Unexpected destruction of fiat currency has been advanced by the monetary and fiscal response to the coronavirus. Financial markets have yet to discount the possibility of such an outcome, but in the coming months, they are likely to awaken to this danger. The question arises as to what will replace fiat currencies.
In the past, the answer has always been gold but today there are cryptocurrencies as well, whose enthusiasts are more aware than most of fiat money's failings. This article describes the basics about money, what it is and the role it plays in order to understand what will be required by the eventual replacement for fiat. It concludes that gold will return as the world's medium of exchange, and secure cryptocurrencies, unable to provide the scalability and stability of value required of a medium of exchange will be priced in gold after the demise of fiat. But then the rationale for them will be gone and with it their function as a store of value.
These are strange times. Circumstances are forcing governments to destroy their money by debasing it to pay for their obligations, real and imagined. If central bankers had a grasp of what money really is, they wouldn't have got into a position where they are forced to use their seigniorage to destroy it. They are so ignorant about catallactics, the fundamentals behind economics, that they cannot see they are destroying the means of exchange they have imposed upon their citizens with far worse consequences than the abandonment of the evils they are trying to defray.
Unless you believe in a financial form of perpetual motion you will know that all else being equal if you double the quantity of money you approximately half its purchasing power. It is, therefore, an incontestable fact that if a central bank doubles the quantity of a circulating fiat currency, it is taking to itself half of the value of everyone's cash, currency deposits, profits and salaries. It makes everyone poorer and it is simply a travesty to promote monetary inflation as a costless form of economic rescue. Yet the major central banks are now unashamedly admitting to a policy of deploying an infinite expansion of circulating currency.
Oresme was spot on. The whole purpose of debasement is to fund the state, and the state licences banks for that purpose, extending monetary favours to big business as well. Forget the flummery about stimulating us; that amounts to a cover for the statist robbery of our wealth. The coronavirus is not the cause of this folly. It has only shortened timescales, the likely time before we discard fiat currencies entirely. It has brought forward the time when homo economics anticipates the total loss of the government currency's purchasing power. From that moment, those of us unwilling to descend into barter will seek a new medium of exchange. In desperation, governments are likely to attempt to provide alternatives. If so, it almost certainly will be a variation on the fiat theme, which they find impossible to abandon for lack of finance. They will then discover that lasting money is not to be chosen by the state, but by the people. This has been the lesson of history. Those who think economics as science started with Keynes, and preceding theories were thereby invalidated, are in for a primal shock. It is time to relearn the basics about money so that we can anticipate what form of money will endure as a replacement for the failure of government fiat currency. There are two incontrovertible facts that underlie economic analysis and the role of money. The first is that the division of labour is more productive than the work of isolated individuals.
Furthermore, for now, bitcoin is the preserve of investors and speculators, taking a punt on the demise of fiat, without an exit plan other than to measure or take profits in fiat currency. The same accusation can be levelled at gold, which is probably even less used in transactions for goods than bitcoin. But gold has the advantage of a track record of always returning as the money of public choice after fiat fails. Together with its suitability for deferred settlements, we can, therefore, be certain that gold will be money once again, while we cannot be so certain of the future for cryptocurrencies.