Carlos Bondone’s monetary theory clasiffies fiat currency as Irregular Credit Currency, that is, it is a credit where the present economic good that cancels the debt is not specifed or its quality or its quantity or its due date. I feel that this needs to be further explained in order to fully understand it. As a first step, let´s summarize his theory into the following summarized taxonomy:
Currency: Indirect medium of exchange and unit of account. Currency Types:
-Money: Present economic good used as currency (wheat, gold, silver, etc).
-Credit Currency: Any currency that is not money, it can only be credit. Then there are the following types of credit currencies:
- Regular Credit Currency: When the present good that cancels the debt is specified, and so is its quality, quantity and due date. This is the case for bank bills that where redeemable for gold or silver.
- Irregular Credit Currency: When the present good that cancels the debt is not specifed or its quality or its quantity or its due date. This is the case for today´s currencies such as dollars or euros.
Given the above taxonomy, it is clear that we now need a way to differentiate between present economic goods and future economic goods, and we also need a definition for credit:
- Good: useful thing for human necessities (can be tangible or intangible).
- Economic good: Scarce good, that is, the available quantity of the good is lower than the demanded quantity.
- By axiom, there is no economic good without owner nor owner without economic good.
- Present economic good: economic good that exists in the present time of the owner.
- Future economic good: economic good that will be present in the future time of the owner.
- Credit: exchange of present economic goods for future economic goods.
Fiat currency clearly falls into the category of future economic good because it is issued under the final obligation of the issuer to be accepted to writte off debts with the issuer in the future. By definition, all obligations are future goods.
Furthermore, the way today’s fiat currencies are recorded within the financial statements of the issuers by recording an entry on its liability column and duly backing it with an asset, fully reflects its credit nature. Whenever a fiat currency issuer has violated this accounting discipline, the currency has failed miserably.
From all the above we can draw the following conclusions:
- The market, not the state nor legal tender laws, is who gives value to fiat currencies by delivering present goods (labour, services, commodoties) in exchange of future goods (fiat currency). Price inflation and currency repudiation are clear proofs of this conclusion. As for any other debt asset, the market will assess the value of fiat currency based on the diligence and creditworthiness of the issuer.
- As Carl Menger stated, money’s origin is always on the market. This also holds true for the more general term “currency”, which includes money and credit within Bondone’s monetary taxonomy.
- Any agent that hodls fiat currency is a creditor of the banking system, and as such is always subject to credit risk and counterparty risk.
- The Central Bank is not the lender of last resort but the First Instance Debtor.
*EDIT: For the reader that wonders if irregular credit exists outside currencies, it is one of the most ancient and used forms of exchange within business (departments and teams), families, tribes and circles of friends. When we agree that we deliver some good or service to someone in exchange of an unspecified good or service to be received somewhere in the future, we are bartering through irregular credit. For example, when a work colleague covers my absence, and in exchange I’ll do something for him not yet determined in the future. This kind of irregular credit barter works more or less in very small circles (although it raises disputes quite often), but it is extremely troublesome when applied at large scale (currency).