Fiat currency is backed by the existence of an economy that exchanges fiat currency for goods and services. If that economy disappears you get hyperinflation. See Zimbabwe and Argentina as examples of countries that destroyed their economies and suffer from hyperinflation as a result of massively reducing the ability to exchange money for food.

Think about it this way. You play a video game with micro transactions. You receive 1000 units of premium currency. Why is that currency valuable? It's valuable because you can exchange it for cash shop items. Imagine if the cash shop shuts down but the game keeps running. Your currency would be worthless because you lost the ability to exchange it.

The idea that proponents of the gold standard assert that its value is tied to some eternal constant of nature is also a fantasy.

It might be a bit of an exaggeration, but not by a lot. I think there is a heavy dose of magical thinking in it, and plenty gold bugs really, actually do seem to think there is something special about gold.

I even once got into a discussion with someone on a science fiction forum who's belief in gold was so absolute that he thought it would inevitably be the foundation of all interstellar commerce, even with alien species because gold is so unique it's one thing everyone would inevitably agree on being a universal store of value.

Actually, all money is backed by the available goods and services in an economy. It is a plate that spins itself.

No one is forced to give up their goods and services for any specific money.

Money is “backed” by the trust that someone else will be willing to accept it at a later date for goods and services.

Well, you’re forced to pay your taxes in specific money, so that’s one thing.

Isn’t the point that gold is finite?

A lot of excellent other answers, so I hesitated to chip in but I think there is a useful way to think about this.

If the unit of exchange was always physical gold coins then yes, there would be a finite amount of money. However the moment we turned to promissory notes, cheques, bank notes and financial instruments such as in fractional reserve banking the link to physical gold was a fiction. Such notes have been around a very, very long time although of course increasing in prominence over time.

It was a fiction even for precious metal coins as well because the moment a government started running low on the metal, or just wanted to inflate it's currency, it would just debase the coins.

Even if we think gold is finite (doubtful in any meaningful sense), it does not follow that the amount of money (in the modern sense) would be finite in gold standard.

Gold standard means that the value of an unit of currency is tied to a specific amount of gold. In addition it may mean that the amount of bank notes in circulation in such system matches the amount of gold in the vaults of central bank.

Neither of those means that the amount of money people have lent to the banks (i.e. money at their bank account) has any meaningful relationship to the amount of gold - at least without extremely strict regulation of financial companies, lending and saving.

(Of course, same applies to cryptocurrencies, the claim that current cryptocurrencies would somehow set a limit for money creation is just a massive misunderstanding of money and credit.)

I don’t understand what you’re trying to say. How does “lending and saving” change the fact that money can’t be created out of thin air?

That's not a fact. Money can and will be created out of thin air regardless if your monetary system is built on central bank money, gold or even bitcoin.

A naive example:

Alice has a gold coin. she walks to a bank and makes a deposit. Now she has one gold coin in her bank account and bank is holding her coin.

Now Bob walks into the bank and says that he needs a loan of one gold coin to buy things. Bank happily lends the coin received from Alice to Bob.

Bob walks to Alice and buys things from Alice and gives the coin to Alice.

Now Alice has one gold coin and another gold coin at her bank account. Total amount of money she has is now two gold coins, even if only one gold coin exists in the whole universe!

And yes, that money at her bank account is as real money as money nowadays gets. And yes, the truth is even more weird, you do not even need to circulate the money as in the naive example, banks can and will just create money out of thin air to people's accounts. After all, the money at the account is literally, literally nothing more or less than a way for bank to say that it will pay you money some later date if you so wish. To make that promise, you do not need any money to exist anywhere. Even I can do that promise on any imaginable currency (what that promise is worth is another discussion). And as said, this has absolutely nothing to do with what "base money" the monetary system is built on. And of course, this is the reason why financial system is so heavily regulated.

That promise is based in trust that when someone wants their gold back out, they can get it.

If there is little confidence in that, people wouldn't store their gold there.

There is, therefore, a natural limit to how fractional your reserve can be and keep trust over a long term.

With fiat currency backed by nothing, the reserve no longer needs to exist at all as long as you have control over the creation of new money.

I'm not saying the gold standard is the answer but it is different. That difference does not go away when we talk about lending.

> There is, therefore, a natural limit to how fractional your reserve can be and keep trust over a long term.

The point is that both fiat and gold sit in a system of debt powered by trust. If you're theorizing a natural limit to the smallness of reserves, you might as well be theorizing a natural limit to the amount of money that can be printed.

edit: it's certainly physically easier to have no reserves than to print infinite paper.

That natural limit is way, way, beyond levels that cause catatrophic disturbances in economy[1], thus the distinction is irrelevant.

[1] See your favourite mania, or even crisis of 2008 that can be argued to be because of failure of regulation to limit leverage of financial institutions.

But Bob has -1 gold coin in his bank account, so there is still only 1 gold coin. If Alice deposits her "new" gold coin into her account, the bank still has only one coin. If Alice demands to withdraw her 2 coins, the gold bank won't be able to comply, whereas the fiat bank would just print another coin.

That's not how amount of money is calculated. If you did, you would end up with a funny result that there is no money at all. As all modern money is debt from someone to someone else.

His point is that most money is indeed created out of thin air through the mechanism of fractional reserve banking and the creation of debt.

This happens even if the monetary 'base' remains a fixed quantity, like bullion gold.

Fractional reserve banking doesn't actually model how banks work in the modern economy though - they don't lend out deposits, they just add a figure to the customer's account and add a matching loan to their assets, literally creating money. They could do this without any deposits at all.

Yes, but minimally you can create disclosure regulations requiring entities that are lending to disclose the level of leverage they are operating at. Customers can then discriminate when they deposit based on withdrawal risk.

Sorry, your comment made me laugh a bit. You know, before the smartest guys were incentivized to figure out how to make you and me click ads, they were incentivized to figure out how to circumvent financial regulation. Turned out that it is really, really f*cking hard to write a regulation that can't be somehow gamed. And even if it was not, you need to remember that vast majority of people do not know how to handle percentages, it is quite naive to expect that those people could make any rational judgements based on any financial disclosures whatsoever. Just look around, Madoff managed to con quite a few sophisticated investors, and to anyone with any common sense Tether has been behaving exactly as if they would be doing their best to scam the whole crypto scene - and nobody cares or requires disclosures.

Under standard definitions, every bank loan creates money out of thin air. When you get a $10k car loan, for example, that means the amount of money floating around the economy has increased by $10k; there's nobody else in the market who has to spend $10k less because you got that loan.

We pull gold out of the ground all the time. It is finite only in theory.

We pull gold out of the ground when it is economical to do so. That is to say when the exchange of gold to currency is favorable for extraction, which can also be conveyed to mean that when there isn't enough gold to the demand of currency for gold.

It's infinitely easier to print money at will, which is what keeps happening. Gold has intrinsic value for practically all of human existence.

Coming from a gold bug: you can still create an infinite number of IOUs on gold. Thats what the dollar was before Nixon closed the gold window. The fed was running a fractional reserve on their gold. Believe it or not they still are today, despite folks and major nations no longer have the ability to trade their dollars for some amount of the US treasury gold.

Look into the market value of the gold certificates that the fed has on its books. The fed hasn't marked their gold position to the market since the 70s. Very peculiar if you ask me. Also consider why each of the federal reserve banks trade these certificates amongst one another.

On top of that you can read the treasury's website and find that the policy states that the treasury gold plays an important role as collateral on the dollar https://www.treasury.gov/resource-center/faqs/Currency/Pages... "Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them."

Yeah... sometimes I think Mises should be required reading for anyone commenting on HN threads about money. If anything, his descriptions of money and money substitutes are even more relevant in the modern financialized economy, where substitutes (i.e. derivatives) now exist for every imaginable asset class.

> you can still create an infinite number of IOUs on gold

This is why Islam, Judaism, and Christianity prohibit interest. That closes the door on exploits like this.

>Gold has intrinsic value for practically all of human existence.

The intrinsic value argument hardly makes any sense because it's almost always lower than the actual value. Someone interested in intrinsic value would be buying copper, not gold.

The intrinsic value of gold is an answer to whether gold will stay relevant 5000 years from now. It will guarantee that gold will always have some residual value, it doesn't guarantee that its current valuation is correct.

Compare this to Bitcoin which can be replaced by any competitor.

Compare this to the US dollar which is required to pay taxes. You will still see a use case for the dollar in a hundred years.

Nothing has intrinsic value

Obviously a statement like that requires some explanatory notes?

When talking about money, the term intrinsic value means the market value of the commodity the money is made from, versus the face value of the money.

This is very real and has been exploited in the past, with people effectively melting down large quantities of money and selling it as a commodity.

The rate is limited, though.

The finiteness of gold doesn’t imply any particular monetary value for it. The pre-1971 gold standard was maintained not by concrete standards of value but by global scale market manipulation; as we can see in market data since then, the actual market clearing price of gold is much more dynamic than the fixed peg imposed by gold standard laws.

The monetary value of gold emerged organically because it turned out to be the best available option for transactions between untrusted parties. After the emergence of modern states, this use case was restricted to cross-border payments since strong legal protections and centralized banking systems made fiat currencies trustworthy enough for domestic commerce.

But anyways, if one looks at why gold emerged as the preferred money for its time and place, “finiteness” aka non-zero marginal cost of production is certainly a relevant factor.

It does not follow from the post- gold-standard instability of gold that the prior stability was due to market manipulation; the nature of the asset changed fundamentally. You might say the gold was "backed by" the financial system, whereas now it's a speculative asset no better than BTC.

The point is that there was no underlying law of nature attaching gold to the financial system. The only thing "backed by" meant was, the government promised to trade gold and regulate the gold market as required to maintain their declared peg. Maybe it's a bit of a "hot take" to call that manipulation, but I don't think it's untrue or unfair - in some countries (although not the UK) governments went as far as simply prohibiting private speculation in gold.