Chapter 4. In a fiat standard, the money is not useful for any non-monetary purpose, or redeemable for any commodity with a non-monetary use. Fiat monies historically emerged not from market forces but from default on gold-redeemable central-bank or Treasury liabilities. The quantity and purchasing power of fiat money obeys the logic of supply and demand in the special form of the Quantity Theory of Money. Central banks control the growth rate of the quantity of money and thereby the rate of inflation. In principle fiat standards could produce lower inflation, but in practice have produced higher inflation than silver or gold standards. Higher inflation imposes real burdens on the public. These burdens, especially when we include the expenditure of labor and capital to produce hedges against inflation, has exceeded the resource burden of a gold standard.

Chapter 3 considers the analytics of helicopter money drops – monetized fiscal stimuli. These will always boost nominal aggregate demand because central banking is profitable (interest rates on assets exceed those on liabilities and/or central bank money is irredeemable). This Chapter also summarizes some of the key results of the first three chapters in the following propositions.

1: A central bank can be solvent with negative conventional equity.

2: Central bank current and future resources are ‘tax payers’ money,’ because the Treasury is the beneficial owner of the central bank.

3: The cancellation of Treasury debt purchased by the central bank is equivalent to the central bank holding that additional Treasury debt forever.

4: QE that is permanent/irreversible in present discounted value terms creates fiscal space for a deferred helicopter money drop.

5: A helicopter money drop today boosts demand even in a permanent liquidity trap, when the nominal interest rate is at the zero lower bound (ZLB) forever.

6: Lack of nominal effective demand is a policy choice or the result of a failure of cooperation and coordination between the central bank and the Treasury, not an unavoidable fate, even for an economy apparently stuck at the ZLB.