Brad DeLong brilliantly pointed out that, “Underpinning the value of the dollar is… the fact that you can use them to pay your taxes to the US government…” Ah! Now I think I understand why the libertarians hate “fiat money”! It’s because libertarians are generally idiots. No, really.
As I’ve noted in the past, basing currency of gold doesn’t make any sense. Gold Has Little Intrinsic Value. In that article, I discussed how gold doesn’t stop inflation. And in another article, Gold Is Not a Good Investment—At Least for 500 Years, its value doesn’t keep up with the economy. So why base your currency on gold?
Why “Fiat Money” Really Is Valuable
The one thing that the good old American greenback is good for no matter what is that you can pay your taxes with it. The truth is, that’s a great thing. We all have to pay taxes and as long as the government is fairly large, people are going to need a lot of that supposedly useless paper to pay their taxes. So the baker down the street will at very least sell you some bread for the fiat currency because he is going to need some of it to pay his taxes.
And that my friends is why libertarians don’t like it. They think taxing is theft. Interestingly, they don’t think driving on public roads that were paid for by taxes is trespassing, but then libertarians have never been known for their deep thinking skills. So because taxes are not valid, libertarians think “fiat money” is of no value. The rest of us know that we have to pay our taxes, so regardless of everything else, cash really is worth something.
Live in the Real World
Now what is that “everything else”? That’s the fact that we all agree that cash is worth something. I can go to Walmart today and buy a candy bar for 69¢, just like I could yesterday or last month. We all agree that today, cash is worth about what cash was worth yesterday. But that’s largely due to the government. The government is roughly a third of our economy. This is just like when labor unions were big. It didn’t matter then that only about 30% of the workforce were in unions, the fact that the percentage was so high helped keep wages and working conditions of people not in unions high and good. So given that one-third of the economy accepts the greenback, means that 100% of the economy accepts the greenback.
So the libertarians continue to live in their mythic land where everyone is fairies and elves and there is no government. But in the real world, “fiat money” works really great. And inflation under it has been lower and more stable than it ever was under their beloved “gold standard.” Personally, I’d love to live in the mythic libertarian land and be an elf with a fairy wife. Unfortunately, I have to pay my bills. And they are all due in real “fiat money” greenbacks.