This is a question asked in review of Chapter 4: Prices and Consumption in the Man, State, and Economy with Power and Market study guide written by Robert Murphy.
I started this topic to ask the question and see if my response was right and also to inquire to see if anyone knew of any place in which to find an answer key for this book. I find it odd that being written in 2006 there is not yet any sort of material in which I can judge my answers, but then again that may be the point - to encourage thought. In any event here is my answer and please let me know if you have come up with one.
Mises's theory of money regression applies to fiat money in the sense that it has obtained it's valuation from individuals from prior exchanges on basis of it's commodity value. It's purchasing power is thus build regressively over time and can be traced back to it's original contractual value backed by, let's say, the gold standard. The dangers in this is that in the event of a collapse of a fiat currency valuations must be reestablished and it may bring civilization back to a much more primitive state (gold being unowned now by the majority of people, as it has been prevented as legal tender, it would not be able to be on the side of many transactions thus would not quickly reestablish itself, possibly never, as the new 'money' commodity of use and this would have to be decided upon by the acting individuals and their activities in exchange).
I hope that wasn't too hard to follow and I myself am a bit confused as I'm trying to teach myself all of this stuff with no prior economic schooling and only a GED. Thanks for your help and encouragement!
Welcome to Mises! If you'd like any one on one help with your studies in Human Action, feel free to pop me a PM. Also, what you have said is not hard to follow at all, it is quite straight forward.
You seem to understand exactly how regression applies. However, just to trace it out precisely for you:
Where I do take issue is with your description of the dangers of a fiat currency. The number of times that an economy has utterly "collapsed" as such in the absence of changes in the real money supply can be counted on ones fingers. This is not the true danger because it is so rare and unlikely. Why would a collapse simply happen for no reason? The real problem is that a fiat currency is extremely manipulatable, and so it becomes increasingly possible to change the money supply which, as you will read further on within Mises' work , can be extremely dangerous.
Where I think you might be being tripped up is in Mises' scenario of all money prices being suddenly erased from an economy. With a fiat standard there would be no way to reestablish these money prices, unless you're going to base it off of the artistic value of dollar bills....
At any rate, this is simply an analogy, not something that is in any way likely to happen in real life.
Hope that helped
What I meant by on the basis of it's commodity value was the previous valuations by individuals in exchange traced back to time of barter of the commodity in question. That could make a world of difference.
I think you have it right.
I'm not sure why you added the part about the danger of it. I am also not sure why a collapse of the fiat currency will bring civilization to a more primitive state.
Keep up the good work.
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It's easy to refute an argument if you first misrepresent it. William Keizer
Thank you for taking the time out to answer that and when I get to Human Action I will most certainly take you up on that offer. Thanks also to Smiling Dave who replied above.
As for the collapse line of though I'm comforted in your reply, honestly just think I let myself get a little carried away on the train of thought I was having. You seem to have summed it up and again thank you for clarifying the latter part of my answer concerning the collapse effect.
Ooooh sorry I thought you were reading HA. I'd be happy to help out with MES too, although I am not as familiar with the book as I am with human action, having read through the MES only once and then revisiting sections.