Ladies and gentlemen, it's a great pleasure to be here.
I'm really excited.
Mises Institute is a fantastic place,
and I really feel honoured to have the opportunity this afternoon
to share some thoughts about my work.
It's titled, Fiat Money Cannot Last, Or Can It?
What Mises and Rothbard Had to Say About It.
To most of you, I think I'm stating the obvious,
if I say fiat money has got a bad name.
But if we look at economic literature, this impression is basically confirmed.
Frank Fetter, for instance, in his 1926 book, Modern Economic Problems,
wrote on fiat money, which he called political money,
quote, political money resorted to in desperate extremities
has usually proved to be a costly experiment.
It is peculiarly liable to the subject of political intrigue
and of popular misunderstanding. It is this danger more than anything else
that makes political money in general a poor kind of money.
And also Irving Fischer, for instance, in his The Purchasing Power of Money
wrote about fiat money, quote, irredeemable paper money has almost invariably proved
a curse to the country employing it. And lastly, the French philosopher Voltaire
noted once, quote, paper money eventually returns to its intrinsic value, zero.
Against this backdrop of this kind of skepticism, the question which I found quite interesting is the following.
Is there a priori theory which must lead to the conclusion that fiat money cannot last, that it will necessarily break down?
And with a priori theory, I mean propositions which tell us something about reality and which can be validated without taking recourse to experience.
When we look at the Austrians, let me start with Ludwig von Mises. He concluded that fiat money cannot last.
He made it pretty clear in his magnum opus, Human Action, that fiat money cannot last.
In contrast, Murray Rothbard, in the case for a 100% gold dollar, expressed concern that fiat money may continue indefinitely.
The fact that Mises and Rothbard's conclusions diverge may come as a surprise to you,
especially so as both thinkers rest their analyses in praxeology, the science of human action, the logic of human action.
And in the article, hopefully you could secure a copy, I try to address the issue where Mises and Rothbard's reasoning converges and where it diverges.
And the article has been structured as follows.
The second part, I will briefly outline some important aspects of fiat money.
Then I address Mises and Rothbard's view on whether or not fiat money is a lasting monetary system.
And then I move on to the issue, and I think this is the focus of my presentation,
that fiat money basically leads to an exportational rise of debt and money relative to income
and therefore proves from a praxeological point of view unsustainable.
And finally I outlined the role of public government, public ownership of government and fiat money and its destructive economic effects.
Let me briefly say something about fiat money just to clarify.
fiat money, the world is full of fiat moneys. These fiat moneys have not originated through free market forces, but through an act of violating money holders property rights.
I think in the Philippe Bargus address this morning made it pretty clear what the real nature of fiat money is.
is, and Guido Hülsmann wrote, quote, paper money has never been introduced through voluntary
cooperation. In all known cases, it has been introduced through coercion and compulsion,
sometimes with the threat of the death penalty. And fiat money is typically created through
a bank circulation credit, as Mises termed it, so banks extending loans to let's say
Businesses and Private Households, thereby increasing the money supply.
And fiat money is of course at the heart of the Austrian theory of the trade cycle.
It is fiat money which sets into motion the boom and bust cycle.
Now moving on, Mises and Rothbard on whether or not fiat money can last.
Ludwig von Mises wrote, quote, there is no means of avoiding the final collapse of a
The boom brought about by credit expansion. The alternative is only whether the crisis
should come sooner as a result of a voluntary abandonment or further credit expansion or
later as a final and total catastrophe of the currency system involved.
To me the fate of fiat money would be sealed once people become aware of its inflationary
People would then try to get out of fiat money, investing in real assets.
This is the so-called crack-up boom and would then lead to a total destruction of the purchasing power of money.
In contrast, as I mentioned earlier, Rothbard, in his case for a 100% gold dollar, argued that there would actually be no such necessity.
I want to make clear what I'm not saying. I'm not saying that fiat money, once established on the ruins of gold, cannot then continue indefinitely on its own.
If fiat money could not continue indefinitely, I would not have to come here to plead for its abolition.
So Rothbard basically maintained the idea that fiat money could possibly continue indefinitely.
Now I think this is important contrast between these two great thinkers and requires some
analysis of why they come to these different conclusions.
I would like to make my explanation on the basis of this little illustration.
To outline the differences between Rothbard and Mises, I made use of this rather simple
illustration.
It shows you on the upper right-hand side the credit market where credit supply meets
credit demand.
The lower quadrant shows you the production function as a function of credit.
The upper left-hand quadrant shows you the money market, where money demand meets money supply.
And the left-hand quadrant on the lower left shows you the relation between money and output.
And let's assume we are in a fiat money system and the credit supplies increase without the societal time preference experiencing any change.
So the credit supply moves to the right, lowers the interest rate and an increase in credit, as I included it in the explanation of the product, of the output function, increases output.
output, but due to the law of diminishing marginal return, which is an axiomatic truth,
as you all know, the increase in the bank circulation credit supply will remain lower
than the output gains.
And that results over time, if we would try to continue to hold up an inflationary boom
through further expansion of money and credit
would lead to a rise of the credit and money supply
in excess of output gains,
thereby raising the economy's indebtedness.
And I think it's worthwhile to contrast this result
with a situation in a commodity money regime,
which is illustrated on this chart.
Again, we have a rise in the credit supply because of a lowering of the time preference
rate and that moves the credit supply schedule to the right.
But in this example, the lowering of the time preference leads to more savings, more investments
and therefore an increase in the economist capital stock.
And that moves the production schedule outwards.
As you can see, the production schedule over here moves outwards.
So one can argue that in this environment, the increase in credit is basically matched
by a rise in output, so you wouldn't end up in a situation where the credit supply exceeds
the gains in output.
At the same time, the money supply remains constant because in a commodity money regime
A bank landing activity just means a transfer of existing balances from the saver to the investor.
So the case is basically made on the basis of praxeology using the refutably true law of diminishing marginal returns,
which allows us to say that in a fiat money system, in order to keep going a boom,
in whom you would end up with debt and money spinning out of control relative to income.
And I think just from this point of view, ignoring the issue of compound interest,
you can come up with the conclusion that economically speaking,
fiat money is really unsustainable from a praxeology viewpoint.
and I must say I come to the conclusion at this stage to side with Mises conclusion rather than with Rothbard's conclusion.
Now another argument advanced in this paper is the role of a government in the fiat money regime
and I try to outline taking recourse to the work of Hans-Hermann Hoppe that fiat money of course is a creature of public ownership of government
which is associated with further economic incentives and I would say logically argues for capital consumption,
for an eroding of the productive capacity of the economy which also would argue that this is going to make it increasingly difficult for an economy to service the accumulation of debt in a fiat money system.
So I conclude, I would like to conclude, the article has tried to show that first, fiat money is economically unsustainable as it makes debt and fiat money growing exponentially relative to income and that two, the use of fiat money will destroy the free market order,
It will destroy the free market order and both findings are actually in support of Mises,
I said it earlier, rather than Rothbard's conclusion, namely that from a praxeological
viewpoint fiat money cannot last but must collapse. Thank you very much for your attention.