According to Menger theory, monies are goods
which are “commonly accepted as medium exchange”. White (1999) pointed out that
gold and silver overcome the other commodities, become widely accepted by
people as money because they are saleable and have at least four special
characteristics. First, they are uniform and easily recognized
quality. Their uniform characteristics increase when they are in form of coinage.
Second, gold and silvers are durable. They cannot be spoiled in
long term. Moreover, they are easily divisible and fusible. Gold can be splited
it into small prices or unite them from small pieces to larger one. Finally,
gold and silver are portable. It means that they take a small of cost for
transferring. Later, in the early form of bank-issued money, gold and silver
still were the medium of redemption. The issued-money could be redeemed by the
gold and silver reserved in the banks vaults.
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| Source: http://kwaves.com/fiat.htm |
White (1999, p.14)
clearly claimed that even different banks issued different types of money
backed by gold, because of “profit motive” and “without legal compulsion” they
still accepted different banks’ money at par value. So why did people change to
the fiat money? Historically, the government monopolised the note issue to a
central bank. Then, unable to pay their debt in gold or silver, they
permanently suspended the central banks’ liabilities redemption, “central bank
notes and deposits became a fiat base money” (White, L., 1999, p.19).
Why do people accept
the money which cannot redeem anything? Perhaps, I would discuss this
phenomenon in the next post ahead!
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