Reply To: Relationship Between Money and Money Substitutes


How do we demonstrate that the use of the thing we’re calling a money substitute, as a medium of exchange, is actually dependent on its redeemability for the thing we’re calling the money proper? This is easy to see for commodity monies, and for fiat monies when a money substitute is first introduced, but once you have a money substitute for a fiat money that’s accepted as readily or more readily than the money itself, it’s not clear to me why its value should any longer depend on the fiat money at all, since the only value either one has is its value in exchange. There doesn’t seem to be a reason to prefer one or the other, as long as it can suitably perform this function.

Now I’m not saying that this is empirically the case in the US. As far as the suitability as a medium of exchange is concerned, physical dollars still have the important advantage of being able to be held independent of any bank. Maybe the answer that I’m looking for is that a thing only ever becomes a money substitute if it lacks some important characteristic of the money proper? If it really were as suitable or more suitable, it wouldn’t become a money substitute, but simply a competing money. There wouldn’t really be any point in using gold as a money substitute for gold, or in using some other paper certificate as a money substitute for fiat dollars.

Thank you for your time in replying by the way.