Is there such a thing as FREE money?

Isn't commodity money and fiat money the same thing when you think about it?

• Commodity money is backed by something - presumably gold. But then it's only valuable as long as everyone agrees that gold is valuable. If no one wanted gold, a gold-backed dollar wouldn't be worth anything either. Fiat money is backed by something of value too - a government's reputation. Everyone agrees to trust the government's guarantee. If no one trusted the government, the value of a fiat dollar would be worthless as well. Doesn't this prove that there really isn't any difference between commodity money and fiat money? They're both backed by something everyone agrees is valuable and without that value, the money is worthless.

• Answer:

  It is true that all money has meaning only in terms of people's willingness to exchange it for goods and services, http://www.pkarchive.org/cranks/goldbug.html but that's where the resemblance ends. The whole reason gold bugs want to go on the gold standard is that they believe that it would prevent the government from inflating the economy (because the supply of gold is (now - let's not forget the various gold rushes) increasing only slowly) and rendering their money worth less, while a fiat currency allows the government to inflate. http://www.constitution.org/mon/greenspan_gold.htm Now the Keynesians actually agree with this. But while the gold bugs think that eliminating inflation would be a good thing, the Keynesians point out that a rowing economy needs a growing money supply and that a little inflation increases real (not just nominal) economic growth: http://pages.stern.nyu.edu/~nroubini/NYT/krugeconairu.htm Milton Friedman was halfway in between. On the one hand, he recognized the necessity of fita money and, at one point, wanted the Fed to increase the money supply at a fixed rate: http://en.wikipedia.org/wiki/Friedman's_k-percent_rule On the other hand, he also proposed setting nominal interest rates to 0. In a growing economy, this has the effect of forcing deflation. http://en.wikipedia.org/wiki/Friedman_rule