The Mystery of Unbacked Fiat Currency: How Does It Maintain Its Value?steemCreated with Sketch.


In the world of finance, one of the most perplexing questions that remains unanswered to this day is why an unbacked fiat currency has any value as a medium of exchange. While some argue that it is a reflection of faith in and the creditworthiness of the issuer, others contend that the demand for such currency is guaranteed by the requirement of the nation's subjects to pay taxes and account for them. However, these explanations fail to address the consequences of the massive expansion of unbacked fiat currency that occurs when the state treats it as real money. As a result, they are insufficient in providing reasons for the public's tolerance of repeated failures of currencies.

To highlight the depth of this problem, let us consider a thought experiment. We know that metallic metals, particularly gold, silver, and copper, have been used as media of exchange over millennia. The use of their value was broadened through credit in the form of banknotes and bank deposits, and the relationships between legal money and credit in its various forms were defined in Roman law in the sixth century. This system of money and credit, with the value of credit tied to that of money, has served humanity well ever since.


Now, let us imagine that in the absence of metallic money, a ruler instructed his subjects to use a new currency which he and only he would issue for public use. This new currency would undoubtedly be seen as a benefit to everyone, compared with the pre-existing condition of barter. However, the durability of the ruler's new currency would be in question. With no precedent, how could the currency be valued in the context of the ratios between goods and services bought and sold? And how certain could one be about tomorrow's value in that context? What if the king lost his power or died?

Clearly, without a reference to something else, the king's new currency would be a highly risky proposition and sooner or later would simply fail. And even when a new currency has been introduced and linked to an existing form of money, if the tie is then cut, the currency will struggle to survive. Without going into the good reasons why this is so, the empirical evidence confirms it. Chinese merchants no longer use Kubla Khan's paper made out of mulberry leaves, and German citizens no longer use the paper marks of the early 1920s. But they still refer to metallic money.


Yet today, we impart value to paper currencies issued by our governments in defiance of these outcomes. Custom is why we still think of currencies as money, even though for the last fifty-one years, their link with money was abandoned. The day after President Nixon cut the umbilical cord between gold and the dollar, the world continued using dollars and all the other currencies as if nothing had happened. But this was the last step in a long process of freeing the paper dollar from being backed by gold. The use of depreciating currencies as the basis for pricing everything is a perplexing phenomenon. Considering the inevitable change in their value, why do we continue to rely on them? Once the distinction between a stable currency and a faltering one is fully recognised, it's likely that people will abandon the latter and rerurn to the former. The ongoing developments in the financial world are hastening the approach of that moment. So whether you like it or not, fiat currencies around the world are heading to zero..... You can decide to continue to bury your head in the sand and ignore all the indicators, or you can take action NOW and become your own central bank and hold gold.and silver before its too late.


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40+yr old, trying to shift a few pounds and sharing his efforsts on the blockchain. Come find me on STRAVA or actifit, and we can keep each other motivated .


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Fiats only value comes from the promised taxation of the future generations.

As much as I don't like Fiat USD's, I still think they will be the best "Physical" Fiat Currency to be holding at the time of the U.S. Monetary Correction... They won't go to Zero, but they will lose any and all Legal Tender Status...

Upvoted! Thank you for supporting witness @jswit.

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