what is the deal with fiat currency? how does it arise and where does it attain its exchange-value? i’m currently participating in the hexbear capital reading group and in chapters 2 and 3 marx goes heavily into the way that gold standard money becomes exchange-value. fiat money is discussed only a little, and somewhat dismissively, although as far as i can tell none of the actual theory of the time precludes it from existing. are there any texts that go into it in detail?
important context: https://lemmygrad.ml/post/10346359/7603669
Marx talks more about fiat currency in the (unfinished) Foundations of the Critique of Political Economy, which is more or less his notes for writing Capital later on.
Fiat currency is money backed by nothing, except a decree by the local government that the bills have value. This is the system the world uses today (known as the Bretton-Woods system).
Back in Marx’s time, most nations, and especially the major ones, used representative currency, which is money that represents a government’s physical gold reserves (or other similar commodities, like silver, but usually the main commodity was gold).
Theoretically, in a representative currency system, you can only print as much money as your reserves. If you want to print more, you need to either go into debt so you can buy more gold, or you will need to debase the value of your currency (i.e. say that 1 pound = 1 gram of gold today, but from tomorrow onwards 10 pounds = 1 gram of gold). In a fiat currency, you don’t have to worry about the value of your gold reserves, so you can just print money when it is needed. For example, if you want to stimulate the economy.
In Marx’s time, the economists supporting the fiat currency system would argue that since people still mined for gold, the amount of gold was constantly increasing, and its price was decreasing. This created a naturally increasing inflation that was hard to control. With a fiat currency you wouldn’t have to worry about that at all, since the government could control inflation by just deciding not to print more money (at least that was the general idea). And it would make the economy more robust and able to deal with quick crises demanding quick influx of cash, like a crop failure. There were also some arguments about easier trade, etc.
As usual, Marx correctly predicts that, because fiat currency is backed by nothing except a government’s decree that it is legal tender, then there is no limitation on how much currency can actually be printed/minted. In fact, this is precisely the reason for which a government creates a fiat currency. Hence, as governments won’t be able to resist the urge to print in a nigh unlimited fashion, inflation will rise perpetually, causing an equally perpetual increase on the cost of food, products, housing, clothing, etc, as well as the source of resources, machinery, labour, etc.
This will affect both the proletariat and the bourgeois, but in different ways.
The proletariat will see the value of their wages diminish every year, and will face an increasing need to enter into debt in order to survive. On the other hand, the bourgeois will see the value of their investments and deposits also diminish every year, and will demand constantly an expansion of the economy, so as to minimize the effects of inflation.
For a nation without colonies, dependencies, protectorates, and spheres of influence, expansion of the economy means national indebtedness to other bigger powers, so as to have the funds to actually expand the economy. For a major power, expansion of the economy means using its military and diplomatic leverage to expand its influence, invade, colonize, so as to open for itself more markets, and acquire cheaper resources.
For all nations, expanding the economy means finding ways to squeeze even more profit from the productive processes, which means putting more pressure on the proletariat, forcing them to work harder, while compensating them for even less.
Simultaneously, inflation will negatively impact banks the most, as banks rely the most on the value of their currency reserves (which is diminishing due to inflation), and on the value of their assets, i.e. debts (which is similarly diminishing as inflation rises). Hence, banks will enter a perpetual cycle, where their lending fees (interest rates) become ever-more increasing, while their clients’ interest rates on deposits will become ever-more decreasing. This will lead into an even bigger increase in the price of products, compounding the same problem perpetually.
Therefore, eventually, a nation employing a fiat currency scheme discovers that, even though in theory the fiat currency is backed by nothing than the government’s word, in reality the fiat currency is backed by the entire nation’s economic output. Any efforts to limit inflation, including limiting the previously unlimited printing of money, will wreak havoc on the economy. Any efforts to return to a representative currency (e.g. backed by gold) will cause the economy to contract massively, which is against the bourgeois’ interests.
Whatever, the outcome, the result is the same: The economy’s biggest commodity becomes debt. Debt owed by the proletariat to the bourgeois, nationally. Debt owed by minor nations to major powers, internationally. Thus, the bourgeois is further alienated from the product of its labour, while nations are alienated from their own economies.
This is not to say that a representative currency system won’t cause the same effects. According to Marx it does. But a fiat currency would skyrocket debt, causing even more severe effects.
This is analyzed further by Lenin in Imperialism: The Highest Stage of Capitalism.
is imperialism a necessary precondition for a fiat system to flourish? in the other thread i put a quote from capital that seems to suggest it is, and i suspect that isn’t wrong. for a country to leave the gold standard, it seems to me it would be necessary for it to have a reasonably-sized sphere of influence such that its currency doesn’t immediately become worthless abroad. maybe it could move gold reserves into the hands of consumers or of importers, but at that point it would probably end up making its own money obsolete. relatedly, is it accurate to say bretton-woods replaced the gold standard with the dollar standard? that is, with all or most nations holding dollar reserves, has the labor-value of the miner been replaced in money by the labor value of the entire usamerican proletariat, plus debt owed to the united states by foreign nations? or am i misunderstanding the source of the value of fiat money?
Imperialism is necessary for a transnational currency to flourish, like how the dollar is used for global trade and especially for oil trade. Fiat national currency only really needs the government of a particular polity to have a monopoly on violence, and this creates a stable internal market for currency as well as an exchange market for buying other national currencies.
is imperialism a necessary precondition for a fiat system to flourish?
Historically it seems so. Though we need to be careful when examining this, because there was a very particular course of events that led to the current world system of currency, and probably a very particular intent behind it.
In Marx’s time, the primary proponents of a fiat currency were the Americans. The US was competing with the English (and French, Dutch and Spanish to an extend) for control of the Americas, as well as colonial expanses in the Pacific and Asia. All these nations were considered to be major powers (i.e. imperialist empires), with extensive economic systems. The US was at a serious disadvantage against all others (except the Spanish who were a waning colonial empire in the process of collapsing):
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The Europeans had extensive and established economies of scale, fueled by cheap resources from their colonies and by cheap labour from both their colonies and their forced urbanization efforts in the past century, while the US was still in the process of transitioning from an agricultural and resource economy to an industrial economy. The US tried to fix this by creating its own cheap labour force through extensive campaigns to attract European immigrants (slogans like “land of the free”, “land of opportunity”, “the American dream”, etc were born in this era for this very purpose).
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The Europeans had extremely strong currencies owing to their industrialization. They were the primary sources of finished goods in most forms across the globe, and the primary recipients of raw materials from across the globe, making them the prime movers of trade. Coupled with their colonies, most trade occurred through their currencies. In addition, and in particular the English, they were the major lenders of all other minor powers. This meant they could not only easily control any inflationary tendencies of their currencies by giving out national loans and controlling trade and prices, they could also keep expanding their economies at rates and sizes the US could not hope to match. On the contrary, the US was able to produce comparable number of goods, but had no external markets to export them to. This meant that the US was plagued by constant crises of overproduction, wild cycles of inflation and deflation, and no means to recover besides lending from the very European powers they wanted to be rid of.
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The US started out with a representative currency (like was the trend at the time). For example, George Washington is known to have been particularly opposed to attempts to establish a fiat currency, because he understood that this would turn the farmers and labourers into debt slaves for a small subset of land-owners and industrialists. Not that he was abhorred by the morality of the idea, but he knew that this would doom any attempts to rapidly develop the country from a colonial nation into a self-sufficient major power. However, the US lacked the gold reserves to actually do this. They knew however that there were big gold deposits scattered all over the country (many in Indian territories) and made a concerted effort to send pioneers to such areas (like California and Colorado) to mine this gold and sell it to the government. The effort was a success, but the great influx of gold created a massive inflation that the US couldn’t really recover from until the early 1900s, when they banned free gold prospecting and heavily regulated the mining, selling and ownership of gold, as well as its use as a secondary form of transactional currency.
When WW1 happened the US managed, for the first time, to gain an economic advantage over its competitors, who were busy slaughtering each other in France and elsewhere. The US snuggled into the niche of primary exporter, as the Europeans were converting their industries into arms manufactories, and their labour forces into soldiers and then into fertilizer. Simultaneously, they started lending to the warring Europeans. There’s a whole slew of literature on how Woodrow Wilson, and others, were attempting to prolong the fighting in Europe in order to continue reaping the benefits.
Then after WW2, the US found itself the nation all its allies (and the defeated too) would rely upon to rebuild them. Everybody’s nation (and industry) was in ruins, vast portion of their population was dead or incapable of work, and their economies were in tatters. The US had a large and capable labour force, proven itself able to be the factory of the world, had a vast merchant fleet ready to carry goods across the globe, and was holding every other country in massive debt. A debt they quickly tried to grow by devising such schemes as the Marshall plan. This is when the first foundations were laid for a fiat currency.
As US dollars became more prominent in world trade, the English pound was falling rapidly. Eventually in the 1970s, the Americans were able to cut a deal with every other major nation in the world, to transition to a fiat currency. Nobody could object, because if the Americans decided to go ahead at it alone, they would all be in trouble due to their massive debts to the US, and their reliance on trade with the US. Soon everybody followed along, with very few exceptions.
But this is where things get complicated. Because immediately after this, the Americans established a deal with the Arab states (and through them with OPEC), that all oil sales from now on would occur in dollars. Meaning, if the French wanted to buy oil from the Arabs, they couldn’t do it with francs anymore. They’d have to exchange their francs for dollars, and then go to the Arabs to buy the oil with the dollars they got. Meaning, that the dollar fiat currency was no longer so much fiat. It was backed by the price of oil. Which the Arabs controlled through rate of production. For which the Americans paid with military and diplomatic protection of the Arab states. This is why the dollar became a reserve currency of the world. As the world needed to always have dollar reserves to buy the oil it needed, this meant it became convenient to conduct all trade of all other goods in dollars too. And what do you do with all these dollars you now have sitting in your vault? You could exchange them back for your own currency again (by paying fees to do so), but it would be more profitable to go into the US and use them to invest in US bonds, US stocks and US businesses (without paying any fees because you are already using dollars to do dollar things). Which solved the problem that Marx predicted: Inflation was no longer an internal problem for the infinite money printing in the US, because the dollar itself became a commodity to be exported.
In summary, yes you need to be a pretty strong imperialist force to establish a fiat currency. But we should recognize that the US doesn’t really have a fiat currency as such. Everyone else does, with all the problems it entails. But the US has a sort of a mixed commodity/representative currency. The dollar itself IS a commodity that is exchanged for other commodities worldwide. No other currency can claim that achievement. At the same time, it is backed by the world economy, as its price depends on the price of oil, which affects the price of everything else. Which is why the US is so intent on two things: Global dominance of trade and economic output, and oil.
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In the absolute most simple explanation possible I can give:
Non-fiat= Currency that can be directly translated to a certain universally valuable good at anytime (i.e. gold, silver), either through reserves or the money itself being made of said material (coins). The concrete measure of wealth helps gives investors and whoever else confidence that your government won’t go bankrupt.
Fiat= Currency that’s worth something because the government says it is. Look at us, we are big, our military is strong, don’t you trust we will always be powerful, wealthy and stable? You better or else we send that military after you if you put our financial solvency into question. Notably used by the Mongol Yuan Dynasty and the US today.
Another thing that gives fiat money value (at least domestically) is that the state will only accept tax payments in its own currency. Those taxes, which remove money from circulation, also moderate inflation. The sovereign’s debt is the money in the economy[1], which is why it’s in no one’s interest for the sovereign to pay off its debt.
There’s also money created by private banks, with permission from the sovereign, by writing loans. ↩︎
A virtual resource controlled by a government that’s supposed to support exchange of goods ans makes it convenient.
I’d argue that no backing and ability to control its value is an advantage over representative currency. As long as government is working in the interest of the people of course.
We should just remember that digits with arbitrary value that nowadays don’t even have to be printed are not a material resource. Having money doesn’t secure anything, its volatile yet effective value emerges from the possibility to exchange it for material resources in given moment.
Money is a pie, we each get paid with pieces of the pie. Government prints their fiat money, but unless economic production also increases, their newly printed money just means the pieces of the pie get smaller.
So you will still get paid in the same amount of pieces of the pie, only they’re smaller now. This is the best way I’ve found to think about inflation. This also helps me to understand how cost of living is generally 3 times as expensive now as it was back in the 70s (for most of the western world). Because money is worth about 3 times less than it was. Because so much God damn fiat money has been printed. Look at those insane Fred charts. 2008 was a massive inflexion point, as was 2020.
The government printed so much money, so much more than the increased production of economic value, that the pieces of pie that we all get paid in are 3 times smaller than they were 50 years ago. The pie didn’t necessarily get bigger, there’s just more pieces of it.
And certainly the pie has grown since then, but not as much as they’ve printed in fiat.
So the amount of money in circulation has increased faster than value has been created. Hence that money being worth less, and it taking more of it to buy the same thing.
I’m clearly not an economist, but this is how I think about it.
This is correct, AND not only does the government print new money, it decides who to give it to.
In the US, the government almost exclusively gives this money to banks and financiers to invest for their own profit, especially inflating the prices of stocks, bonds and real estate. All this free money going into these specific markets causes house prices and stock market valuations to continuously increase, but no one calls it ‘house price inflation’ or ‘stock price inflation’, they call it ‘a good economy’ because otherwise it would give the game away. The increase in asset prices relative to wages and the price of goods (which still increase more slowly) means workers end up paying a larger and larger portion of their wages to land-owning financial capitalists. They then have less to spend on actual goods, putting pressure on manufacturers who end up with a smaller market. It becomes more and more difficult to turn a profit by hiring people to actually make things, so the economy becomes deindustrialized.
Alternatively, government could use the money to hire more employees or purchase goods and services, which would cause the inflation of wages and goods relative to assets and cause the formation of an industrial economy. But that would challenge and eventually overturn the control of the economy by financial capital, so it can never be allowed to happen.
Well said. Yes, we already live in socialism, just that it’s socialism for the wealthy with harsh austerity for the rest of us.
I agree with everything you say there. It sounds more and more like a return to feudalism everytime I think about it.
The wealthy are literally trying to price working people out of existence. This is one of many forms of increasing class warfare we’re forced to endure.
Certainly the only solution is organised militant resistance 💪 eat the rich asap 🔥
On a similar tangent, I once read something about gold prices. That basically, a gold coin has about the same amount of buying power over time with only minor fluctuations. Gold “price” doesn’t go up so much as moneys “value” goes down. So buying and “investing” in metals like gold doesn’t really increase the value of your investment so much as it does prevent your savings from deflating in value.
That’s a brilliant way to think about it, thx for sharing 🙌
So, in terms of currency, fiat currency is make believe. But so is any other money.
