On the Resource Cost of Fiat Money

Milton Friedman and all monetarists after him claimed that the Gold Standard had a fatal flow. The Gold Standard required that gold be dug up, refined and then made into coins or stored away in vaults to back paper money in circulation. Therefore this gold was expensive and could not be used in jewelry, artwork, industry, etc. The fiat money system does away with most of this cost. In a recent working paper Tyler Watts and Lukas Snyder show that the cost of the fiat money system can be just as high as the gold standard. Their rational and evidence suggests that during the inflationary 1970s and during the current economic crisis that just as much gold is being purchased for investment purposes and therefore there is no resource cost advantage of fiat money.


  1. The swiss are doing very fine up til now. But i don’t understand why the swiss government are printing money in order to stabilize their economy, because their currency is too strong. The swiss middle class is suffering from the EU problems, but that, i guess, is only temporary, until there is a new equilibrium ?
    Or am i wrong ?

  2. In order to achieve an optimal resource cost of a monetary system, two requirements are necessary:

    - no new money can be produced (i.e. all units must be produced before the medium of exchange evolves into money). This eliminates the production costs.
    - the transaction costs of the monetary base must be lower than the transaction costs of financial instruments (in particular credit). This renders the services of a lot of financial intermediaries unnecessary, mainly deposit banking.

    An example of a system showing that it’s possible is Bitcoin.

  3. Is it possible to add up the administrative costs of all central banks today (salaries, rents et c,) and other governmental institutions involved with fiat money and interest rate regulations and on and on? And compare that with the expenses of all gold mines? Just as a very immediate comparision of direct “production costs”. Interesting too to look at how those two cost trends have developed over time.

    I think one could dig deeper into that myth of Milton Friedman.

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