"Of course, people value the dollar; however, that is only because of The State's backing and mandate that the dollars be used as currency...If we went to free-market banking, dollars would quickly lose all value as currency. People do not place much subjective value on a cheap piece of paper with a dead man's face on it. Not everyone places subjective value on gold; however, there are so many people who do place high subjective value on it that it is useful as a medium of indirect exchange (currency)." -David Heinrich
I will argue that this is not the case; people would continue to value the
dollar without State backing because it is entrenched as a medium of
exchange. Established (widely accepted) currencies, such as the US dollar, take on a life of their own, and maintain their indirect value, with or without government fiat guaranteeing
their value, unless severely devalued by overproduction.
To argue this, I first need to define a couple of terms:
- Direct value is the highest price that I would pay for something that I expect to retain.
- Indirect (tradeable) value is the highest price that I would pay for something that I expect to trade. If I have done my homework correctly, indirect value is also equal to the maximum price that I can obtain for the object through exchange.
- Gift value is a special case of indirect value in which the value is equal to the highest price that I would pay for something that I expect to give away. The direct value that I receive from giving would be the gratitude that I expect to receive in return for the gift.
- An end user or consumer of an item is someone who directly
values an object.
Established unconvertible currency has an indirect value based on an indirect value. When I work for dollars it is only because of what they can buy, not because of what others do.
In other words, even though no one values established currencies for their paper or artwork, they value them indirectly because others value them (indirectly). Yes, the logic of the fiat currency exchange is circular, but exchange is simplified and the currency will remain a currency until it is abused by a rapid increase in its supply. Once an indirect value exchange loop is entered, it will persist until the indirect value of the currency is diminished by rapid generation of new currency.Commodity-backed currencies also make exchange easier, but why demand de jure convertibility with any particular commodity or small set of commodities?
No real advantage is gained by commodity-backing an established currency because
it is unrealistic to expect exchangers to faithfully visit currency clearing houses to verify the claimed de jure interconvertability. De facto convertibility with other directly-valued objects is all that is required of a currency and is pragmatically equivalent.
I predict that if the Fed would stop printing dollars tomorrow and eliminate all legal backing for the dollar, people would continue to use them and that their buying power would remain approximately constant because they would retain their indirect value.
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