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Why do people still value fiat money? Part I

Image result for Guillermo A. Calvo

Why haven't we gone to barter? Or adopted systems such as bitcoin much more widely?

Few people really trust the fiat money created by governments, their printing presses, and their captive central banks. The distrust has been growing in intensity ever since people came to understand that  the official money isn't backed by anything and isn't going to be backed by anything. So ... why haven't people abandoned it?

Because the government forces us to use its money?

No, it doesn't not really. We must be able to convert some of our wealth into its money at tax time. just as you must be able to pay for your trip on the subway with a subway token. But you can make that conversion just before your subway ride.

So other than that: why do people still value the US dollar and other examples of fiat money?

One thinker who offers a provocative answer to this question is Guillermo A. Calvo, a former chief economist with the Inter-American Development Bank.  The institutions of central banking are these days generating their own critics from within.

Calvo, whose spectacled face you see above these words, says if I understand him that the chief reason people value fiat money is stickiness. They value it because and to the extent that both prices and wages tend to be sticky. This stickiness in turn is critical to Calvo’s discussion of how the works get gummed up, that is, to his understanding of the boom-bust cycle.

More of this tomorrow.


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