03.05.2022

What is Money?  -  Fiat Explained

What is Money?  -  Fiat Explained

Money may seem like a very simple object to define as it’s “what we use to buy stuff.” But in reality, money is a highly complex tool with several uses.

In today’s societies, many consider the US dollar, or the Euro, or the Chinese RMB to be different types of money. The truth is, the definition of money supersedes any of these current fiat systems, and goes deeper still into the fabric of society.

What Is a Fiat Currency?

Fiat currency is a currency created, distributed, and otherwise issued entirely by a government. The value of these currencies is entirely dependent on the stability, authority and faith held in the government from which they were issued. In other words, they aren’t backed by commodities or assets like gold, silver, etc.

The US dollar is the most widely used and accepted fiat currency. Just like the US dollar, most other paper currencies, like the Euro or the Japanese Yen, are not backed by gold or silver either. Thus, the value of fiat currency is highly manipulable, and for this reason fiat currencies have no intrinsic value. Sure, they can be used for trade, and may store wealth under a responsible government, but they aren’t reliable stores of value under difficult conditions.

The five most recognized central banks in the modern world are the United States Federal Reserve, the European Central Bank, the Bank of Japan, the Bank of China, and the Bank of England, all of which issue fiat currencies. Many other countries also issue fiat, such as Venezuela’s Bolivar, or Canada’s dollar.

Fiat in its final form, CBDCs, exists today. CBDCs are Central Bank Digital Currencies, which is what China uses in its economy. The issue with CBDCs is that they are connected to social credit systems by which an employer and government (or anyone with authority) can control an individual’s wealth, as well as how they spend it. CBDCs are the definition of fiat as they can be used to dictate every move a consumer makes.

When Fiat Became the Norm Around the World

An early exploration of a fiat standard occurred in China in 800 AD and lasted for several centuries. The country ran into a few issues under their paper currency as it was incredibly easy to print (as opposed to mining for precious metals), and could be created in massive quantities.

The Chinese ended up printing too much over time and created fiat inflation, devaluing their currency until it was essentially worthless.

Sadly, modern day nation states didn’t heed this fiat failure (or any others) as a warning against separating intrinsic value from a currency. At the end of World War II, a Bretton Woods System was created to form an international monetary world order with the US dollar set to be the reserve currency of the world. Up until 1971, the US dollar was backed by gold. But since President Nixon took the US dollar off a gold standard then, a fiat paper currency officially became the world reserve currency around the world.

Digital currencies may be an answer to reestablish intrinsic value in money, and more. But before we touch on that, let’s look closer at what money is.

Money Through History

Different types of currencies have come and gone for thousands of years. The successes and failures of a society, empire, and especially the type of market have determined the utility of currency for millenia. In fact, markets have been around throughout human history as they serve as a way for people to procure what they need while providing to others what they can. Markets necessitate trade, and the most efficient way to trade is via money.

  • For example, an apple farmer might have trouble trading his apples for a cow if the cow rancher only likes oranges. Money provides a mediary in which both parties find value.

So in order to operate in these markets, different types of money sprouted up in various forms. Some odd ones seen around the world include super tiny coins, crosses, T-shaped rods, wooden notes and even cardboard coins. But the most widely used form of money has been created in metal coins. More specifically, coins were made from precious metals like silver, gold, bronze, copper, and anything that had utility such as the ability to be melted down and repurposed, giving them intrinsic value.

What Is Money Foundationally?

When it comes to money, there are a few foundational qualities that are non-negotiable.

Money should act as a reliable vessel by which to store and transact the monetary value of your time and energy that you spent to earn it. In other words, money needs to hold intrinsic value so that it doesn’t collapse under duress, and is highly valued during times of prosperity. Nobody, including governments and banks should be able to easily issue fresh money, as is the case with paper currencies, otherwise the intrinsic value would be squandered.

Money should not be corruptible or easily replicable. Gold, silver and other precious metals have qualities that are impossible to replicate from other materials which is in part what makes them valuable. Paper currencies are easily replicated by anyone who is willing to put the effort in to make copies. Also gold coins, for example, can be melted down or parsed into pieces, but as long as the whole amount of the coin exists, it is still valuable. Paper money is worthless when shredded or burned.

Fungibility is important to money, as inconsistencies in money could make tracking, counting, and maintaining money difficult. Fungibility is also important for trustworthiness between two traders, and upholding a verification system (like Proof-of-Work) also protects users from double spends, scams, and theft. Transactability is related to fungibility as money should be easy to trade with. Carrying around bags of gold coins is impractical and dangerous.

Between Bitcoin and CBDCs, many have floated the idea that money should also be uncensorable, meaning a government should not be able to freeze bank accounts or prevent transactions from occurring. Money being autonomous provides security to the individual and prevents the individual from relying on faith in their government.

If these qualities are met, a currency can be considered a reliable form of money as it would be worthy of upholding its intrinsic values, and would be considered a sound money.

Why Crypto Is so Revolutionary

Cryptocurrencies, and especially Bitcoin, are incredibly exciting as they present a new case for sovereign assets and sound money. They rely on decentralized blockchain technologies to maintain a public ledger for monetary transactions. They were created because fiat currencies showed signs of instability and corruption, and are often considered the answer to fiat problems.

NFTs are interesting as they change the schematics of asset purchases and can indeed turn anything into a valuable asset, both in the physical and digital world. NFTs rely on blockchains to be stored and transacted on, much like cryptocurrencies. For more info on NFTs, see our academy piece “Non-Fungible Token”.

Fayre is at the cusp of monetary developments with NFTs as it is possible to mint, buy, sell, and trade NFTs with multiple cryptocurrencies. Always pursuing innovations in the NFT industry, Fayre is on a mission to provide means to mint NFTs and create communities. And with cryptocurrencies becoming more and more dominant over time, Fayre could help new digital economies scale and grow without fiat involvement.

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