tender laws, which in their most "light" version, declare a currency to be valid for extinguishing any debt when offered ("tendered"), even if it is against the will of the receiver.

Legal tender status also implies that the fiat money is the Unit of Account used by official entities to calculate and impose taxes, which create frictions to the adoption of other moneys as exchange rate fluctuations may trigger tax liabilities. 

The Fiat monetary system: 

A fiat monetary system is controlled through a Central Bank by a state or a group of states. 

A Central Bank has the monopoly over the creation of fiat units, both in physical form (notes & coins) and 

in digital form (commercial banks reserves at the Central Bank). 

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Those units are considered issued once they have been allocated.

The plan for allocating them is called monetary policy. It is usually justified under the intention of providing monetary stability and financial stability, although the FED has the additional mandate of achieving maximum employment

Nevertheless, despite all those advertised mandates, whenever states accumulate big deficits, Central Banks' first priority becomes to cover those deficits with new printed fiat units.

Central Banks view monetary stability as a constant "consumer price" inflation and as a non-volatile exchange rate against the main other fiat currencies. 

 

Financial stability implies to allocate fiat units to financial entities that are considered “too-big-to-fail” or “too-connected-to-fail” when they are under financial stress, which incentives those entities to incur in bigger risks and to disguise capital consumption as profits.

Central Banks' receipt to reduce unemployment in short-term by "stimulating" the economy, is to distort the functions of the fiat currency through an unexpectedly high rate of monetary inflation:

-The Store of Value function is distorted by redistributing value saved in fiat money to the Central Bank. This way, the easiest way for people to accumulate value disappears. 

If the stored value rots, continuous labour becomes more necessary. 

-The Medium of Exchange function is distorted because exchange rates between goods and money (aka prices) don't adapt instantly nor uniformly to the new amount of fiat units. 

Goods' providers have an inertia to continue offering their services at the same prices, ignoring that monetary units are more abundant than expected; so they end up obtaining less value for their labour. This mechanism is often referred as Cantillon Effect. 

-The Unit of Account function is distorted because each fiat unit constitutes a smaller portion of the monetary system. It is an accounting trick that benefits borrowers and harms lenders.

It tends to temporarily increase the profit of businesses whose capital is intensive on labour at the expense of harming workers with already established contracts because fiat obligations are partially "forgiven".

Fiat's inherent lack of basic monetary properties like verifiability scarcity, storability and transferability makes necessary the use of third parties like comercial banks and financial entities; who issue money substitutes in exchange for the money that is deposited to them.