The whole population of Earth is using the so-called fiat money. This is both well-known cash that we tend to use less and less in our everyday lives and the funds we keep in our bank accounts and deposits. The very term Fiat comes from the Latin word “fiat” which can be roughly translated as “let it be” or ” so it shall be done”, it became widely used at the end of the XIX century in the USA. Fiat is a currency not backed by anything; the price is fully based on people’s beliefs that it can be exchanged for goods and services. The government makes fiat money a legitimate payment method, it also defines their nominal value, issues new money and regulates the national currency.
Most of the time, people used commodity money that had value in itself as it was produced of precious metal; and before that, people used rice and other grains, animal fur, and even cattle – in other words, certain goods were used as money.
You can find out more about the history of money in an article by the Reserveum Group called Money in the Stone Age
What is the main point of the tax system?
The term “fiat” was preceded by another one – “fiduciary”, it emerged in the XIX century England as the Bank of England issued paper money. At first, the price of such a banknote – in fact, a promissory note, – was defined by the amount of gold stored in the bank. However, the development of economy led to lack of gold to back all the printed money, and in 1844, the British Parliament accepted the Bank Charter Act, or the Peel Banking Act, that secured the monopoly of money issuing to the Bank of England exclusively, and also made certain restrictions for pound emission compared to the country’s gold reserves. This event marked the start of the Gold Standard era that lasted till the middle of the XX century.
Read more about the history of this economic feature in our article The Gold Standard is Not Standard Anymore
However, long before the term “fiat” or even “fiduciary money” emerged, there was a currency not backed by gold or any other precious goods. Back in the III century AD, the Roman Emperor Diocletian introduced silver coins where the price of silver itself in the coins was lower than their nominal value. And those who refused to accept this money were executed. That’s the severe regulation of the beginning of the millenium.
First paper banknotes emerged in the land where paper originated – in VIII century China. Here no one either cared for those who didn’t accept paper money: they were also executed. Later on, the governments of different countries used quite severe measures to make paper banknotes more popular – it included jail and treason accusations. Today, they steer away from such measures, of course; also, we use paper money less and less, our preferences shift to cards and online payments. It is all stimulated by both banks and the government. Cash is harder to track; unlike e-payments which make our transactions history transparent to the corresponding institutions.
How many of us keep using cash? I presume most of us prefer using cards now, as banks give cashback, grace period for credit cards payments, etc. A card can be easily blocked when lost and as easily restored, so fraudsters can’t spend much. It seems it’s all roses, no? Well, we know about free cheese: everything banks do they do solely for their own profit. If you think of it, credit card money is even less real than paper money. It is just digits on your smart phone screen and these digits are no more real than cryptocurrencies that Central Banks of different countries fight so vigorously. No wonder! Just the existence of cryptocurrencies takes the money monopoly away from the government, and it lowers their regulation abilities.
But the major problem of any fiat currency is inflation, in other words, the fact that it always loses value. Following Great Britain in the XVIII century, many other countries started printing their money; Europe was just going through hyperinflation times caused by high money supply volumes.
You can find out more about different hyperinflation cases in our article Hyperinflation: 5 stories.
Another danger to fiat funds is the lack of support from the government or instability in the country. We all remember that the value of a currency is solely defined by the government; and if, for some reasons, it has to deal with other problems, the country may face a default and all of its citizens would end up having meaningless papers and digits in the screen. There are many cases of social, economic, and political crises leading to a catastrophic instability of a national currency.
All these factors make fiat money even less popular and make people look for new, safer payment methods. The Reserveum analytical group has been working hard on creating a cryptocurrency not subject to inflation; we are sure it is real and that we will soon be able to present the public with a protocol of a new coin that would only grow in price!