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Why do people still value fiat money? Part II

Image result for Isaac Newton

Yesterday, I began a discussion of the work of  Professor Guillermo Calvo, now of Columbia University’s School of International and Public Affairs, in an effort to answer the question in the headline of this blog entry, and I got so far as to introduce the word "stickiness." Let's proceed from there.

Calvo does acknowledge that fiat money contains within itself the principle of its own destruction. But ... why does its destruction take so long? Even if deliberate government buttressing of the use of its money were "completely absent," he says, this factor would slow the aforementioned destruction. 

Stockiness is simply a convenient name for the behavioral fact that suppliers of goods and services "broadcast, far and wide, their willingness to take fiat money in exchange" for what they are selling. Further, private sellers often "reaffirm their willingness to do so over extended periods of time."

The suppliers find it useful as a marketing matter to advertise this commitment, and the buyers find it useful to rely upon such commitments. The fiat money is the focal point of this utility on both sides, and that will be difficult to change. Thus, gold "may not succeed in debunking the US dollar ... unless gold becomes a unit of account and, more to the point, a substantial share of prices and wages are quoted in terms of gold."

The threat to fiat money these days arises from the cryptocurrencies, not from gold. Still, the same argument applies. There is a powerful institutional inertia implicit in the existing system.

Inertia that would even impress the fellow pictured above.


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