I followed a link on David Glasner’s latest blog post to an older post of his on the value of fiat money, “The Paradox of Fiat Money.” Glasner comments on Mises’ regression theorem and the Chartalist’s theory of a state-derived value of money (by guaranteeing a demand for that currency through taxation). I am not well-read enough to comment on how well, or how poorly Mises’ interpreted Knapp’s arguments in his refutation, nor am I well read on Ben Klein or Earl Thompson. I thought the post was interesting largely because of Glasner’s criticisms of Mises, and the example it provides of the possible lack of consideration for the role of expectations in determining the value of anything (i.e. it reminds me of Lachmann).

Glasner suggests that Mises’ regression theorem — in a nutshell: the value of money (as a medium of exchange) is derived from past value — cannot possibly be correct, because economics is also forward-looking. In other words, there has to be some expectation that any given currency will be valued by others in the future. I do think that Glasner is a little quick in dismissing Mises’ theory altogether, but he brings up a very valuable point (that can be used to, at least, strengthen the Austrian understanding of the value of money).

Mises’ general argument is sound. Monetary calculation relies on a constellation of money prices; prices formed through exchange. For a certain currency to have any value, money prices need to be denominated in it — or, there needs to be some exchange relationship (such as an exchange ratio between different currencies, which forms an indirect price relationship with goods denominated in other currencies). Prices are ratios of the immediate past. So, there is a backwards-looking element in the value of money, and it has to do with monetary calculation.

Glasner is correct, though, in pointing out the forward-looking relationship. There has to be an expectation that money will be exchangeable in the future for goods and services. If you expect that the (fictional) Amero-dollar will no longer be demanded, and in its stead will rise the Citi-shekle, why hold Amero-dollars?

From this perspective, I think the Chartalist view makes some sense. Government taxation is basically a demand for dollars. This demand for dollars guarantees those who hold dollars that their money will have some use in the future. However, this is not enough. One could, conceivably, trade in another currency (perhaps one not affected by severe fluctuations — in either direction — in value), and then buy dollars in this currency to use to pay taxes. There must be other factors involved, and as examples I would cite the inability for banks to issue money (banks being, most likely, in the best position to introduce new, competitive currencies), the fact that minor losses in the value of one’s savings (since while the dollar has lost value, money incomes have tended to rise) might not be sufficient to persuade towards the creation of new currency, and the fact that, because of all this, one might expect the dollar to be more stable than a brand new currency (besides, what stable commodity is there as of right now to act as outside money? — the value of gold is largely non-monetary [gold is not a medium of exchange]).

In short, the right theory is a combination of Mises and expectations.