Category Archives: fiat currencies

Is money’s value inversely proportional to how much there is?

Last time in this series, we considered the effect of halving the number of New Zealand Dollars, and halving every NZD-denominated debt. In particular, would this double the value of the dollar? It didn’t seem tenable that it wouldn’t at least have the tendency to double the value of the dollar, although stickiness and other constraints may work against that tendency.

So if we accept that halving the stock of money, and all the money-denominated debts, has the tendency to double the value of money, then we might wonder whether both debt-halving and money-halving are necessary. So today, let’s consider the situation where we just halve the stock of money (in circulation and in hoards and stockpiles), without halving everyone’s debts. Would this on its own be enough to double the value of the dollar? Continue reading Is money’s value inversely proportional to how much there is?

Stickiness

In my previous post, I proposed a thought experiment: If all the debts denominated in New Zealand Dollars suddenly halved, and half of all the New Zealand Dollars in each person or organization’s possession suddenly disappeared, would the value of the dollar double? Today, let’s consider what it might mean if the answer is “no”; what could we conclude about what determines the value of the dollar? Continue reading Stickiness

A fiat currency thought experiment

As far as I know, every nation’s official currency is a fiat currency. This means that the government (or the European Central Bank, or whoever) doesn’t promise anything of value in exchange for their own currency.

This is in contrast to a “hard” currency; for example, before the so-called Nixon Shock in 1971, foreign countries could get an ounce of gold from the US government for every $35 they sent back; this was meant to ensure that the US dollar had a certain value.

At first, it appears that a fiat currency provides no guarantee for holders of the currency or for creditors owed money in that currency; no-one is obliged to give them anything valuable in exchange for the token coins, pieces of paper, or electronic records.

But four decades after the Nixon Shock, US dollars are still treated as if they have value, and most other countries have functional fiat currencies, too. So why are they valuable? Continue reading A fiat currency thought experiment