Chapter 5: The Fiat Standard: Monetary Nationalism, Central Bank Autonomy and Credibility
5.1 INTRODUCTION The nineteenth century had seen the rise of two innovative payment technologies, one founded on the convertible banknote, the other on bank money, both having the metallic standard as protection against abuse. In the twentieth century, instead, the splitting of money from metal was carried through to completion with the success of legal tender. The new payment technology did not differ from its two forerunners in some tangible characteristic or in the manner of circulation. Legal tender is in fact composed of two different elements, which reproduce the forms of money that had come into their own in the previous century: the banknote, now produced under a central bank monopoly, and the deposit with the central bank. What distinguishes the new form of money, therefore, is only its legal nature: money no longer represents a claim to obtain a quantity of metal, but rather a claim to obtain a performance, the transfer of goods or services, whose price, however, is not fixed. It is an intrinsically useless piece of paper or accounting entry. Its utility depends on its acceptance for payment and on the predictability of the price level, and so its circulation depends on a government guarantee as to its future value. It is legal money in the sense that the state takes it upon itself directly to produce and guarantee it. This is an astonishing change of perspective from the previous centuries, when the state was frequently singled out as the main enemy of monetary stability....
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