In reply to Eric Tymoigne:  
  
It is, of course, possible both to choose particular definitions and to   
quibble unnecessarily over their application without changing the substance   
of the matter.  I take "liability" to essentially require repayment of   
something of value under specified circumstances.  Paper money does not fit   
that requirement in that there are no circumstances under which I, as the   
holder of a dollar bill, am entitled by right to receive anything else from   
anybody.  So, why then does paper money have a value?  In part because of   
the bootstrap:  I value it because you value it.  The question then is why   
such a bootstrap is stable.  There is more than one reinforceing   
mechanism.  That payments of taxes are generally receiveable (in principle,   
not often in practice) in paper currency is one.  But it is not the only   
one.  The government's spending practices -- payments are made with checks   
ultimately convertible only into paper currency -- also help to underwrite   
the stability, as do legal tender laws (if a debt is expressed in dollars,   
then this paper dollar can be legally used to satisfy the debt).  Mr.   
Tymoigne's argument that unbacked paper money is a liability of the   
government relies on treating the levy of taxes as a good that I buy rather   
than a transfer, since it is then the asset counterpart of my tax   
liability.  When I pay my taxes I exchange my liability to the government   
for the government's liability to me (my paper money).  But this is an odd   
way to think about taxes and paper money.  If we want to stretch the   
language far enough, then I could regard the paper dollar as the   
government's liability, but then the counterpart asset is a weirdly   
contingent one.  When I receive a dollar in trade, I have no idea what I am   
"owed" by the government for it -- that depends on when, whether, and what   
to what degree it chooses to tax me.  
  
The points about coins under a metallic monetary standard are, in contrast,   
not just matters of words.  In Great Britain, gold coin was freely   
minted.  If I brought bullion to the mint, they would turn it into gold   
coin at the fixed rate of  3� 17s 10 1/2d per ounce.  If I owned my ounce   
of gold outright -- it was, in its bullion form, no one's liability -- and   
I own the coins once they are minted, how could we possibly regard the   
coins as a liability of the government?  The image that Mr. Tymoigne paints   
is one of the government deciding that, instead of printing money on cheap   
paper, it will stamp it on expensive gold.  If one is fiat, then so is the   
other.  But that is a poor description of British practice, in which   
private parties could turn privately owned bullion into coin at a fixed   
rate.  Even if the government bought its own bullion and stamped it, once   
it had used it to purchase goods, its status could not be any different   
from an identical coin minted by private demand.  What is more, if I melted   
my British coins and shipped them to, say, France, I could have them   
reminted into francs.  That can't be done with unbacked paper money.  I   
can  buy or sell paper pounds on the foreign exchange for francs, but I   
cannot convert the substance of a 5-pound note into franc notes of   
equivalent value.  Nor does the value of the gold coin hinge on the   
government levying taxes payable in that coin.  Britain could have   
abolished taxes or demanded that they be paid in kind, and the coins would   
not have lost all value -- in part because gold has non-monetary uses and   
in part because it was monetary in other nations and could be converted   
into their coin (or, as frequently happened, circulate in its original dress).  
  
This is not to deny that there are fiat aspects of coined gold.  The   
mediaeval legal debates over whether the nominal or real value of a coin   
should be respected in contracts -- an interesting part of Sargent and   
Velde's book, The Big Problem of Small Change -- bear on the process by   
which a commodity becomes something different as money.  And, unlike the   
British, many other countries charged seigniorage or brassage for minting   
coins driving a wedge between the value of the coin and the value of the   
unminted bullion.  Since the coin serves as a certification of size,   
weight, and purity -- at least when newly minted -- it is easy to see why   
such differences in value could persist in the market.  But certification   
for a fee no more turns the coin into a liability of the government than   
does the Good-Housekeeping seal of approval turn an oven-mitt into a   
liability of Good Housekeeping's publisher.  And, if the coin is not a   
liability, then the inconvertible fiat paper money, which occupies the   
exact same functional space in the monetary system, is not either.  
  
Kevin Hoover