Kornea Bauble

Objectivists should advocate a fiat currency

Summary: You should advocate an inflatable fiat currency like the US Dollar because there is nothing wrong with it morally, and its only alternative is trade taxes (income/sale/tarrif), which are worse.

`Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it.` - Francisco d'Anconia

This discussion is not about the morality of seizing someone's gold (no argument there), but about the morality (and practicality) of an inflatable fiat currency like the US Dollar. The gold was seized generations ago, and no justice can be brought to the situation any longer, but we are presently forced to use an inflatable fiat currency, which on the face of it is a clear-cut initiation of force, and therefore immoral. Why should there even be such a thing as "legal tender"? Why not let people trade using whatever currency they want? This document provides an explanation.

My premise is that the government has the moral right to tax, if voluntary donations do not suffice and the only alternative is anarchy. In order to arrive at the conclusions presented in this document, one must accept the inevitability of taxation as a basic premise, which is something Ayn Rand never fully committed herself to. Once we accept the inevitability of taxation, we must consider the implications of that premise. This will lead us to certain conclusions which differ from Ayn Rand's.

Legal Tender

One key to understanding the issues involved is the concept of "legal tender". This is a complex concept, and unraveling it reveals much knowledge. We begin by asking what in reality, if anything, makes the concept of "legal tender" necessary.

"Competing currencies" or "monetary freedom" work fine in the context of trade, but when people come before the legal system, they are not trading anything, but appealing for justice. The court has to have a unit of value to think in for purpose of collecting fines and resolving tort disputes. The legal tender is the unit of value in which the legal system thinks.

If in Mulligan's Valley, Hank Rearden were to invent a cheap method of manufacturing precious metals, such that Midas Mulligan could mint currency practically as easily as printing paper, we would have a system in which the legal tender (Narragansett's unit of value) is an inflatable fiat currency issued by Midas Mulligan. That system would not be immoral, and that system is what we have today.

Once you understand that the legal tender as defined above has to exist, the next inevitable question is: Why are we forced to accept the legal tender for "debts private", rather than merely public? The answer is: in order to make it possible to collect trade taxes.

Trade taxes (income/sales/tariffs) are one of two possible methods of taxation; the other method is printing money. They accomplish the same purpose: transfer wealth from the people to the government. The difference between them is not moral, but practical.

A commodity currency's supply is restricted by the availability of some commodity. A fiat currency's supply can be arbitrarily increased by a human agency (which gives that agency the power to destroy the currency, see hyperinflation).

Gold presently remains a method of storing one's wealth and guarding against local currency inflation. Morality does not demand that we use gold as the legal tender. If an argument is to be made against inflatable fiat currency like the US Dollar, it must be based on practical rather than moral grounds.

The Practical Argument

The total cost of compliance for collecting trade taxes is enormous; they require the government to be intrusive, and corrupt the government by giving it the power to micromanage the economy via the tax code. Printing money is cheaper, less intrusive, and less open to abuse than collecting trade taxes. The only thing to fear is government spending, which is a problem either way.

Some believe that government spending can be limited by limiting its income; that therefore having a commodity currency like gold rather than an inflatable fiat currency like the US Dollar would limit government spending. But even with the gold standard, the government can still spend borrowed money until it bankrupts itself, its credit backed by its power to tax. Attempts to prevent government bankruptcy by restricting its income cannot succeed.

A proper government costs as much as necessary, and as little as possible. Government spending must be controlled directly, via Constitutional Amendment prohibiting the government from spending money on anything other than the instruments of government (police, courts, military). The principle to fight for is separation of state and non-state, where non-state is understood to mean church, retirement planning, health insurance, business, charity, and everything else that doesn't pertain to administration of justice or defense of liberty.

Since wealth is constantly increasing, it stands to reason that supply of currency should be increasing as well (which happens for gold). Since a proper government is affordable and capitalism is prosperous, it might be possible to fund a proper government entirely by printing money, without causing inflation; that the creation of new wealth under laissez-faire capitalism would outpace the production of new currency needed by a proper government.

The wealth that the currency represents has to be not only created, but also defended. Defense of wealth is not a creation of new wealth, yet it is productive work. It seems appropriate that this work is paid for by increasing the supply of currency. Better that than the IRS.

Please re-read this tomorrow.

Copyright Val Kornea