Skip to main content

How is fiat money possible? — or, the devolution of money and credit

This is a preview of subscription content, access via your institution.


  1. See on the following, in particular Carl Menger,Principles of Economics (New York: New York University Press, 1981); idem,Geld, in Carl Menger,Gesammelte Werke, vol. 4, F. A. Hayek, ed. (Tübingen: Mohr, 1970); Ludwig von Mises,Theory of Money and Credit (Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1971); idem,Human Action: A Treatise on Economics (Chicago: Regnery, 1966).

    Google Scholar 

  2. Mises,Theory of Money and Credit, pp. 32–33.

  3. See Murray N. Rothbard, “New Light on the Prehistory of the Austrian School,” inThe Foundations of Modern Austrian Economics, E. G. Dolan, ed. (Kansas City: Sheed and Ward, 1976); Joseph T. Salerno, “Two Traditions in Modern Monetary Theory,”Journal des Economistes et des Etudes Humaines 2, no. 2/3 (1991).

    Google Scholar 

  4. On commodity reserve proposals see B. Graham,Storage and Stability (New York: McGraw Hill, 1937); F. D. Graham,Social Goals and Economic Institutions (Princeton: Princeton University Press, 1942); also F. A. Hayek, “A Commodity Reserve Currency,”Economic Journal 210 (1943); Milton Friedman, “Commodity-Reserve Currency,”Journal of Political Economy (1951).

    Google Scholar 

  5. See Milton Friedman, “The Case for Flexible Exchange Rates” in Friedman,Essays in Positive Economics (Chicago: University of Chicago Press, 1953); idem,A Program for Monetary Stability (New York: Fordham University Press, 1959); alsoPolicy Implications of Trade and Currency Zones: A Symposium (Kansas City: Federal Reserve Bank of Kansas City, 1991).

    Google Scholar 

  6. See Irving Fisher,The Purchasing Power of Money (New York: Augustus Kelley, 1963); idem,Stabilizing the Dollar (New York: Macmillan, 1920); idem,The Money Illusion (New York: Adelphi, 1929); Milton Friedman, “A Monetary and Fiscal Framework for Economic Stability,”American Economic Review (1948).

    Google Scholar 

  7. Mises,Theory of Money and Credit, pp. 187–94; idem,Human Action, pp. 219–23.

  8. See N. Wallace, “A Legal Restrictions Theory of the Demand for ‘Money’,” Federal Reserve Bank of MinneapolisQuarterly Review (1983); E. Fama, “Financial Intermediation and Price Level Control,”Journal of Monetary Economics (1983); for a critique see Lawrence White, “Accounting for Non-Interest-Bearing Currency,”Journal of Money, Credit, and Banking (1987).

  9. Mises,Theory of Money and Credit, p. 111.

  10. See Friedman, “Essays in Positive Economics, p. 210; idem,A Program for Monetary Stability, pp. 4–8; idem,Capitalism and Freedom (Chicago: University of Chicago Press, 1962), p. 40.

  11. See Milton Friedman and Anna Schwartz, “Has Government Any Role in Money?”Journal of Monetary Economics (1986); for Hayek's proposal see hisDenationalization of Money (London: Institute of Economic Affairs, 1976).

  12. See Friedman,Essays in Positive Economics, p. 216; also Friedman and Schwartz, “Has Government Any Role in Money?”

  13. See Milton Friedman, “The Resource Cost of Irredeemable Paper Money,”Journal of Political Economy (1986).

  14. Friedman, “The Resource Cost of Irredeemable Paper Money,” p. 646.

  15. Friedman,Essays in Positive Economics, p. 250.

  16. Friedman, “The Resource Cost of Irredeemable Paper Money,” p. 646; also idem,Money Mischief: Episodes in Monetary History (New York: Harcourt Brace Jovanovich, 1992), chap. 10. Among the suggestions for an alternative fiat money “anchor” recently considered by Friedman, the “frozen monetary base rule” deserves a brief comment (see Friedman, “Monetary Policy for the 1980s,” inTo Promote Prosperity, J. H. Moore, ed. [Stanford: Hoover Institution, 1984]). In one respect this rule represents an advance over his earlier 3 to 5 percent monetary growth rule. His advocacy of the latter rule was based essentially on the erroneous—proto-Keynesian—notion that money constitutes part of social capital, such that an economy cannot grow by 3 to 5 percent unless it is accommodated to do so by a proportional increase in the money supply. In contrast, the frozen monetary base rule indicates a recognition of the old—Humean—insight that any supply of money is equally optimal or, in Friedman's own words, that money's “usefulness to the community as a whole does not depend on how much money there is” [Friedman,Money Mischief, p. 28). Yet otherwise the proposal represents no advance at all. For how in the world can a monopolist be expected to follow a frozen monetary base rule any more than a less stringent 3 to 5 percent growth rule? Moreover, even if this problem were solved miraculously, this would still not alter the monopoly's character as an instrument of unilateral expropriation and income and wealth redistribution. For the monopolist, apart from offering depositing and clearing services (for which his customers would pay him a fee), would also have to perform the function, to customers and non-customers alike, of replacing old, worn-out notes—one-to-one and free of charge—with new, identical ones (otherwise, who would want to replace a permanent commodity money by a perishable fiat money?). Yet while the costs associated with this task may be low, they are definitely not zero. Accordingly, in order to avoid losses and recoup his expenses, the monopolist cannot butincrease the monetary base—and hence one would essentially be back at the older monetary growth rule.

  17. On the following see in particular Murray N. Rothbard,The Mystery of Banking (New York: Richardson and Synder, 1983); idem,The Case for A 100 Percent Gold Dollar (Auburn, Ala.: Ludwig von Mises Institute, 1991); Mises,Theory of Money and Credit; idem,Human Action; also Walter Block, “Fractional Reserve Banking: An Interdisciplinary Perspective,” inMan, Economy, and Liberty: Essays in Honor of Murray N. Rothbard, Walter Block and Llewellyn H. Rockwell, Jr., eds. (Auburn, Ala.: Ludwig von Mises Institute, 1988); J. Koch,Fractional Reserve Banking: A Practical Critique (Master's thesis, University of Nevada, Las Vegas, 1992).

    Google Scholar 

  18. On the theory of the business cycle see in particular Ludwig von Mises,Geldwertstabilisierung und Konjunkturpolitik (Jena: Gustav Fischer, 1928); idem,Human Action, chap. 20; F. A. Hayek,Prices and Production (London: Routledge & Kegan Paul, 1931); Murray N. Rothbard,America's Great Depression (Kansas City: Sheed & Ward, 1975).

    Google Scholar 

  19. On the fundamental distinction between commodity credit and circulation credit, see Mises,Theory of Money and Credit, pp. 263 ff.

  20. See Lawrence White,Competition and Currency (New York: New York University Press, 1989); George Selgin,The Theory of Free Banking (Totowa, N.J.: Rowman & Littlefield, 1988).

    Google Scholar 

  21. For a critique of White and Selgin as misinterpreting the fundamental thrust of Mises's theory of money and banking see Joseph Salerno, “The Concept of Coordination in Austrian Macroeconomics,” inAustrian Economics: Perspectives on the Past and Prospects for the Future, Richard Ebeling, ed. (Hillsdale, Mich.: Hillsdale College Press, 1991); idem, “Mises and Hayek Dehomogenized,”Review of Austrian Economics 6, no. 2 (1993): 113–46.

    Google Scholar 

  22. White,Competition and Currency, p. 156, also pp. 55–56; George Selgin, “Short-Changed in Chile: The Truth about the Free-Banking Episode,”Austrian Economics Newsletter (Winter/Spring, 1990): 5.

  23. White,Currency and Competition, p. 157; Selgin,The Theory of Free Banking, p. 137.

  24. See Block, “Fractional Reserve Banking: An Interdisciplinary Perspective,” p. 30.

  25. For a critique of this error see Rothbard,America's Great Depression, pp. 39–43; Hans-Hermann Hoppe, “Theory of Employment, Money, Interest, and the Capitalist Process: The Misesian Case Against Keynes,” inThe Economics and Ethics of Private Property, Hoppe, ed. (Boston: Kluwer, 1993), pp. 119–20, 137–38.

  26. Selgin,The Theory of Free Banking, p. 54–55.

  27. Ibid., pp. 61–62.

  28. See Friedman and Schwartz, “Has Government Any Role in Money?”

Download references

Author information

Authors and Affiliations


Rights and permissions

Reprints and Permissions

About this article

Cite this article

Hoppe, HH. How is fiat money possible? — or, the devolution of money and credit. Rev Austrian Econ 7, 49–74 (1994).

Download citation

  • Issue Date:

  • DOI:


  • Public Finance
  • Fiat Money