In the world of crypto the word fiat money is tossed around and frown upon a lot, and with good reason. Because fiat money is a representation of the failed system cryptocurrencies aim to replace.
People outside the space call it simply money so the first step into broadcasting the benefits of crypto is to clarify what fiat money is and what is wrong with it.
So what is fiat money?
Photo by Karolina Grabowska
First things first, the word fiat has the same root of feit in counterfeit. It means false, in the sense of not having the value it claims to have. Money has any value if it's a representation of something else. For example until the Second World War you could trade your paper notes for gold in many countries. After that it became fiat. The value became meaningless in itself. It became an agreement not backed by anything.
So backed money is good? No so fast...
Let me give you an example of backed money gone wrong.
I have loquat trees, and there is a neighbor who has a plum tree. The loquat tree bears fruit at the beginning of the spring, and the plum tree, in the summer.
We can be good neighbors and share the production, which is good and all. But that limits us to the other person feeling like sharing, which can happen or not. Now, let's say I really want plums and they are in season, so I talk to my neighbor and make an agreement. I give her a note for a basket of loquats in exchange for certain amount of plums.
Those papers have no value per se, they have the value of what they represent. Here we are in the gold backed notes agreement.
Now about those notes, my neighbor can decide that she prefers lemons, so she trades my note with another person that has a lemon tree. The person that has the lemon tree can choose to get some other produce... and then my loquats' note can be used around, traded for products or services, for several months between the summer when I got the plums and the following spring when I have to give the loquats back to whoever appears with the note.
It is a darn good system. A single note can fulfill the needs of a lot of people.
And then there is the catch.
Let's say there is a thief that takes notes I have stacked in a drawer for future use. Lets suppose I gave four of those notes that represent the production I want to share, and appear eight people in my doorsteps.
If I don't know this happened I will serve the first four and then have a big headache with the other four. If I have enough production I could honor it anyway, and pay the price of being robbed. Or I could not honor it and people would not want my notes anymore, killing my chances to trade in the future. Because lets face it: the people who come with the notes are most probably not the one that stole them, and they will expect me to honor the agreement.
Now, if I do know this happened, I could become pragmatic and give half of the produce per note. So instead of the basket I had in mind I prepare one that's half the size, and there is need of two notes to have the same amount of loquats.
Releasing more notes than the products backing them creates inflation or scarcity. There is no way around it.
And things get even worse when the one issuing the notes have the monopoly of the violence, like a government. Because then... what will stop them?
This happened in the Roman Empire and it's considered one of the main reasons of their demise. The denarius was a silver coin that paid for one day wage of a skilled worker. When the Roman Empire got cut from the mines of gold and silver, they decided to re-mint the coins adding copper. Of course counterfeiting plus power is a slippery slope and it took many many years, but by the time of Gallienus the silver coins only contained 5% of silver over a copper core—and of course nobody wanted them.
Ref: https://www.visualcapitalist.com/currency-and-the-collapse-of-the-roman-empire/
The main projects in crypto solve this problem because they have a predictable inflation (if any) and a limited chance of counterfeiting coins. This is the power of decentralization and open source technologies where it becomes very clear (for those who get down and dirt and understand the language) how things are gonna be and there is too much people involved to game the system.
If a cryptocurrency is not decentralized and has a clear inflation path, then it's doomed like the Roman Empire and all empires before and after it.
Back to fiat
After the end of the Second World War, the dollar became the coin for international trade. Now, international trade is a lot of trade to sustain from a single country.
Photo by Tom Fisk
Even when a single note can change hands a lot of times before being claimed, there is a problem with the volume. Whatever you use for trading needs to be able to support the volume traded at any single time, otherwise the trade can't be done and you could have a recession.
This is something we know about in the crypto-space with Bitcoin, where the number of transactions per second is limited and because of that it can't be used for buying and selling goods effectively.
Considering this situation, the dollar (and the rest of the currencies followed) came out of the gold standard and the notes became backed by... air.
In theory, if we had very honorable people creating the notes, the system could still work because you could predict the next year trade by volume and eventually create or destroy the notes needed to support it. This actually was done during the colonial USA for a short period of time. When the British found out, they didn't like it one bit, so they forced their currency plus additional taxes, and, well, it ended in the emancipation of the colonies.
Back to the present times, we have all been lied to and made believe that the people printing the money are honorable, that there are constraints in place and that the system is fair.
Only that it's not. The central banks in all countries are managed by pirates, and the corrupt governments slowly but surely are following the Roman Empire towards the precipice.
Let's recap...
Fiat money is colored paper that claims to have value but there is nothing backing it up but trust. And trust has been deceived and misused.
Are there any examples in the world were the the fiat fiasco can be seen clearly?
Yes. Look at Venezuela and Argentina. In Venezuela you need a money counting machine to book a hotel room and in Argentina people buy cars as investment. Yes, inflation is so big that cars appreciate in value as time goes by.
What else happens when the fiat fiasco keeps growing?
Despotism, destruction and death.
Can cryptocurrencies save us from all this?
I believe they can, if we make sure they stay decentralized, can't be counterfeited and have a clear inflation path.
Note: I'm not an expert. All said in this article is just an opinion. I could be wrong and reserve the right to change my mind.
Comments, corrections and hollers are more than welcome.
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