The future of gold? Part 3: Why do people accept fiat-money?

After changing from gold standard to fiat money period, what is different? The main difference between under gold standard and fiat-money period is the inflation, even hyperinflation!!!

                                  Graph: Cumulative inflation in the US from 1913 to 2010

Source: http://inflationdata.com

In The theory of Monetary and Institutions, White (1999) pointed out that expected inflation during gold standard in the long run is zero. Under the fiat-money period, the inflation has risen dramatically. You can directly see in the above graph about the inflation rate in the US-the strongest economy in the world. From 1970s, after the ending of Bretton Woods system and marking for the using fiat money until now, the inflation rate looks like a staircase.Why do people accept fiat money? 

Some claimed that people accept fiat-money since it still has value when acting as the medium of exchange (Turner, J., 2012). David Glasner (2011) stated the backward induction idea of Earl Thompson to prove that fiat-money has no value. Imaging that we are at the end of fiat-money period, no seller will accept money in order to exchange their goods. Fiat-money, therefore, has no value. Glasner gave two theories to explain why people accept this worthless paper. First, people are not as rational as theory claimed they are. Second, according to Earl Thompson, fiat-money provides service actually. The government accepts fiat-money for paying discharge tax. It avoids the backward induction argument because the seller will accept fiat-money to pay tax latter.

Recently, Khanacademic (2011) stated that gold is not actual wealth while the fiat money give “the right to the authorities to tax” and support to the economy which is REAL WEALTH. Innovation products, new services, ideas etc. could be encouraged in the economy with fiat-money. Gold has a limited supply resource. How can a pure gold standard support to this dynamic economy? The fiat-money could be printed with flexiblity to support for the increasing wealth in the economy. So that people may agree to pay tax (inflation) to the government to have a better life. It means they believe in the ability of creating wealth by the governing of those politics. They believe that the governments do not print too many money than the amount is necessary to exchange in the economy. However, what if this belief goes down? The monetary system has been changed many times from gold-standard to fiat money and vice versa. What is the future of gold and will they back to the monetary system? Keep in touch with my blog for the next post.