J B. Say and Today’s Fiat Paper Money Standard

Jean-Baptiste Say (1767-1832)

What is money? What are the qualities of money? Is the note of rupee, that you hold in your hand daily, money? What is wrong with today’s fiat paper monetary system which is in the root of our problems of inflation, business cycles, government’s reckless spending and ballooning fiscal deficits, central bankers’ enabled nation state wars, botched welfare system of giving freebees to everyone etc., etc.? It is crucial for the state officials to keep a tight control over the supply of money because only through that control they can control peoples’ lives and slowly confiscate their wealth. Fiat money is the main tool of our oppression in the hands of the state officials. The state uses court intellectuals – like the school teachers, university professors, professional economists, media journalists etc. – to spread propaganda about money to hide their sinister motives. In such foggy environment, it is important to pierce through this fog of propaganda and keep our focus on the realities of money. In this battle of ideas, we must know and understand the right ideas and discard the wrong ones. In this regard, I am here going to discuss J B Say‘s wonderful work A Treatise on Political Economy, especially his brilliant chapter on ‘money’ where he dislodges many erroneous notions about money – which were floating around in his time also – and lucidly discusses the true nature of money. I will reproduce Say’s chapter excerpts below which will be followed by my brief commentary showing relevance of Say’s ideas in today’s world.

In chapter XXI, Book I titled, Of the Nature and Uses of Money, J B. Say discusses what money actually is.

If there exist in the society any specific commodity that is in general request, not merely on account of its inherent utility, but likewise on account of the readiness with which it is received in exchange for the necessary articles of consumption, and the facility of proportionate subdivision, that commodity is precisely what the cutler will try to barter his knives for; because he has learnt from experience, that its possession will procure him without any difficulty, by a second act of exchange, bread or any other article he may wish for.

Now, money is precisely that commodity.

As Say said, money is just another commodity in the market which people from their experience accept as a common medium of exchange. Money is not government issued paper notes etc. Say has more to say on this false notion of money as a social convention or government issued money.

I have referred to custom, and not to the authority of government, the choice of the particular article that is to act as money in preference to every other: for though a government may coin what it pleases to call crowns, it does not oblige the subject to give his goods in exchange for these crowns, at least not where property is at all respected….

The sole reason why a man elects to receive the coin in preference to every other article, is, because he has learnt from experience, that it is preferred by those whose products he has occasion to purchase. Crown pieces derive their circulation as money from no other authority than this spontaneous preference: and if there were the least ground for supposing, that any other commodity, as wheat, for instance, would pass more currently in exchange for what they calculate upon wanting themselves, people would not give their goods for crown pieces, but would demand wheat, which would then be invested with all the properties of money. And this has occurred occasionally in practice, where the authorized or government money has consisted of paper destitute of credit or public confidence. (emphasize mine).

So, government’s central bank RBI issued notes are not real money. Real money slowly evolves in the market exchange process. People today use fiat notes because there are legal tender laws which compel them for using only RBI issued currency notes in exchanges. As Say said, whenever authorized or government money consisted of paper destitute of credit or public confidence, that paper money will no longer be used by people in the exchange process. Today’s government issued paper money is losing its value real quick, and so it is losing public confidence too. This is the prime reason why people are converting their paper wealth into real wealth, gold and silver. In future, these fiat currency notes will no longer remain in circulation because government continues to debase them.

Next Say discusses the qualities of sound money. Below I discuss them one by one and compare it with today’s fiat paper currency.

Market value

Only those commodities can serve the function of a common medium of exchange which are already having value in the market. Here is Say:

Yet, to enable it to execute its functions, it must of necessity be possessed of inherent and positive value; for no man will be content to resign an object possessed of value, in exchange for another of less value, or of none at all.

Fiat paper currency notes are made of paper, which has very little positive value compared to something like gold in the market. No sane person in the free market will accept pieces of paper as money in exchange for other valuable commodities like car, home, cloth etc.


We are told by Homer, that the armour of Diomede had cost nine oxen. A warrior, that wished to arm himself at half the price, must have been puzzled to pay four oxen and a half. Wherefore, the article employed as money must be capable of being readily and without injury apportioned to the different objects of desire, and subdivided in such manner, as to admit of exchanges of the exact amount required.

Paper currency notes are divisible and available in smaller denominations.

Scarce supply

At Newfoundland, it is said, that dried cod performs the office of money, and Smith makes mention of a village in Scotland, where nails are made use of for that purpose. Besides many other inconveniences, that substances of this nature are subject to, there is this grand objection, that the quantity may be enlarged almost at pleasure, and in a very short space of time, and thereby a vast fluctuation effected in their relative value. But who would readily accept in exchange an article, that might, perhaps, in a few moments, lose the half or three-fourths of its value? Wherefore, the commodity employed as money must be of such difficult acquisition, as to ensure those who take it, from the danger of sudden depreciation.

As we can clearly see, paper note – and these days only computer digits – quantity can be increased very easily by the RBI and commercial banks. Just few strokes on the key board generates vast amount of such paper and digital currency, which is the prime reason why it is losing its value daily i.e., inflation.

Universal acceptance

In the Maldive islands, and in some parts of India and Africa, shells, called cowries, are employed as money, although they have no intrinsic value, except that they serve for ornament to some rude tribes. This kind of money would never do for nations that carry on trade with many parts of the globe; a medium of exchange of such very limited circulation would offer insuperable objections. It is natural for people to receive most willingly in exchange that article, which is the most universally received in like manner by other people in their turn.

Fiat paper notes are not universally accepted e.g., if I get lost in an African jungle then my rupee notes will not be accepted by African tribes!

And, if not paper then which commodities have these qualities and are thus suitable for use as money? Say gives the answer:

…and it is long since the precious metals, that is to say, gold and silver, have been almost universally adopted. To this use they are particularly applicable:

  1. As being divisible into extremely minute portions, and capable of re-union, without any sensible loss of weight or value; so that the quantity may be easily apportioned to the value of the article of purchase.

  2. The precious metals have a sameness of quality all over the world. One grain of pure gold is exactly similar to another, whether it came from the mines of Europe or America, or from the sands of Africa. Time, weather, and damp, have no power to alter the quality: the relative weight of any specific portion, therefore, determines at once its relative quality and value to every other portion: two grains of gold are worth exactly twice as much as one.

  3. Gold and silver, especially with the mixture of alloy, that they admit of, are hard enough to resist very considerable friction, and are therefore fitted for rapid circulation, though, indeed, in this respect, they are inferior to many kinds of precious stones.

  4. Their rarity and consequent dearness are not so great that the quantity of gold or of silver, equivalent to the generality of goods, is too minute for ordinary perception; nor, on the other hand, are they so abundant and cheap, as to make a large value amount to a great weight. It is possible, that in progress of time, they may become liable to objection on this score; especially if new and rich veins of ore should be discovered: and then mankind must have recourse to platina, or some other yet unknown metal, for the purpose of currency.

Gold and silver, the precious metals, are the real money used by human beings since last 5000 years. They have all the qualities of money and so they are chosen by the market participants spontaneously to be used as a common medium of exchange. Most importantly for us today is the hope that the world monetary system is again moving in the direction of gold and silver standard after having a terrible experience of last 50 years or so with the pure fiat paper money standard experiment.

After discussing the nature of money, Say goes on to discuss what happens when authorities fiddle with money. I reproduce some excerpts below which has direct relevance with what is going on today.

Should a government attempt to force an ill-adapted medium into circulation, it would sustain a loss itself on every bargain, and the people would, by degrees, adopt some other medium.

Precisely this is what is happening today. Governments around the world are trying to force their ill-adapted – i.e., debased – medium of paper notes in circulation. And this inflationist policy is very likely to result in people adopting some other medium in the end! The day fiat paper notes will lose considerable amount of its value, people will adopt some other – mostly gold and silver – standard.

He then discusses princes who debases their money and says this:

..Princes, that resort to such pettifogging expedients, can be viewed in no other light, than as counterfeiters armed with public authority.

Exactly. Today’s governments and their central banks – RBI in case of India – are the counterfeiters armed with public authority.

And for how long this counterfeiting and looting will go on? Not forever. Here is Say again:

A system of swindling can never be long-lived, and must infallibly in the end produce much more loss than profit. The feeling of personal interest is that which soonest awakens the intellectual faculties of mankind, and sharpens the dullest apprehensions. Wherefore, in matters affecting personal interest, a government has the least chance of outwitting its subjects. Individuals are not easily duped by measures tending to procure supplies to the state in an under-hand manner: and although they cannot guard against direct outrage, or breach of public faith, yet it can never long escape their penetration, however artfully disguised and concealed. The government will acquire a character for cunning as well as faithlessness, and will lose entirely the powerful engine of credit, which will operate with infinitely more efficacy, than the mere trifle that fraud can procure.

People world over are slowly waking up to this swindling game of government and central bank led counterfeiting. Although they can’t directly fight the government behemoth, but they are taking all those steps – e.g., buying gold and silver – which will safeguard their wealth against this swindling. In the end government will lose its credit, and the system will crash and we will see a wholesale change in the world monetary system.

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