One common theme I read in Austrian economics is the idea that fiat money is inherently unstable because it leads to booms and busts. Therefore, it must collapse at some point. For instance, I was reading this piece on Mises.org which argues that the cause of the boom/bust cycle is fiat money:
“It was Ludwig von Mises who understood that a fiat money boom will, and actually must, ultimately end in a collapse of the economic system. The only open question would be whether such an outcome will be preceded by a debasement of the currency or not:
The boom cannot continue indefinitely. There are two alternatives. Either the banks continue the credit expansion without restriction and thus cause constantly mounting price increases and an ever-growing orgy of speculation, which, as in all other cases of unlimited inflation, ends in a “crack-up boom” and in a collapse of the money and credit system. Or the banks stop before this point is reached, voluntarily renounce further credit expansion and thus bring about the crisis. The depression follows in both instances.”
This strikes me as a little misleading though. Fiat money is just a tool. It is an accounting construct that was created as a record of account. It does not cause booms any more than a hammer causes homes to be built. The outcome of this tool is ultimately a function of how its users use it. Of course, a hammer enables the building of a house, but I think it’s misleading to blame the existence of hammers if a housing boom occurs. You would, of course, blame the people who decided to build the houses.
In a capitalist system the boom phase of the business cycle is not the result of excessive credit or excessive hammers, if you will. It is due to the behavioral and competitive nature of a capitalist system. The irrational users simply abuse the use of the tool at times. And if the people within that system abuse the tools in their search for profit then we shouldn’t blame the hammers for the booms. We should blame the people and their behavior. And booms and busts and irrational behavior is a part of a capitalist system. It is neither good nor bad. It just is.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.