Liberty in a time of Fiat Currencies
It has long been said that there can be no liberty without economic liberty; that the individual cannot experience real freedom without the ability to freely transact and dispose of resources according to their own inclinations.
This axiom derives itself from the fact that an individual’s choices, both economic and social, are determined by their intrinsic values; so it follows that economic liberty is the ability for the individual to freely represent their beliefs and values through the choices they make.
An individual will choose to engage in a contract if the outcomes and terms are aligned with their beliefs about the world. For example, an environmentally conscious person would hardly engage in a contract if its fulfilment required the increased emission of carbon, as this opposes their beliefs about what should and should not be done.
Similarly, an individual will choose to dispose of their own property as and when the inclination arises. In the case of a hedonist, they would only dispose of their income on the purchase of a good if it was believed to add to their happiness. Subsequently, to deprive the individual of the ability to freely transact and dispose of resources is to deprive them of the ability to express their intrinsic values through choice and force them into a life of hypocrisy.
Consequently, as the economic and social person is inextricably linked, the freedom of the individual is contingent upon economic liberty. Of recent, however, the maintenance of liberty in all things economic has been difficult due to the constant government intervention in fiat currencies, which have affected the individual’s ability to dispose of their resources as they see fit.
Fiat currencies are those currencies which have no intrinsic value. This is because they are not backed by a particular commodity, unlike traditional currencies which are exchangeable for a set amount of the physical commodity by which they are backed (for example the pound and its gold standard). As such, because fiat currencies do not derive their value from an asset but rather confidence, based on the principles of demand and supply, they do not have any value in themselves.
The fact that fiat currencies are not commodity backed means that they theoretically have an unlimited supply and are open to manipulation. Central banks can print money without the need to hold commodity reserves, which has allowed governments to expand the money supply for their own purposes. In the case of Zimbabwe, the government sought to use seigniorage, whereby the money supply is expanded through the creation of new money, for the purposes of increasing their own purchasing power, although this has occurred at the expense of the individual’s purchasing power which was degraded by subsequent inflation. Hence, as the supply of currency is controlled by a central entity (typically a central bank) that can expand or contract the money supply at will, the value of the currency is liable to manipulation.
While currencies may be subject to changes in value due to external shocks, this government manipulation interferes with the individual’s ability to self-determine. For if the value of the currency is not secure then the individual is forced to dispose of their income not at their own leisure, as was previously the case with traditional currencies, but at the leisure of the government. For instance, were the government to decide on a policy of inflation, the currency would be devalued with large expansions in the money supply. This has the effect of forcing the individual to dispose of their income sooner rather than later to avoid future price increases, whereby each dollar buys progressively less. Therefore, as the government determines the value of the currency, the individual is no longer necessarily in control of when they dispose of their income.
This implies that when the government has the power to interfere with the value of a currency, the individual’s economic liberty is compromised. The ability for them to transact and dispose of resources according to their own inclination depends on the benevolence of the government, who has the capacity to make them do otherwise. Thus, the maintenance of economic and hence absolute liberty in the presence of fiat currencies is a precarious business.
Rachel is a recent graduate of UWA having completed her Commerce degree with a double major in Economics. She is currently doing her honours thesis in the same field.
Note: Fiat currencies have existed since the 11th century and continue to be used today. China was the first to employ such a currency with the distribution of paper notes as a medium of exchange during the Khan Empire, these pieces of paper were valued at a set amount of a physical commodity but not able to be converted. Since then many countries have adopted similar national fiat currencies including the United States of America and Japan, whose dollars were unpegged from the gold standard in 1971 and 1973 respectively. Although more recently there has been the development of international fiat currencies, in the form of Bitcoin and other crypto-currencies that are neither government issued nor commodity backed. Taken in of itself this significant change, from paper currency to shared electronic ledgers, shows just how much fiat currencies have evolved over time and continue to play a large role in our society as a means of payment.
