Typography

Over the last few years I've increasingly crossed paths with the following claim on the internet: "The average life expectancy for a fiat currency is 27 years." Is this claim true? What definitions are being used? I mean, are we talking about inconvertible paper money here, or currency that was convertible into gold, too? I finally got curious enough that I decided to chase down the source of this meme. After all, without knowing what data it is based on, it's hard to evaluate the claim's truthfulness. Below I give a description of my trek through internet history. The average-life-of-fiat meme has become particularly popular among cryptocurrency types. For instance, here is Jimmy Song, a popular bitcoin educator/developer, confidently invoking the slogan back in 2017: "When a society lacks prudence, what happens is that the society collapses or goes into chaos. It’s not a coincidence that the average lifespan of a fiat currency is only 27 years." A lo...

The (Great) Tower of Babel , 1563, Bruegel the Elder. "Therefore is the name of it called Babel; because the Lord did there confound the language of all the earth" People bandy the term fiat currency around a lot, but what exactly does it mean? None of us wants to live in a Babel where people use fiat to indicate twenty different thing. So let's try to zero in on what most people mean by playing a game called fiat-or-no t. I will describe a monetary system as it evolves away from a pure commodity arrangement and you will tell me when it has slipped into being a fiat system. (The technique I am using in this post cribs from a classic Nick Rowe post ). So let's start the game. 1) An economy in which gold coins circulate as the medium of exchange. Fiat or not? I think we can all agree that there is nothing fiat at all here. (For simplicity's sake let's assume for the duration of this post that taxes can be paid with anything, and that there is no legal tender.)...

I am a big fan of coinsplainers like Andreas Antonopoulos. Listening to Andreas explain how bitcoin works is a great learning opportunity for folks like myself who know far less about the topic. I am less impressed when bitcoiners engage in fiatsplainin', since they generally have an iffy understanding of the actual financial system and central banking in particular. So for the benefit of not only bitcoiners, but anyone interested in the topic of money, I'm going to fiatsplain' a bit. (I really like this term, I got it from an Elaine Ou  blog post ) Paul Krugman recently had this to say about the difference between bitcoin and fiat money: "So are Bitcoins a superior alternative to $100 bills, allowing you to make secret transactions without lugging around suitcases full of cash? Not really, because they lack one crucial feature: a tether to reality. Although the modern dollar is a “fiat” currency, not backed by any other asset, like gold, its value is ultimately back...

Bitcoin boasts many technical achievements, but none is more interesting to me than they way it was successfully bootstrapped. How did a small group of cypherpunks —activists interested in widespread use of cryptography and digital currency—manage to get an intrinsically valueless token to have a consistently positive price? Hal Finney, a cryptographer and early adopter of bitcoin, put it this way in 2009: "One immediate problem with any new currency is how to value it. Even ignoring the practical problem that virtually no one will accept it at first, there is still a difficulty in coming up with a reasonable argument in favor of a particular non-zero value for the coins." The bootstrapping of bitcoin seems to have been achieved with some care. William Luther has gone through old bitcoin message boards to show how early adopters, including Finney and bitcon-creator Satoshi Nakamoto, coordinated to 'enter the network' at the same time, thus generating a positive valu...

Somalia has long played host to one of the world's strangest monetary phenomenon, a paper currency without a central bank. I explored the idea of Somalia's "orphaned currency" more fully four years ago , but if you're in a rush what follows is the tl;dr version. Despite the fact that both the Central Bank of Somalia and the national government ceased to exist when a civil war broke out in 1991, Somali shilling banknotes continued to be used as money by Somalis. Over the years, Somalis also accepted a steady stream of counterfeits that circulated in concert with the old official currency, a state of affairs that William Luther explores in some detail here . The story is worth revisiting because apparently Somalia's newly restored central bank is on the verge of re-entering the game of printing banknotes after a quarter century absence. With the help of the IMF, the Central Bank of Somalia (CBS) plans to issue new 1000 shilling banknotes, the introduction of hi...

Michigan Central Railroad 3.5% Bearer Bond with attached coupons, 1902 David Glasner is frustrated that there is no satisfactory theory of the value of fiat money, noting that "it's just a mess, a bloody mess, and I do not like it, not one little bit." According to David, the core problem is the backward induction argument . Say that a valued fiat object provides no non-monetary services so that its price depends entirely on the expectation of future resale. This is a highly precarious situation since it it inevitable that someday no one will want to exchange for that fiat object. But if it is certain that no one will accept it at some point in the future, then why accept it in the first place? The explanation for the object's value rests on an "unlimited supply of suckers", as David puts it, hardly good fodder for a long term theory of asset prices. David proposes tax acceptability as his way out of the problem, although he doesn't seem to be entirely ...

In a previous post , I made the point that banknotes aren't Samuelsonian bubble assets , say like a chain letter or a ponzi scheme or bitcoin. Upon the dismantling of a central bank, each note has a senior claim on a central bank's remaining assets. Rather than being mere "oblongs of paper", as Samuelson described them, banknotes occupy the very top of the capital structure hierarchy, above stock and bonds. This quality of being "well backed" might be sufficient for notes to trade at a positive value in the first place, and also help explain subsequent fluctuations in the purchasing power of those notes. In this post I revisit these ideas. The process of dismantling a central bank would go like this. Imagine that the Reserve Bank of Fiji announces that it will wind up operations next week and recall all notes. Its assets consist entirely of Fijian dollar-denominated bonds. With the eminent end of Fijian dollars , the entire Fijian economy will have to quick...

Despite its odd denomination, the above is a genuine banknote. Ne Win , Burma's military dictator from 1962 to 1988 and the man pictured in the note, was convinced that his lucky number was nine. So he had notes issued in multiples of nine, including the forty-five and ninety kyat notes (which also each add up to nine 4+5=9, 0+9=9). But I'll get to this story later. This is a continuation of a post I wrote earlier describing how central banknotes aren't mere bits of intrinsically useless paper. The standard view among economists is that banknotes are bubble assets. Because they are intrinsically valueless, the fact that paper notes earn a positive value can only be explained by the fact that the market expects them to have value in the future, much in the way that a ponzi scheme or chain letter is perpetuated. This view goes back to Paul Samuelson ( pdf ), who described how a "grand consensus" might be arrived at whereby society could contrive to have "obl...

The building that housed the original Swedish Riksbank, the earliest European issuer of banknotes In my previous post on bitcoin, I noted offhandedly that I don't consider modern central bank-issued banknotes to be fiat but classify them as liabilities of the issuing bank. By fiat, I mean unbacked, intrinsically valueless, inconvertible, unenforced bits of paper. In the comments section , monetary operations whiz ATR (who blogs here ) challenged me to clarify the nature of the IOU attached to paper currency, and whether that IOU had any value. It would be cheating to point out that the world's 160+ central banks all list banknotes as a liability on their balance sheet. The deeper reason that I prefer to classify banknotes as liabilities (i.e. IOUs, promises, claims, or obligations) rather than fiat bits of paper is the "fine print". The best place to find the clauses governing the IOU nature of banknotes isn't on their face, but rather in the various acts and leg...