by Gene Callahan
Again and again, I run across this complaint that fiat money “is money created out of nothing.” This is supposed to be an argument against fiat money, but, in fact, I take it to be a substitution of sloganeering for scientific analysis.
The reason the slogan works emotionally is “creating money out of nothing” appears to rely on some sort of black magic, and therefore to be evil. But that is a category error: creating money (or anything else) from nothing is not evil, it is impossible (except, perhaps, on the part of our Maker, should He exist). And, since it is impossible, it cannot really be what fiat money regimes are doing.
In fact, although this is an idea I haven’t yet had the time to pursue at length (which is why I’m blogging it rather than publishing it as an academic paper, at least at this point) I believe that fiat money is created from a government’s ability to collect taxes, combined with the fact that it promises to accept the pieces of paper in payment for those taxes. My hypothesis, as this point only a suspicion, is that the “backing” of fiat money is first and foremost its ability to pay tax obligations to the government, and that’s its value for other uses is anchored in this ability, just as the value of gold as money is initially anchored in its value in all non-monetary uses.
However, even if I turn out to be wrong about this, I am sure about one thing: the value of fiat money is not created “out of nothing,” because ex nihilo nihil fit.