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Famous Myths of “Fiat Money”
Dror Goldberg
Assistant Professor of Economics
Department of Economics
Texas A&M University
________________________________________________________________________
This paper expands on Subsection 1.6.3 of my Ph.D. dissertation at the University of Rochester. I thank
seminar participants at Texas A&M, Leonardo Auernheimer, James Bullard, Robert Ekelund, John Hanson,
Paula Hernandez-Verme, Kevin Hoover, Dennis Jansen, Adalbert Mayer, Ross Starr, Geneviève Verdier,
Cynthia Werner, and an anonymous referee, for comments, suggestions, and references.
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Famous Myths of “Fiat Money”
Dror Goldberg
Assistant Professor of Economics
Department of Economics
Texas A&M University
Abstract
The paper re-evaluates the conventional wisdom regarding the existence of moneys that
supposedly circulated without any legal status or intrinsic value. Economists call these
objects “fiat money.” I re-examine the most famous examples of such objects from
primitive societies, such as the stone money of Yap and seashells, which have been cited
by some of the most prominent monetary economists. I find that actually none of these
cases is an evidence of “fiat money.” A general conclusion is that one needs to seriously
study the society in question before making a claim that it has used “fiat money.”
JEL: E42, B40, N10.
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“Even generations later, when no one alive had ever seen this stone, the
claim to this [stone] was still valued in exchange.” (Mankiw 2003, p.79)
1. Introduction
Economic theories and models often feature ideal concepts such as perfect competition,
complete markets, and lump-sum taxes. Such abstractions are useful simplifications of
reality for many purposes. Most economists agree that these concepts are fictional.
Monetary economics has an ideal construct of its own. It is what economists call “fiat
money.” This is an object that has no intrinsic value and is not convertible into anything.
An implicit assumption in the definition is that no one is forced to use such money and that
the money has no other legal status such as legal tender. Acceptance of such money is
entirely discretionary and based exclusively on the expectation that others would accept it
too, even though no one else is forced to accept it (Wallace 1980).
Interestingly, monetary economists do not claim that their “fiat money” concept is
fictional. On the contrary, they identify it with the modern money we use in reality. Legal
scholars and laypersons call the money we actually use by the same name since “fiat”
refers to its status as legal tender. Monetary economists usually ignore this status. As
Wallace and Zhu (2004) explain, using the “fiat money” concept (even when money was
gold or silver) “was convenient because it produced a simple and strong prediction:
allocations are independent of the amount of money.” Convenience aside, the literature has
used various ways to justify the use of “fiat money” in models and its identification as the
money we actually use in reality. First, models prove that extrinsic expectations are
sufficient to get this money circulating (e.g., Samuelson 1958, Kiyotaki and Wright 1989).
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This means that legal status or intrinsic value are not necessary. Second, some of the well-
behaved equilibria in these models survive when a commodity value is attached to the
money (e.g., Wallace 1981, Wallace and Zhu 2004). Third, there are supposedly cases of
“fiat money” used in primitive societies. The reference to these societies is needed because
modern moneys do have an explicit legal status (see Goldberg 2003b for a detailed
discussion). Such claims and allusions regarding the use of “fiat money” in primitive
societies have been made by some of the most prominent monetary economists (Friedman,
Keynes, Kiyotaki and Wright, Mankiw, Samuelson, Tobin, and Townsend), and the issue
serves as a very rare example of consensus in the field of monetary economics. The goal of
this paper is to re-evaluate this empirical evidence.
The main result of the paper is that there is no conclusive evidence that what
economists call “fiat money” has ever existed. The leading problems are that some goods
were intrinsically valuable to their “primitive” users, but not to us, and that scholars have
ignored the laws, customs, religion, and trade relations of the money’s users.
A general conclusion of the paper is that a comprehensive anthropological, historical,
and legal survey of the society in question is necessary before we jump to the conclusion
that this society has used “fiat money.” This is important because the evidence I refute is
probably not all the evidence that exists in innumerable writings about all human societies
that have ever existed. If new evidence comes to light, one should keep this conclusion in
mind and evaluate the new evidence accordingly.
This work is similar in spirit to Garber’s work on “famous first bubbles” (Garber 1989,
1990, 2000). Generations of economists have been raised on the belief that these episodes,
such as the Tulipmania, prove the power of speculation in financial markets, but Garber
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claims that economic fundamentals, rather than pure speculation, can explain most of the
data from these episodes. Similarly, economists have been taught that money can circulate
in reality based purely on people’s speculation that others will voluntarily accept it too,
with the proof supposedly coming from primitive societies. I find that physical, legal, and
cultural fundamentals can explain the circulation of primitive moneys.
Any money can be thought of as having a value based on such fundamentals, plus an
extra value from the use of the object as a medium of exchange. The existence of the latter
component, which is emphasized by Sargent and Velde (2002) among others, is not
disputed here. My only goal is to refute claims that some moneys had only that speculative
value, without any fundamental value. The fundamental values I uncover here are not
negligible1 but extremely high. The objects discussed in this paper were the most coveted
ones in their societies, regardless of their use as money. Their status was equivalent to that
of gold in Western societies.
The paper is organized as follows. In Section 2 I discuss the most colorful and popular
myth of all—the stone money of Yap—because prominent economists have mentioned it
as a classic example of “fiat money.” In Section 3 I discuss shell money, also mentioned in
modern monetary literature as an example of “fiat money.” Section 4 provides a general
discussion and Section 5 concludes. In Goldberg (2003c) I analyze dozens of other “fiat
money” claims that have not yet reached the mainstream monetary literature2.
2. The Stone Money of Yap
A story regarding the money on the tiny Micronesian Island of Yap (or Uap) is very
popular among economists. The main source is Furness (1910). Excerpts from his book,
The Island of Stone Money, were reproduced in The Economic Journal (1915). Prominent
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economists give it as an implicit or explicit example of fiat money in various publications:
Keynes (1930, p.292) in a monetary theory book3, Friedman (1992) in the opening chapter
of a monetary history book, Tobin (1992) in an economic dictionary, and Mankiw (2003)
in a popular intermediate macroeconomics textbook. The story includes two “fiat money”
claims: the money itself, and a story that a verbal claim to a lost unit of that money also
functioned as money.
2.1. The Stone Money
Furness reports that the money on that island was huge round stones of no practical use. In
pictures they look like simple millstones, but were never used as such because no mills
existed there. Based on this description, economists jumped to the conclusion that this was
“fiat money.”
Typically, where the existence of something is disputed (e.g., extra-terrestrial life
forms), it is expected that those who claim its existence will provide a positive proof. “Fiat
money,” however, is completely defined in negative terms: it is not useful, it is not
convertible, and it does not have any other legal status. Therefore, given a claim of a
particular “fiat money,” such as the stone money of Yap, it is my task to show the
existence of usefulness, convertibility, or other legal status. Alternatively, I can show that
regardless of the “fiat-ness” of the object, it was not actually used as money. Finally, I can
show that the source of the “fiat money” claim is not credible and uncorroborated.
In this case, a careful reading of the reports of Furness and others reveals that the stones
were unique and were imported from distant islands. The natives imported the stones
because they considered them to have high esthetic value. Yap’s official website
(http://visityap.com/aboutyap/about_yap_history.html) describes the stones as
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“crystalline.” Furness actually describes the stones as having a “white, opaque appearance,
somewhat like quartz, but not so translucent nor of so fine a grain” (Furness 1910, p.94).
Other travelers, traders and anthropologists describe the stones as “glistening,” “like large
crystals of quartz,” “quartzose” (Gillilland 1975, pp.4, 8, 9), and “shining . . . quartz-rock”
(Christian 1899, p.300). For Pacific islanders who knew no metals or precious stones, it
was reasonable to attach high value to semi-precious stones. Another proof for the high
esthetic value is that the largest stones were “entirely beyond price” (Einzig 1966, p.40).
Small specimens may have been used in jewelry, but the stones became more popular as
big statues in the shape of a full moon (Gillilland 1975, pp.19-20). In fact, these stones
were Yap’s version of gold4. Just as gold could barely be used for any practical purpose (it
is too soft), and one of the few things one could do with it was sit on a throne made of it,
the Yap stones were also used as thrones (Gillilland 1975, p.3).
The stones were also acceptable for tax payments, and that makes them partially
analogous to our concept of legal tender5. Possessing them allowed one to avoid being
punished by the government for non-payment of taxes, and that was enough to make the
stones valuable. In addition, strict norms were established over time regarding the
mandatory use of the stones for payments on special occasions such as festivals, weddings,
and chiefs’ funerals (Gillilland 1975, pp.11-12). According to the island’s official website
(http://visityap.com/aboutyap/index.cfm) they are still in such use today, as well as for land
purchase, side by side with the official currency (U.S. dollars). The money was therefore
forced on both buyers (what we call “cash in advance constraint” in models) and sellers. Its
acceptance is therefore not surprising.
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Finally, the stones had a religious value. One local legend says that the bodies of the
islanders’ ancestors, which were half-human and half-divine, have become the oldest
stones (Gillilland 1975, p.19). Another legend says that the Fairy Godmother of Yap chose
which stones would become money, and the stones’ shape was also approved by her
(Christian 1899, p.300). Regardless of the latter legend, it is known that the full moon
shape had a religious significance. The importance of such a religious value is that a
believing seller may be too afraid to reject such a sacred object as payment.
2.2. The Lost Stone
The story that one stone was forever lost at sea, and yet a claim to it retained its
“purchasing power” (as Furness put it, p.98), is a separate “fiat money” story: a verbal
claim to a lost asset is used as money. It is emphasized by Keynes, Friedman, Tobin, and
Mankiw. A careful reading of the story reveals that it is not a case of “fiat money” at all.
On p. 97 Furness tells us about the owners of the claim to the lost stone: “A family whose
wealth was unquestioned—acknowledged by everyone.” The stone was lost “two or three
generations” before Furness’ visit, and the original owner of the stone was “an ancestor of
this family” (my italics). This means that the claim to the lost stone remained with the
same family for two or three generations without being used in trade. Therefore, it cannot
be considered a medium of exchange6. The claimed acknowledgement of everyone in that
family’s wealth may have affected its social status, but did not realize in trade. There is no
documentation of any transaction actually made with the claim to the lost stone.
Another problem hides in the story: Furness (pp.97-8) says that the family’s ancestor
shipped the stone to Yap and on the way to Yap the stone was lost at sea during a storm.
When the sailors came back to Yap “they all testified” that the owner was not guilty of its
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loss, and “thereupon it was universally conceded in their simple faith that the mere
accident . . . ought not to affect its marketable value” (my italics). This description of the
testimony and the universal conceding that the value of the lost stone remains, implies a
public event in which all the natives made a centralized decision. This is entirely
equivalent to modern legislation that declares that some object must be accepted as
payment; such an object is much stronger than the “fiat money” of monetary models.
Finally, the story’s credibility is doubtful. Furness was the only outsider who heard it
from a native. That native, named Fatumak, was not the owner but a man who lived in a
nearby village. He was the local fortune-teller and exorcist, and his credibility as a
storyteller is mocked by Furness elsewhere (Furness 1910, pp.126, 143-6, 154).
Overall, I believe that the arguments I raise here prove that both the stone money and
the lost stone are not the “fiat money” of monetary models.
3. Shells
Shells of many types—especially seashells—were among the most common forms of
primitive money7. They were used in most parts of the world as both jewelry and money,
to the surprise of Europeans who thought they were intrinsically useless. Shells are
sometimes mentioned as examples of “fiat money” since they are supposedly as
intrinsically useless as small pieces of paper (Samuelson 1958, Kiyotaki and Wright 1991,
1993). Here I discuss in detail only the famous cases of American seashells and those of
the Pacific Kula Ring.
3.1. American Shells
Two types of seashells were popular among Native Americans: wampum on the East Coast
and dentalia on the West Coast. Similarly to the stone money of Yap, the Native
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Americans thought the shells had high esthetic value. They put great effort into polishing
and piercing them with their stone-age tools, and then strung them. The mere fact that the
shells were strung is obvious evidence that they were used as jewelry at one point8. Native
Americans did not know how to process precious metals, so this dual esthetic-monetary
use of shells should not be surprising. While the use of wampum as jewelry is undisputed
among those who have studied it, Einzig (1966, p.172) claims that the monetary dentalia
were not used as jewelry. His source (Kroeber 1953) indeed says that only strings of
complete big shells were money and only strings of broken and small shells were jewelry.
However, Kroeber makes it clear that the monetary strings were not used as jewelry not
because they were considered esthetically worthless. On the contrary, they were much too
valuable to be used as jewelry on a regular basis9, just like expensive modern jewelry that
usually stays in a safe. Besides, if small and broken shells were used as jewelry, then it is
obvious that the large ones were considered esthetically valuable10.
The shell money’s legal status was stronger than our concept of legal tender. It was
acceptable in payments of debts, fines, blood-money, ransom, tributes, and bride-money,
and was usually the only object acceptable for such payments (Einzig 1966, pp.165-6, 172-
3, Tylor 1881, p.445). Both types of shells also had a religious use: they were buried in
graves and burned in funeral pyres (Einzig 1966, p.172, Ingersoll 1883, p.479). This
necessity of using them in religious rituals provided an independent, and very powerful,
source of demand. The dentalia also had a religious value, as in mythology there was a
character named “Great Dentalium,” who was sometimes considered semi-divine and even
as The Creator (Kroeber 1953, pp.25, 74). All these uses and values guaranteed the shells’
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value even when the Europeans brought with them precious metals that could have
replaced the shells in their original esthetic use.
While the European settlers did not see any esthetic value in the wampum, they
nevertheless used it as money because the natives were always willing to trade skin and fur
for it (Ingersoll 1883, p.471). Since the settlers knew that they could always convert
wampum into fur, even though the natives did not commit to do it, we can call this
“voluntary convertibility.” Later the settlers themselves made the shells legal tender in
some Colonies (Ingersoll 1883, p.472), and even demanded the natives to pay them taxes
in shells (Einzig 1966, p.173). Eventually, the large decline in the number of Native
Americans and the demise of their culture made the shells inconvertible and their monetary
use indeed ceased.
3.2. The Kula Ring
In the founding book of economic anthropology, Malinowski (1922) describes a system of
international trade near New Guinea. This system, called the Kula Ring, looks superficially
like a modern monetary model, as cautiously noted by Townsend (1988). Many villages on
many islands are arranged along a circuit. Each one trades only with its neighbors on each
side in fixed intervals of time. Every trade meeting involves the transfer of at least one of
two types of seashell ornaments, called the Kula shells: necklaces and armlets. The former
always travel in the circuit clockwise from one village to another, while the latter travel
counter-clockwise. The problem is that most armlets are too small to be worn “even by
young boys and girls” (Malinowski 1922, p.88).
First, it should be noted that the shells do not actually function as money in the Kula
Ring. Their exchange is always strictly separate in time from the actual trade of other
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goods. There is never a quid pro quo trade of a shell for another commodity in this trade
system (Malinowski 1922, pp.210-1, 363). The exchange of shells is parallel to the real
trade, and essentially it is nothing more than a sporting event, with the Kula shells being
the trophies. The sport is trying to get one’s trading partner to give him as a gift the best
shells, and the participants attribute their entire success in this endeavor to their success in
magic that they perform and is supposed to make their trading partner generous
(Malinowski 1922, pp.281, 335-6, 392). It is then like a chess contest, a sport of mental
skills, but—as in the soccer World Cup—the trophy passes on from one winner to the next
after a while. It is also similar to the Olympic Games in that it promotes peace, which in
turn facilitates the parallel real trade (Malinowski 1922, p.274). The shells’ value as
trophies can be called a “showing-off value:” people compete with their fellow villagers in
the form of public displays of the shells they got. The losers suffer great shame, while
winners become famous and are admired (Malinowski 1922, pp.94, 375).
Moreover, participation in the Kula Ring and all the associated customs are mandatory
(Malinowski 1922, pp.187, 209, 325, 423, 457-9). Rejection of shells that are unfit as
jewelry is not an option, and the protocol actually gives such inferior shells a special role
as intermediary gifts (Malinowski 1922, pp.355-6).
The shells do function as money in non-Kula normal intra-island trade, and their
acceptance as such is also not discretionary. One has to give food to whoever brings him
these shells, and even the price level is fixed by custom (Malinowski 1921, pp.9-10, 13-4).
The shells are also legal tender in the payment of debts (Malinowski 1922, p.180), and
they have a religious use since they qualify as offerings to important supernatural forces
(Malinowski 1922, pp.76-7, 512-3)11.
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4. Discussion
The “fiat money” claims reviewed above are, to the best of my knowledge, the only ones
that made it into modern monetary literature. They cover almost all of the categories of
ways to show why a “fiat money” claim is wrong (the money has esthetic value, it is legal
tender, it has a religious use, etc.). There is only one such category not covered by these
examples, and it is the convertibility of the money into goods. Some “primitive moneys”
(defined by Einzig (1966) as moneys that are neither paper nor coin) were indeed issued
under such promise, most notably emergency leather moneys that were issued during
wartime in Medieval Europe (Einzig 1966, p.259). They were the forerunners of the
wartime paper money that was popular in the 19th century.
The classic reference on non-modern money, and one which I use extensively above, is
Einzig (1966). It is a comprehensive and detailed list of all primitive moneys that were
ever used anywhere (regardless of their “fiat-ness”). Einzig’s monumental survey mentions
dozens of other moneys that seem intrinsically useless to a modern Western lay person12.
Detailed discussion of them is available in Goldberg (2003c). There I show that all of these
moneys are actually not “fiat moneys,” or—where information is scarce—I show that it is
more likely than not that they are not “fiat moneys13.”
While the famous cases reviewed above stem from inaccurate or partial reading of the
correct facts reported by anthropologists, there are other ways in which wrong “fiat
money” claims are born. Some evidence comes from people who are not anthropologists,
namely travelers, missionaries, and diplomats. Travelers tend to provide anecdotal
evidence, whereas money is a general medium of exchange. Unlike anthropologists, they
can be very narrow-minded and ethnocentric, thinking that anything that does not fit their
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Western standards is useless, even if the natives think it is useful. Missionaries are more
systematic in their observations as they spend many years in the same place, but some
ethnocentrism seems to be inherent in their job14. Diplomats are somewhat detached from
the society they live in and often lack real interest in the local culture. In addition, none of
them are economists, and what they consider as money may differ from what economists
think of as money. See Goldberg (2003c) for examples.
5. Conclusion
Has “fiat money”—as defined by economists—ever existed? It is impossible to prove that
it didn’t. Every book and article ever published in economics, anthropology, history,
geography, archeology, sociology, and other fields, can include a claim that some object—
intrinsically useless, inconvertible, and lacking any other legal support—functioned as
money. Also, many societies have disappeared without leaving any evidence on the
monetary aspects of their cultures.
The immediate goal of this paper was to refute the famous “fiat money” claims that
have made it into modern monetary literature. These claims have been used to justify the
fact that monetary models typically ignore the legal status of money. I believe I have
proven that these claims are false. In Goldberg (2003c) I provide a similar analysis
regarding all the dozens of other claims collected by Einzig (1966).
More generally, I show here how extremely easy it is to focus on the monetary object
itself, take it out of context, ignore laws, customs, religion, trade relations, subjective
cultural tastes and fashion, and declare: “We found an example of ‘fiat money’!” I then
show that with a little digging for facts it is not so hard to disprove “fiat money” claims.
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In this sense the main contribution of the paper is to raise the burden of proof on “fiat
money” claims, as there are probably more such claims out there. “Fiat money” is defined
by the absence of properties: intrinsic value, convertibility, and other legal support.
Proving that these properties do not exist is perhaps impossible, but anyone who makes a
“fiat money” claim must at least carefully look for them. More specifically, this paper
shows examples of the ten categories of reasons other than pure speculation that can create
positive demand for an object, independently of its monetary use: practical use, esthetic
value, showing-off value, religious value, religious use, legal tender status, forced on
buyers, forced on sellers, convertibility, and voluntary convertibility. If an object has at
least one of these properties then it is not “fiat money.” In addition, it needs to be verified
that the object is indeed a general medium of exchange, and that the source of the claim is
credible.
With the evidence from primitive societies refuted, what remains of the justification for
using the “fiat money” concept? The main theoretical justification—models prove that this
money can circulate based purely on speculation—has been challenged elsewhere. In
Goldberg (2003a) I show in a search model that these models lose most of their predictive
power once a large number n of potential “fiat moneys” are allowed to exist, because then
there are n
2 stationary equilibria, all with different combinations of “fiat moneys”
circulating. Prescott and Rios-Rull (2000) go further by pointing that in an overlapping
generations model no monetary equilibrium exists under such conditions. This is because if
I pick up, say, a useless nutshell and try to use it as “fiat money” to buy goods from you,
then your optimal response is to pick up a different nutshell, or a fallen leave, and try to
use it as a different “fiat money” to buy goods from the next generation.
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The strongest justification then for using the “fiat money” concept is that some of the
well-behaved “fiat money” equilibria survive the generalization to moneys with a
commodity value or legal status. Wallace (1981) and Obstfeld and Rogoff (1983) examine
the implication of a promise to convert money into a commodity in an overlapping
generations model and a cash-in-advance model, respectively. Wallace and Zhu (2004)
examine the implication of a small commodity value in a Bewley model and in a search
model. Goldberg (2003a) examines the implication of allowing agents (or forcing them) to
use money for tax payments in a search model. The implications of other forms of legal
support for money, such as making it legal tender in debt payments, have not been fully
examined yet. Therefore the modeling implication of the current paper is that more
research should be directed at checking the robustness of “fiat money” models to such
realistic assumptions about moneys.
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Notes
1 By “negligible” I mean that the money can be used as paper weights or burning material.
2 After giving the example of the stone money of Yap, Friedman (1992, p.7) writes that “numerous additional
[examples] could be listed.”
3 Keynes refers to “the stone money of Rossel Island,” but it is obvious that he means the stone money of
Yap.
4 Friedman (1992) also claims that gold and the Yap stones are equivalent, but he does that by ignoring the
esthetic value and legal tender status of both.
5 This refers to regular taxes by chiefs (Einzig 1966, p.39), and even by the German colonial regime (Furness
1910, p.99). Our concept of legal tender refers to debts and taxes, but not to spot commercial transactions.
For details, see Goldberg (2003b).
6 This is the only aspect of money that I am interested in, since the motivation for this paper comes from the
use of “fiat money” as a medium of exchange in modern monetary models.
7 Shells of snails, turtles, ostrich eggs, and coconuts, were also used (Einzig 1966, p.555).
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8 Indeed, strings may be easier to handle than single shells, but the effort of piercing them and obtaining
chords in a stone-age society is not worth it.
9 A string of the largest dentalia could buy a wife to a famous man; two such strings made a man famous, and
no commodity or wife was worth two such strings (Kroeber 1953, pp.23-4).
10 They were at the very least a raw material, as they could be broken and then used as jewelry.
11 The case of the Kula shells—deformed specimens of intrinsically valuable goods—was not unusual in the
Western Pacific. There are other cases in that area where an object was originally considered esthetically
valuable or practically useful, and by the time it lost these values and uses to superior materials or changing
tastes it had already made it into the local laws, customs, and religion. Once achieving such statuses, it was
no longer necessary to bother making that object in a usable form. Then deformed specimens, like the Kula
shells, also functioned as money.
12 The list includes feathers, skulls, pigs’ tusks and jawbones, teeth, broken rice, bitter almonds, poisonous
seeds, rubber balls, intentionally ruined metal, dust, salty clay, and seemingly useless specimens of skins,
cloths, cattle, axes, arrowheads, and glass.
13 In some cases the only source who reports on the use of the money fails to provide enough information on
the society that used it (their laws, religion, fashion, etc.). As seen above, this information is critical for
disproving “fiat money” claims. In other cases the claims are purely speculative, based on archeological
findings of objects that defy standard explanations or remind the archeologists of stashes of money.
14 Stocking (1987) provides a critical look by a historian of anthropology on the anthropological reports of
such 19th century amateurs.