Economic theories and models often feature ideal concepts such as perfect competition, complete markets, and lump-sum taxes. Such abstractions are useful simplifications of reality for many purposes. Most economists agree that these concepts are fictional. Monetary economics has an ideal construct of its own. It is what economists call “fiat money.” This is an object that has no intrinsic value and is not convertible into anything. An implicit assumption in the definition is that no one is forced to use such money in transactions and that the money has no other legal status whatsoever. Acceptance of such money is entirely discretionary and based exclusively on the expectation that others would accept it too, even though no one else is forced to accept it.
Interestingly, monetary economists do not claim that their “fiat money” concept is fictional. On the contrary, they completely identify it with the modern money we use in reality. Legal scholars and laypersons call the money we actually use by the same name since “fiat” refers to its status as legal tender. Monetary economists have largely ignored this status. They have proven in their models that in theory legal status is not necessary for an intrinsically useless money to circulate3. Moreover, they have claimed that legal status is not necessary in reality either. Since modern moneys do have a clear legal status4, monetary economists have based the latter claim on stories that there have been cases of non-modern moneys that were identical to the “fiat money” concept used in monetary theory. Such claims and allusions have been made by some of the most prominent monetary economists5 in almost every form of publication, and the issue serves as a very rare example of consensus in the field of monetary economics.
This paper re-evaluates such evidence on non-modern money. The classic reference on such money is Einzig (1966). His book, Primitive Money, defines “primitive money” as any object that is not paper or coin, and supposedly functioned as money somewhere in the world at some point in time. Einzig’s book attempts to provide a complete list of all primitive moneys that have ever existed (regardless of whether they were “fiat” or not). Among all the evidence that he reports, I treat those objects, and only those objects, whose descriptions in Einzig’s book would likely make them seem intrinsically useless to an average modern Western layperson. There are more than fifty such objects. Objects whose intrinsic value is obvious to such a reader (be it practical use, like rice, or esthetic value, like gold) are not mentioned here, even if their use as money is surprising.
The main result of the paper is that there is no conclusive evidence—among all those cited by Einzig—that what economists call “fiat money” has ever existed. The leading problem is that some goods were intrinsically valuable to their users, but not to us. Many times the fault lies with the Western settlers, travelers, diplomats, and missionaries, who reported the use of these goods as money, and were not as open-minded as anthropologists. Some examples are false because the laws, customs, religion, and trade relations of the money’s users are ignored. Other problems include non-credible or uncorroborated evidence, and objects that actually were not what economists regard as money. Most cases have more than one of these flaws.
The main conclusion of the paper is more general: a comprehensive anthropological, historical, and legal survey of the society in question is necessary before we jump to the conclusion that this society has used “fiat money.” This is important because the evidence reported by Einzig is probably not all the evidence that exists out there in innumerable writings about all human societies that have ever existed. If new evidence comes to light, one should keep this conclusion in mind and evaluate the new evidence accordingly.
This work is similar in spirit, and somewhat analogous, to Garber’s work on “famous first bubbles.” Garber (1989, 1990, 2000) takes a critical look at the Dutch tulipmania, the Mississippi Bubble, and the South Sea Bubble. Generations of economists have been raised on the belief that these mythical episodes are a clear proof of the power of speculation in financial markets, but Garber finds that economic fundamentals can explain these episodes. Similarly, economists are being taught that money can circulate based purely on people’s speculation that others will accept it too, with the proof supposedly coming from the experience of primitive societies. I find that physical, legal, and religious “fundamentals” can explain the circulation of all primitive moneys.
The paper is organized as follows. Section 2 discusses methodological issues. In Section 3 I start the survey with the most colorful and popular myth of all—the stone money of Yap—because prominent economists have mentioned it as a classic example of “fiat money.” In Section 4 I discuss shell money, also mentioned in modern monetary literature as an example of “fiat money.” Next, I list all the other cases, some of which might surface one day in the mainstream monetary literature as examples of “fiat money7.” These are seemingly useless variants of skins, cloths, heads, other organic materials, and minerals (Sections 5-9, respectively). Section 10 concludes.
Download
The Myths of “Fiat Money”
