Coercion Through Fiat Currency
Fiat Money is a kind of money that directly tokenizes a threat of violence from the state, and in doing so creates an organic system of coercion against the state's victims.
All modern money can be used in this way, and modern currencies usually have some aspect of fiat to them. However, in much of the world and for most of history, money has been a simpler kind of "commodity money" (inherently valuable: gold, silver, cacao, axe heads). The kind of thing that a traveling merchant would be happy to accept as payment, because everywhere there are humans, gold is gold, and silver is silver, and axe heads cut wood.
Fiat money, by contrast, only has value in the context of a state (or other large scale power structure, as we'll see below). It is perhaps best explained by Warren Mosler:
The concept of Fiat Money can be illuminated by a simple model: Imagine a world of a parent and several children. One day the parent announces the children may earn business cards by completing various household chores. At this point, the children won’t care a bit about accumulating the parent’s business cards, because the cards are virtually worthless. But when the parent also announces that any child who wants to eat and live in the house, must pay the parent, say, 200 business cards each month, the cards are given value and the chores instantly get done. Value has been given to the business cards by requiring them to be used to fulfill a tax obligation. ~ Soft Currency Economics II: The Origin of Modern Monetary Theory
This would be an abusive thing to do to a child. On a state level, it's no different:
- A large, centralized state (e.g. Yuan China under Kublai Khan) has an unimaginably complex need for labor, materiel, and other goods.
- This state's needs are far too large and diverse to requisition the goods it needs directly. In other words, there aren't enough tax collectors in China to visit every farmer, clothier, weaver, cobbler, miner, brewer, and brothel-owner, understand their trade, assess a percentage of goods to seize, and then actually do so. This is especially true in the case of Yuan, where a small but lethal Mongol minority rules a nation with a population orders of magnitude larger.
- Using commodity money (often known as "real money") to organize peasants is a waste of good gold and silver (which have uses externally, e.g. hiring mercenaries, buying foreign trade goods, and so on). In fact, the Yuan outlawed the use of gold and silver for transactions in China, increasing reliance on their fiat money.
- So instead, the state creates an official currency out of cheap material (like paper), requires that most people pay taxes in that currency, and then uses that same currency to buy services (e.g. paying soldiers, buying things for court, and so on).
- The entire structure of society now self-configures around paying taxes to the state. This makes the currency useful to everybody who lives within the power of the state, which makes it exactly as valuable as coins made out of silver.
Not only that, but because this cheap paper money now has real value (or else), the state can simply print more of it to do whatever it wants. For a little while, at least. The Yuan fiat currency lasted half a century before devaluing completely and causing a societal retreat back to pre-Yuan copper currency. This is one of the earliest examples of hyperinflation leading to an economic collapse (earlier ones being prior Chinese attempts at fiat currency in the preceding few centuries, from which the Yuan dynasty got the idea). As with virtually all other forms of coercive extraction, fiat money benefits a small number of people greatly in the short term, while making things much worse for everybody in the long run.
The threat of violence if you fail to pay your taxes (corporal punishment, imprisonment, angry Mongol horse archers burning your city to the ground) is the initial driver of value for fiat currency. But because people in the imperial center need currency to pay taxes, they're willing to do stuff to get it. And that means the currency also has value to the people on the periphery. Eventually, money within a sphere of influence is valuable almost out of habit -- it's valuable because everyone around you has it. This allows the value of a fiat currency to sometimes outlive the threat of the state that issued it, as was the case with the Somali shilling for many years after state collapse.
Something similar could be seen in "company towns" in the United States, until such behavior was killed by union negotiators, lawsuits, and eventually the Fair Labor Standards Act in 1938, which required payment in real money or something of the same "negotiable value."
Company towns used company scrip to pay employees, which could only be used to "buy" housing and food back from the company. What makes this fiat currency is a bit more subtle, since companies didn't (in theory) have the legal right to violence against their employees.
Instead, the violence was implicit. With no actual money, workers were functionally penniless, and given that the state in those times provided no welfare or other support for those without money, victims of company towns could only get shelter and food by spending scrip; and they could only keep getting scrip by working for the company.
When laborers protested and organized against this treatment, the violence became explicit, with mercenary policing agencies like Baldwin-Felts and the Pinkertons hired to intimidate and attack laborers and union organizers. These mining and manufacturing companies were functionally mini-states that existed within the United States' lack of higher labor protection laws, and often with its direct support (as in the Battle of Blair Mountain in 1921).
It is often tempting to think of things like "money", "the state", and even "capitalism" as monolithic, self-sustaining entities in and of themselves -- world-spirits of the modern age. But in fact all of these things are constructs, set up by a few cruel and enterprising individuals in order to extract value and labor from people around them. This is not to say that all forms of the state and fiat currency today are purely extractive (they aren't). But it's worth knowing what the system was originally designed for, and how easy it will be for a few cruel, enterprising individuals to restore it to its original intent.
A Change in Structure
These "systems thinking" essays are going a bit deeper than I expected, and as a result are taking me longer to write. Moving forward, these letters will still reach you every week with interesting facts, useful tools, and maybe some other short sections TBD; but these long-form systems thought essays will now go out on the last Friday of every month.
Appreciate you all! And see you next week with a new terminal tool and some other miscellaneous "patch notes".
If you enjoyed this, consider subscribing! Changelog letters are delivered weekly on Friday. I will never advertise to you (unless I'm letting you know about something I personally made) or sell your information to anyone.
