For more than a century, skeptics of government power have rightly focused on the damage caused by interventions in money. As the market’s classic commodity monies have been displaced by unbacked State-issued paper, libertarians — particularly those versed in Austrian economics — have disparaged fiat currencies and championed commodity-based money, especially gold and silver.
Unfortunately, the complaints against State fiat money can be imprecise at times, leading libertarians to form a faulty understanding of how money works. “Fiat money” is not unique to a coercive State. Neither does the State have the power to force its citizens to use something as money. In other words, it takes more than guns and cages. Until we’re clear on the market’s role in establishing the commonly accepted medium of exchange — that is, until we understand how the community of buyers and sellers gets to decide what counts as money — we will continue to muddy the waters with talk of fiat versus free-market money.
First, we should define our terms. In his 1912 classic The Theory of Money and Credit, Ludwig von Mises distinguished between commodity and fiat money in this way:
There are two sorts of thing that may be used as money: on the one hand, physical commodities as such, like the metal gold or the metal silver; and, on the other hand, objects that do not differ technologically from other objects that are not money, the factor that decides whether they are money being not a physical but a legal characteristic. A piece of paper that is specially characterized as money by the imprint of some authority is in no way different, technologically considered, from another piece of paper that has received a similar imprint from an unauthorized person, just as a genuine five-franc piece does not differ technologically from a “genuine replica.” The only difference lies in the law that regulates the manufacture of such coins and makes it impossible without authority…. We may give the name of commodity money to that sort of money that is at the same time a commercial commodity; and that of fiat money to money that comprises things with a special legal qualification.
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