All Currency is “Fiat” Currency

April 25th, 2013

Or to be more precise, all currency is consensus currency.

Units of exchange (dollar bills, great big rocks at the bottom of the ocean) can have value merely because everyone in a community agrees that they have value. That value need not be declared, defined, or enforced by some “fiat” authority with powers of (ultimately physical) coercion — though it often or usually is.

That’s one big realization I came to from Graeber’s Debt: The First Five Thousand Years. (Though he doesn’t state it so succinctly, and I’m not sure he’d agree with it.)

Think of gold coins. If their exchange/consensus value is (enough) less than the (commodity) value of their metal content, people will melt them down and sell the metal. Arbitrage happens. Their consensus exchange value must be higher than the exchange value of their constituent metal, or they’re simply not currency any more; they’re chunks of commodity.

So why gold coins? Because the next city-state over, or the one 500 miles away, might not have the same consensus about those coins’ value as in your city-state. But there is a much wider consensus as to the value of gold. As far as they’re concerned, your ruler’s gold coins have the value of their gold content, and that’s all. But at least they have that value, because the gold-value consensus is widespread. 

So if you’re a trader looking to buy 1,000 yak skins from the remote Azbakalians, you can carry a bunch of gold coins there and trade them instead of carrying 1,000 amphoras of lima-bean oil. Yeah, you sacrifice the extra consensus value you’d have if you instead used those gold coins to buy things locally, but the cost of transporting all that oil is higher than that loss.

So is a physical one-ounce lump of gold a unit of “currency”? I’d say no. Because while the consensus value of gold might be different and might change at different times and places, there is no particular time and place where it has two different exchange values: its local consensus value and its foreign-trade commodity value. It only has its commodity value.

That differential between currencies’ consensus value and their commodity value is their very sine qua non: the thing that makes them what they are, without which they would not be currencies.

How does this work for cigarettes in a POW camp? They’re obviously used as some type of currency, as units of exchange. I’d suggest that because some people smoke and some don’t — some people value them highly for the utility their consumption can deliver, while others have no use for them — their average commodity value is lower than their average exchange/consensus value. (Also: new cigarettes are constantly being delivered and shared out in some way by the Red Cross or whoever, and they’re constantly being consumed. This is never true of coins or paper bills, which can’t be consumed.) This raises issues of distribution, power, wants, needs, and satisfactions, which I’d love to hear discussion of by my gentle readers.

Cross-posted at Angry Bear.


  1. Jesse
    April 25th, 2013 at 22:16 | #1

    “…there is no particular time and place where it has two different exchange values: its local consensus value and its foreign-trade commodity value. It only has its commodity value.

    This is not clear to me at all. I might be confused by the use of ‘foreign trade.’ Are you speaking about the value of the metal for example as a commodity, versus the value of the metal within a coin as a particular unit of currency? If this is the case, then you seem not to simulataneously imagine a floating exchange rate system.

    But since I don’t quite get your point I would like to hear more.

  2. Jesse
    April 25th, 2013 at 22:37 | #2

    And as an aside, ‘fiat’ money is not necessarily ‘consensus’ money.

    Fiat does not mean ‘not commodity money.’ Fiat implies money that is put forward by a central authority, which may or may not involve a consensus. It is that central authority that provides the substance of the money, the counterparty risk if you will.

    A commodity money like gold for example is said to ‘stand on its own’ because it has no counterparty risk per se, but rests on the value of itself as a commodity.

    See the difference? You take a paper US dollar and I’ll take a gold sovereign and let’s go back in time, and what happens to the value?

    Consensus is a tricky thing. One has to consider who is included in drawing that consensus. And of course you must be familiar with Bernard Baruch’s observation on that with regard to money.

  3. April 26th, 2013 at 09:36 | #3


    I think you’re mixing up terms problematically here:



    Commodity Money

    (Also potentially problematic: “unit of exchange” vs. “medium of exchange.”)

    “Currency” is not the same thing as “money.” Even in the vernacular, it’s common for people to say “how much money do you have” when they’re very much not talking about how much currency you possess.

    And among economists, there seems to be no agreed-upon definition of “money.” Rather like physics not having an agreed-upon definition of “energy.” Makes it bloody hard to talk about a subject that is pretty much all about money…

    I’m saying that a piece of physical currency has two values: its consensus value and its commodity value.

    A dollar bill has no commodity value; a gold coin has quite a bit — so it makes sense to call it commodity currency to impart its duality — but not more than its consensus value, or it would get melted down. Absent those dual values (consensus>commodity), it wouldn’t be currency any more. It would just be a chunk of commodity.

    In the modern (and most of the ancient) world, the consensus is almost always the result of fiat. But conceptually it need not be so.

    Good point re: currency exchange rates. While the consensus is caused by fiat, the consensus value can be different in different places. If you’re offered a 100-Euro deposit account in your name in either a German or a Cypriot bank, which are you gonna choose? I’m going to ponder that some more.

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