Fiat currencies: what they are and how they work

Fiat currencies have a long history dating back to the ancient Chinese dynasties of the 10th century. After a strong demand for metallic currency that exceeded the supply of precious metals at the height of trade during the Tang Dynasty, credit notes began to circulate and were soon used as the first form of paper money we use today as banknotes.

Simply put, the credit note was a piece of paper issued from the first to the second, guaranteeing the second party that the private note is backed by a monetary or gold reserve in the bank.

Therefore, simply issuing an IOU credit note was as good as making a payment for goods and services.

The idea of paper money gained rapid traction since then and was adopted by the American colonies, France and the Continental Congress in the 18th century. As expected, issuing too many credit notes or bills of exchange could create inflation, so governments have taken control of issuing bills of exchange to add security and confidence to the system.

Until the beginning of the 20th century, anyone could convert paper money into gold coins. However, wars and government expansion projects forced governments into higher spending that led to the need to print more money. However, with paper money backed by gold reserves, the only way for governments to access more capital was to raise taxes or print more money. As the world’s superpower government, the United States has decided to opt for money printing by lifting the dollar from the gold standard.

As of 2021, it has been exactly 50 years since the US dollar became a fiat currency after President Richard Nixon abruptly pulled the dollar out of the gold standard. This act of cancelling the direct convertibility of dollars into gold due to dwindling gold reserves and the need for more government spending has led most countries to adopt fiat money. By definition, fiat money is a medium of exchange underpinned by its holders’ belief in the virtue of the issuing government and not a physical commodity.

Why don’t crypto people like fiat currency?

Cryptocurrency enthusiasts dislike fiat currencies because they see fiat money as an archaic monetary instrument that only propagates the lack of government accountability and totalitarian control over the economy.

In the last two years that the world has struggled to overcome a global pandemic, various jurisdictions have continued to print money further highlighting the disadvantages of fiat money. As more money is printed, inflation rises around the world and people’s wealth and income are diluted. This reduces the ability of fiat currencies to act as reliable stores of value.

As inorganic organisms, the governments of the world have grown enough in such a way that there are no accountability systems that counter-control government spending and monetary policies. Yet, governments themselves are run by imperfect human beings. Cryptocurrency enthusiasts regard this centralized control over the world monetary system in the hands of a few bureaucrats as an unfair system that tends to work only in favor of those who control it.

The idea that central banks have absolute power over an economy through control of that economy’s fiat currency is contrary to the ethos that governs pioneering cryptocurrencies like Bitcoin that encourage fairness and overall transparency.

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