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Gold Does Not Have Intrinsic Value


"Investors seek the intrinsic value of gold to protect themselves from inflation." – Ron Paul

"All political truth can be found in a coin shop." – Jeffrey Tucker

"Basic economic axiom: Money must originate from a commodity with intrinsic value." – Mark Anderson

"Gold and silver have intrinsic value." – Paul 4 Won

"Gold and silver are money made by God. He created them. Paper dollars are made by men! Whose money am I going to trust?" – Sierra HPBT

"The point of buying gold and silver is that the purchasing power of the metals don't change. So, while the dollar goes up and down, gold and silver do not." – Clark St Music



Note:  This is not an academic paper; it is a summary of a debate that took place in the summer of 2008.  People coming to it now, because the dollar is down and gold is up, are advised to start with my short paper, Is the Collapse of the Dollar Inevitable?

The last three people listed are frequent bloggers that everybody on the Daily Paul will recognize. The thread I quote, Gold Bugs, You Ain't Seen Nothing Yet, (click here for the pdf) is just one of many on the Daily Paul that advocate the purchase of gold because it has "intrinsic value." For instance, in another recent thread, a first-time gold buyer writes, "I'm an 18-year-old student with a new paycheck; it's time to buy gold." He is literally swamped with advice on how to buy gold.

I (using the online name Shaka) respond that "gold is the last thing an 18-year-old needs." "You idiot," exclaims SSgt_AF, "How old are you now? What year were you 18? All I can say is, I wish I could go back to when I turned 18 and have all this information on PM [precious metals] then. I would be better off if I only knew."

I respond, "[In February 1984] you were making $3.35 an hour when you turned 18 and working 20 hours a week. You were grossing $67 a week and netting $50. Suppose that, by a tremendous sacrifice, you saved a third of that for gold. After six months of such sacrifice, sipping water at the DQ while watching your friends eat hamburgers, you bought one ounce of gold for $400. After sitting on that coin for 24 years, scraping together money for things like transmission rebuilds in the meantime because you didn't want to sell your coin, what would you have now? $800. Don't spend it all in one place, Sarge."

I quote this exchange at length to point out that "Gold Bugs, You Ain't Seen Nothing Yet" is actually an ironic title for their thread, because they really haven't seen anything (like a profit) yet. The only people who have made any money off this social movement are the coin shop owners. Gold bugs like SSgt_AF, whose vanity drives them to cite nonexistent profits, are just playing into the hands of the coin shop owners, with their pie-in-the-sky claims of gold hitting $5000 an ounce in our hyperinflationary future.

On 6 Dec 2005, Ron Paul wrote, "The market price for an ounce of gold rose to over $500 last week, a significant milestone for economists watching precious metals and commodities markets. The last time gold topped $500 was December 1987, in the wake of the 'Black Monday' stock market collapse earlier that fall." And quite a milestone it was! After sitting on an asset for 18 years, they managed to break even. This is cause for celebration in the gold bug world?

Health Nut 4 Freedom complains, "I have done my best to diversify what little wealth we have accumulated. We have put it in gold, silver and with EuroPacific. Guess what? I am losing my shirt." Clark St Music responds, "Investing in gold is a savings. I wouldn't try to do it to make money. The point of buying gold and silver is that the purchasing power of the metals don't change. So, while the dollar goes up and down, gold and silver don't. If you are just trying to make money on investments, gold and silver aren't the way to go. They are just a way of storing wealth without keeping dollars that could go up or down."

"If you are just trying to make money on investments, gold and silver aren't the way to go," says Clark St Music. But why would anybody invest in something except to make money? In a word: Religion. Clark St Music's unguarded remark is almost a stronger affirmation of the religious nature of the gold bug movement than Sierra BTHP's claim that "gold and silver are money made by God. " (Perhaps Sierra BTHP, who signs off his forum posts with, "as for me and my home, we shall worship the Lord," should recall the story of Moses and the Golden Calf.)

"The point of buying gold and silver is that the purchasing power of the metals don't change," says Clark St Music, echoing his leader, Ron Paul, who writes, "Gold is history's oldest and most stable currency’ Since your dollars have no intrinsic value, they are subject to currency market fluctuations." This is a particularly ironic thing for Clark St Music to say, since he is a strident Austrian who responds to any and all criticism with a list of recommended reading material"all by Mises, Hayek and Rothbard. If he had actually read any of those books himself, he would know that the fundamental contribution of Hayek's Prices and Production was that higher-order goods (farther from the consumer) are more volatile than lower-order goods. Mining, being the highest of Hayek's five stages of production, is the most volatile of all. Mainstream economists have rejected Hayek's five stages, preferring only two, labeled "production" and "consumption." But they would not dispute the fact that production goods are more volatile than consumption goods. I have criticized Hayek at length, but I would not disagree with this basic observation either. Incidentally, as I explain in my Answer to Stephen Zarlenga, gold is not history's oldest currency"cows are. Gold coins were just tokens for cows, similar to the way paper notes would become, thousands of years later, tokens for gold.

Modern Austrian economists give lip service to the subjective theory of value, but that is largely because its originator, Carl Menger, was a professor in Vienna, so they feel that they can claim him as their founder. However, as the preceding discussion demonstrates, they are clearly wedded to the theory of intrinsic value. Ron "investors seek the intrinsic value of gold" Paul and Jeffrey "all political truth can be found in a coin shop" Tucker are not just incidentally associated with the movement. They are the leaders of the modern Austrian movement"its only leadership, in fact, considering that professors like Roger Garrison refuse to defend the theory they propagandize. (I have been waving $1000 under Garrison's nose for four years and he refuses to rebut my Critique of Austrian Economics.)

The only Austrian professor who dared to rebut my Critique was Robert Murphy, and he is clearly not an adherent of the subjective theory of value. "The consumer's good is always the 1st order, regardless of how far back we push the analysis, even if we go back to axes carved by prehistoric men," Murphy writes, oblivious to the fact that the subjective theory of value sees the source of value in the future use of goods, not in their past costs of production.

In my Critique of Austrian Economics, I write:

Austrian economists (by nationality"they were not a school until Hayek's famous lectures) were already weak by 1930. Menger was good. His 1871 Principles of Economics (1981) is one of the most important economics book ever written. But, with the publication of Böhm-Bawerk's 1889 Positive Theory of Capital (1959), Austrian economists split into two branches. Menger did not find a worthy successor until Mises and together they laid the groundwork for the Axiomatic School founded by this author (1999). Meanwhile, Böhm-Bawerk was laying the groundwork for what would become the Hayekian School. This branch has grown progressively weaker all the way up to 1990. We found only problems with it while the legacy of Mises contains some good ideas.

It would be more accurate to consider Menger and Mises forerunners of this author's Axiomatic School while making Hayek the founder (and Böhm-Bawerk the forerunner) of the Hayekian School. Menger, Mises and this author are the only truly subjectivist economists. Böhm-Bawerk's average period of production demonstrates that he was still mired in the labor theory of value. Hayek's backwards triangle and his use of the terms "earlier stages" and "later stages" is no better. Skousen gives plenty of lip-service to subjectivism but is belied by his instructions for compiling the APS (1990, pp. 184-185), which depend on remembering the date of an item's manufacture and when its costs of production were paid. Making everybody save their receipts is not that much different than Böhm-Bawerk's trying to remember the one hundred working days that were expended in the production of a consumption good.

Thus, for this reason and because Mises' praxeological method and his regression theorem somewhat inspired this author's postulate set, I insist on claiming Mises as my forerunner and on asking the economists now called "Austrians" (e.g. Garrison and Skousen) to call themselves Hayekians.
I wrote this in 2004 and it has become even more true now that Ron "investors seek the intrinsic value of gold" Paul and Jeffrey "all political truth can be found in a coin shop" Tucker have pushed the intrinsic value of gold to the forefront of Hayekian thought. Under the command of Paul and Tucker (and Rothbard before them), Hayekian economics has become a religion: The Cult of the Golden Calf. And, as is typical of crackpot religions, it is full of sanctimonious morality talk. I observe:
Rothbard discusses an inevitable "distortion-reversion process" but says little about how it actually plays out. Apparently forgetting his master's regression theorem, he declares "the continuance of confidence in the banks is something of a psychological marvel" (1970, p. 867).

Garrison (2001, p. 44) redefines the Production Possibilities Frontier, PPF, to be sustainable combinations of investment and consumption, but says nothing about what is so unsustainable about a credit expansion. Since he defines consumption on the PPF (which is real) to be the same as consumption on the Hayekian triangle (which is nominal), the unsustainability cannot have anything to do with a devaluation of the currency.

So we see that Mises, writing in 1949, was really the last Austrian to make much of an effort to explain or predict interest rate spikes. After that, their discussion of this issue, including Mises' later writings, increasingly took on the tone of a morality play, with the greedy bankers getting their "inevitable" comeuppance.
The worst thing about sanctimonious moralists is their inconsistency. For instance, we have already seen how Robert Murphy trumpets his belief in the subjective theory of value while simultaneously claiming to refute my Critique of Austrian Economics with statements like, "the consumer's good is always the 1st order, regardless of how far back we push the analysis, even if we go back to axes carved by prehistoric men."

Their most egregious inconsistency, however, is trumpeting themselves as libertarians while simultaneously calling for vast, intrusive and unworkable government intervention in banking. I write, "The most absurd example of Austrian economists' na’vet’ is their demand for a 100% reserve requirement. Do they really want the government to inventory a bank's vaults every morning and again in the afternoon to enforce a rule that makes sense to nobody? Since everyone knows that not a tenth that much gold is actually needed, they would just ship it from bank to bank ahead of the inspectors. Even Skousen considers 'the problem of bank evasion and the uncanny ability of banks to escape the 100% rule imposed upon them (1977, p. 47)' to be his plan's major defect."

Such so-called "libertarians" as Murray Rothbard and Jesús Huerta de Soto pay no more attention to how the government is going to enforce a 100% reserve requirement than gun-control advocates pay to how the government is going to seize all the firearms in society. Just as gun control results only in the seizure of home-defense guns held by honest men, while barely nudging up the price that black market guns fetch in the slums, so grandiose pronouncements on the dollar's value in gold or on reserve requirements for banks only hurts the honest actors and goes unnoticed by the dishonest ones.

In contrast to the Mises Institute, I do not see the market working though pronouncements from economists like Jesús Huerta de Soto who do not actually have any authority. The market works through voluntary agreements between independent actors, including people we do not like, such as Middle Eastern governments and international arms dealers, and often between people who do not much like each other either. When goods cannot cross borders, armies will. Even people who despise each other on religious, racial or cultural grounds will set their differences aside in the marketplace.

In my Answer to Stephen Zarlenga, I discuss the origin of money. There are several important points that this paper makes which are contrary to Ron Paul's belief that gold has intrinsic value:

  1. Gold never had any more use value than paper. It is a soft metal and is easy to stamp, which makes it useful in the same way that paper's ability to absorb ink makes it useful. "It is back to this use, the minting of cow-tokens, that Mises' regression theorem traces the value of gold, not to the making of pretty necklaces."

  2. There was never a 100% reserve requirement; the monetary system was always fiduciary. "Before paper receipts for gold coins were issued, the gold coins were themselves receipts for cows and, like banknotes and then checking accounts, it is probably true that more coins were issued than there were actual cows in the herd."

  3. No monetary system has ever been based on trust. "The townsfolk do not accept a money substitute (coins in antiquity, checks in 1844) because the issuer 'vied for their acceptance' as Kindleberger (1996, p. 62) claims. They accept it because the issuer is alive, which is taken as evidence that he has survived the latest clearing house meeting."

  4. Last but not least, "the one point that Zarlenga misses is the keystone, without which his whole thesis collapses: Cow-tokens were issued by the people who owned the cows. The church elders did not just write the equation '130 grains of gold = one cow' on the bulletin board at their temple and expect people to obey it. How could that work?"

So how might a new institutional framework for banking arise in the future? Self-important economists like Jes’s Huerta de Soto would like to think that it will come about through their own grandiose pronouncements: "Okay everybody, 100% gold reserves from now on. No cheating!" And hucksters like Gary North would like to think that it will make them, with their 56-pound bags of dimes, rich men.

Instead, let us see if change can come about through the actions of independent actors and in a way that does not make Gary North rich. (Gag on that thought! I think I would rather see worldwide economic collapse than to watch that huckster buy me out with his dimes.)

Consider this easy ten-step program for establishing a free-banking regime:

  1. Clueless George looks into the eyes of Vlad the Poisoner and decides that he is basically a good-hearted, honest man whom we can trust. Specifically, Bush trusts Putin to let him bomb Iran in exchange for us letting Russia control their "near abroad."

  2. Through the blatant use of forgery, Bush convinces Americans that Iran is prepared to nuke east coast cities on 45-minutes notice, purchased yellowcake uranium from Niger, directed the attack on the WTC and shaved Britney Spear's head. We commence to bomb them.

  3. The Iranians respond by closing the Strait of Hormuz. With Putin's help, they kick our ass"it is raining Russian-made ballistic missiles in Qatar - not at all like the cakewalk that Bush promised.

  4. As Mohamed ElBaradei predicted, "a military strike on Iran will turn the Middle East to a ball of fire." Responding to this ball of fire, Middle Eastern nations desperately need weapons, but they are unable to ship oil to pay for them. Instead, they offer IOUs redeemable in oil.

  5. Since everybody knows that they have the oil and that the strait will eventually re-open, international arms dealers accept the notes, though discounted to reflect the possibility that the note-issuer will not survive. The discount depends, of course, on the survivability of the country or corporation who is issuing the note.

  6. Unable to pay for the war with taxes"Republicans don't raise taxes!"Bush resorts to monetizing the cost of weapons, soldiers and Halliburton contracts. Too late, the Federal Reserve discovers that the AAA-rated securities that their portfolio is packed with are about as marketable as the chocolate-covered cotton balls that Milo Minderbinder was trying to foist on people in Catch 22. As a result, the dollar collapses.

  7. People all over the world"not just arms dealers"get in the habit of accepting notes redeemable in oil. Eventually the war ends and the Strait of Hormuz re-opens. The survivors make good on their notes. They have to or they won't be survivors for long.

  8. We now have a free-banking system, as I describe in my 1999 book, with many independent countries and private companies issuing notes redeemable in commodity money. I never used the word "gold" in my book, you know, only the more abstract term, "commodity money." Oil can be a commodity money too. It is just as useful and important to us as cows"the original commodity money"were millennia ago.

  9. Plutonium from shot-down Israeli missiles is scavenged from the battlefields"enough to run Iranian nuclear power reactors for seven years. (They always said that they were just interested in producing electrical power, you know.) This fulfils a key Biblical prophecy, causing evangelicals everywhere to rejoice: "See? Devoting our lives to studying the Book of Revelation wasn't a total waste of time!"

  10. Gary North, who has spent the war years hiding in a hole in Nevada, finally runs out of pork and beans. In desperation, he opens one of his 56-pound bags of dimes and attempts to eat them. Too late, he discovers that he is actually a vampire. He dies a horrible death after ingesting silver. Nobody misses him.

In conclusion, some poetry

Gold! Gold! Gold! Gold!
The yellow metal has intrinsic value,
At least that's what we are told.

Gary North says it's so, and he would know.
He's the investment guru of LewRockwell.com,
So it cannot"must not!"be a job of snow. No!

“A 50% drop in GDP during the first half of 2009.
Gloom!  Doom!” cries Karl Denninger.  But why,
Did he ban from Market Ticker this poem of mine?

"In coin shops all political truth can be found."
So says Jeffrey Tucker. But how does he explain,
Why our golden investments have all run aground?

Zounds! $850, $250, $1000 and $700 in thirty years.
Gold prices are volatile, at least that much is clear,
I don't get this dizzy after a whole case of beers!

Gold bugs claim: They've made millions since 1983.
But they're living in plywood shacks in northern Idaho.
Should we believe what they tell us, or what we see?

In Moses' time they danced around a golden calf,
Now Paulistas say, "Gold is money made by God."
Not much has changed. What a laugh!



Appendix: Is the collapse of the dollar inevitable?

In my Critique of Mathematically Perfected Economy, I write:

The basic flaw in the logic of modern socialists (Montagne, Cook, Zarlenga, etc.) is confusion between motivation and capability. "He's privately controlled!" the socialist sneers at the Federal Reserve chairman, the unspoken assumption being that, were the socialist put in charge, he would immediately open the floodgates of wealth and prosperity for us all. It would be a veritable socialistic paradise, if only the Benevolent One were given the authority to print money! But, the fact is, the Fed is in a box. If a socialist were put in charge, he would be in the same box.

In my Critique of Austrian Economics, I write:

Rothbard discusses an inevitable "distortion-reversion process" but says little about how it actually plays out. Apparently forgetting his master's regression theorem, he declares "the continuance of confidence in the banks is something of a psychological marvel" (1970, p. 867).

Garrison (2001, p. 44) redefines the Production Possibilities Frontier, PPF, to be sustainable combinations of investment and consumption, but says nothing about what is so unsustainable about a credit expansion. Since he defines consumption on the PPF (which is real) to be the same as consumption on the Hayekian triangle (which is nominal), the unsustainability cannot have anything to do with a devaluation of the currency.

So we see that Mises, writing in 1949, was really the last Austrian to make much of an effort to explain or predict interest rate spikes. After that, their discussion of this issue, including Mises' later writings, increasingly took on the tone of a morality play, with the greedy bankers getting their "inevitable" comeuppance.


Clearly, the socialists and the Austrians are at opposite ends of the spectrum of views on inevitability.  Socialists believe that the government can turn on a dime, veering away from economic collapse towards a socialistic paradise simply by giving the right person the authority to print money.  And how would the Benevolent One accomplish this feat?  According to the Debt Virus Theory, it is as simple as printing money and spending it directly into the economy, rather than buying Treasury Bills. 

Stephen Zarlenga writes:

Infrastructure repair (including human infrastructure - health and education) would provide quality employment throughout the nation. There is a pretense that government must either borrow or tax to get the money for such projects. But it is a well enough known, that the government can directly create the money needed and spend it into circulation for such projects, without inflationary results.

On the other hand, the Austrians believe that a “distortion-reversion process” is inevitable.  Credit expansion is unsustainable and this, apparently, is true no matter how benevolent the chairman of the central bank may be and no matter what he spends newly created money on, whether on social programs or in the discount of good bills, at not more than sixty days’ date.

Is hyperinflation the inevitable result of inflation?  In America we have only had one bout with hyperinflation and, over 200 years later, the phrase “not worth a Continental” is still part of our language.  “In conclusion,” I write in my Critique of Mathematically Perfected Economy, “to Montagne, Cook, Zarlenga and anyone else who claims that they can open the floodgates of prosperity by spending paper money directly into the economy, I say:  ‘The Debt Virus Theory is not worth a Continental!’”  Debt Virus Theorists’ followers are mostly laymen (for obvious reasons) and, when I wrote this, I fully expected any American with a passing interest in economics to be familiar with the expression, “not worth a Continental.”

Indeed, the collapse of the Continental was inevitable because, having spent Continentals directly into the economy (mostly for soldiers’ wages), the Continental Congress had nothing in their portfolio with which they could buy them back.  They were, in fact, benevolent men who had no desire to see their newly-won nation racked with hyperinflation, but they could no more recall the paper money that they had printed than Frankenstein could recall his monster.

But surely the Federal Reserve is smarter than the Continental Congress!  Until as recently as last year (2007), I would have responded to this question with a begrudging “yes.”  As much as I dislike the United States having a central bank (I advocate free banking), I will admit that, by buying only short-term Treasury Bills, the Federal Reserve has given itself a portfolio with which it can buy back dollars in the event that inflation should threaten to turn into hyperinflation.  Unless the Federal Government itself collapses – by losing a war, for instance – there will always be a market for T-Bills.  The three months it takes for these bills to mature is just not enough time for the government to collapse.  Selling T-Bills for cash and destroying the cash is a painful, recession-inducing process, as evidenced by our experience during Reagan’s first term, but it can be done.  Contra Rothbard, hyperinflation is not inevitable under a central bank.

So what has Ben Bernanke done to make me question his intelligence, if not his benevolence?  He polluted the Fed’s portfolio with AAA-rated securities, which I have mocked as being “about as marketable as the chocolate-covered cotton balls that Milo Minderbinder was trying to foist on people in Catch 22.”  Everybody knows that, in spite of their impressive-sounding AAA rating, these securities are really just packages of sub-prime loans that nobody wants – what I defined in my Devil’s Dictionary of Economics, as “worthless crap.”  If people wanted them, in the sense of being willing to pay cash for them, then then we would not be having a credit crisis in the first place.

Bernanke’s actions have made the question of hyperinflation a murky one.  The Austrian’s depiction of hyperinflation as being the inevitable fate of central banking has always been cartoonishly simplistic, and it remains so.  However, economists of all schools must now admit that hyperinflation is at least a possibility.  If the dollar appears to be on the verge of collapse, what will the Fed do about it?  Sell their AAA-rated securities for cash and destroy the cash?  But what if nobody is impressed with the AAA rating and won’t buy their securities at any price?  Then the Fed will be in the same position as the Continental Congress:  Benevolent men with no desire to see their beloved nation racked by hyperinflation, but who have no more ability to recall the paper money that they have printed than Frankenstein had to recall his monster.

Of course, not all of the Fed’s portfolio is in AAA-rated securities and not everything with an AAA rating is worthless crap.  They still have lots of T-Bills and there is a market for at least some of their AAA-rated securities.  This is why the question of hyperinflation has become so murky.  The bottom line is that nobody – not even Ben Bernanke – really knows what the Fed’s portfolio is worth these days.[Footnote] For this reason, I would be very leery of any economist, from any school, who speaks confidently about the future of the dollar.  Is the collapse of the dollar inevitable, as the Austrians claim?  Or are we at the dawn of a socialistic paradise, provided only that we eliminate the Fed and just have the Treasury print money and give it to Congress to distribute, as the Debt Virus Theorists claim?  The answer is certainly somewhere between these extremes, but where exactly I cannot tell you.


What do the critics say?

I have started a thread about this paper at the Daily Paul. It has received many interesting and thoughtful responses"and a few thoughtless ones, but not too many.

Jeff at the Daily Paul has an interesting thread titled, "Gold is a fiat money too." I respond:

"Yes, gold is a fiat money too.

"Dollars used to be redeemable in gold and then they became fiat money when we went off the gold standard.

"D’j’ vu.

"Gold coins used to be redeemable in cows and then they became fiat money when we went off the cow standard.

"As people [in this thread] have pointed out, gold has use-value in jewelry, electronic components, etc. But paper has use-value in books, newspapers, etc. And cows are just as good to eat today as they were 5000 years ago. Who cares?

"All such talk of use-value is really irrelevant to the current value of a fiat money. By Mises' Regression Theorem, it had to have had use-value at one time. But that is in the past.

"See my Answer to Stephen Zarlenga for further discussion of the origin of money."

This response introduced considerable controversy to the Daily Paul regarding the definition of the term "fiat money." Literally hundreds of people have commented on each of these threads, representing many different viewpoints. I cannot reply to or even summarize all of those comments here, though I will quotation one discussant, Phoobaar, who offers a simple definition, a simple example, and a simple question:

  1. "Intrinsic" means "inherent to the nature of;" if something is intrinsic, it is objectively so, independent of observation.

  2. Water is wet whether we are there to observe its wetness or not; it is intrinsically, objectively wet.

  3. In the absence of humans, what is the value of gold?
Also, Glen Allport has responded with a paper, The Meaning and Value of Gold, which I can rebut with a single sentence: Intrinsic value is not the same thing as use value. Allport all but admits this himself when he writes, "that 'intrinsic' in this sense is a sliding scale, in that some things are only slightly of interest to a particular species and other things are only of interest to a few members of the species, based on unusual quirks in those individuals. Fresh air has universal value to human beings, but most other things do not, including things which are fairly popular at some place and time (various forms of fashion, for instance)." Clearly, the reason that it is a sliding scale is because all phenomena of concern to economists have some use value. Phenomena that do not might be of concern to botanists or geologists, but not to economists.

As these threads have become quite long, I started a new thread titled, "'Fiat Money' has two definitions"let's not talk past each other!" I write:

In Gold Does Not Have Intrinsic Value, I decried, "such so-called ’libertarians' as Murray Rothbard and Jes’s Huerta de Soto [who] pay no more attention to how the government is going to enforce a 100% reserve requirement than gun-control advocates pay to how the government is going to seize all the firearms in society."

In this thread, I denounce so-called "libertarians" who assume that paper currencies with no backing in gold are valued because the government orders people to value them. That is impossible; value is subjective.

According to Percy Greaves' Mises Made Easier, fiat money is defined as (I re-ordered and numbered the sentences for reference):
  1. A coin or piece of paper of insignificant commodity value that a government has declared to be money and to which the government has given "legal tender" quality. The value of fiat money rests on the acceptance of political law or fiat.

  2. Fiat money neither represents nor is a claim for commodity money. Fiat money is issued without any set intention to redeem it and consequently no reserves are set aside for that purpose.
I agree with (2) only. It is impossible to mandate value by law.

Fiat money has value because it had value yesterday and people assume that it still has value today. It had value yesterday because it had value the day before yesterday, and so on. This is described by Mises' Regression Theorem.
The opposing view is that the dollar is valued because legal tender laws force us to accept it, to which I reply, "A chalk line will stop a hen." Ron Paul supports this view: "When we refer to fiat money, we are referring to money that exists because the government declares it into existence." Also in this article he writes, "History has shown that fiat money, or ’faith-based currency' always fails." In the appendix to this paper I argue that the collapse of the dollar is not inevitable but only a possibility. Moreover, if we accept that gold is fiat money too, as I argue in my reply to Jeff's thread, then history waits in vain for it to fail.

This is an on-going debate and readers who wish to weigh in with their thoughts on the subject are invited to do so at the Daily Paul. Here, I would like to thank Michael Nystrom for providing a forum where such discussions are possible and for provoking me to clarify in my own mind the definition of a word that I have used in casual conversation for decades. I was using it in the sense that is compatible with the subjective theory of value and did not realize that I was talking past people who were using it in the other sense.

In conclusion, I hope that readers will take a minute to send Mr. Nystrom a thank-you note for having helped push economic theory towards greater clarity and substance. It is at forums like the Daily Paul where cutting-edge economics research is introduced and tested against criticism from economists representing a variety of schools"not in the unread pages of dry academic journals.



REFERENCES

Aguilar, Victor. 1999. Axiomatic Theory of Economics. Hauppauge, NY: Nova Science Publishers, Inc.

Böhm-Bawerk, Eugen von. [1921] 1959. Capital and Interest. 3 vols. George D. Huncke and Hans F. Sennholz, trans. South Holland, IL: Libertarian Press

Garrison, Roger. 2001. Time and Money: The Macroeconomics of Capital Structure. New York, NY: Routledge

Greaves, Percy. 1974. Mises Made Easier: A Glossary for Ludwig von Mises' Human Action. Dobbs Ferry, NY: Free Market Books

Hayek, Friedrich A. [1935] 1967. Prices and Production. New York, NY: Augustus M. Kelly, Publishers

Kindleberger, Charles. [1978] 2005. Manias, Panics, and Crashes: A History of Financial Crisis. Hoboken, NJ: Wiley, John and Sons

Menger, Carl. [1871] 1981. Principles of Economics. Dingwall and Hoselitz trans. New York, NY: New York University Press

Rothbard, Murray N. [1962] 1970. Man, Economy and State. Los Angeles, CA: Nash Publishing

Skousen, Mark. 1990. Structure of Production. New York. NY: New York University Press

Friedman, Milton. [1962] 1982. Capitalism and Freedom. Chicago, IL: University of Chicago Press