this post was submitted on 15 Nov 2023
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No Stupid Questions

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This community is for people to ask questions they feel stupid for not knowing the answer or how to find the answer. "How do I not already know this?"

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Fiat money is based on nothing, correct? (sopuli.xyz)
submitted 11 months ago* (last edited 11 months ago) by [email protected] to c/[email protected]
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Gov-issued banknotes used to be based on gold, so IIUC that theoretically meant you could always trade your cash for gold. And IIUC, that was also a control on inflation.

Then at some point the currency (guess I’m assuming USD but perhaps it applies to all currencies?) was no longer based on gold. People just simply trust the currency just because there are anti-counterfeit features, and perhaps because everyone else trusts it. Is that it? Is there nothing else to establish confidence in the value?

I ask because I saw a clever anti-cryptocurrency post saying something like:

1 coin of crypto = ½ unicorn horn = 1 faun hoof = ¼ vial of potion from an oni = 50 grams of fairie dust = ⅛ dragon egg = 1 Klingon tooth

Funny, but okay, he hopes to convince people that #cryptocurrency not being based on anything means it’s worthless. Couldn’t we just as well add USD to that equation, since US dollars are also not based on anything now that gold is out of the picture?

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[–] [email protected] 3 points 11 months ago (1 children)

Is there nothing else to establish confidence in the value?

There are

  1. a bunch of US laws preventing counterfeiting,
  2. US laws regulating lending,
  3. past performance of the US economy,
  4. past performance of US regulators,
  5. past performance of US politicians (individually kinda crummy, but they've been pretty consistent about keeping the country stable and the US economy building wealth),
  6. currency held by entities other than the US government (foreign governments and corporations),
  7. international agreements that agree to future payments in US dollars,
  8. and currency held by the US ruling class.

"Everyone else trusts it" sweeps a lot of institutional dependencies under the rug. There are many vested interests in keeping the US dollar fairly stable.

[–] [email protected] 3 points 11 months ago

This is a good list but misses the fact that the state has a monopoly on the legitimate use of force (and therefore can both tax and compel the use of the dollar). The dollar therefore represents the economic potential of ~360m affluent (globally speaking) people who are economically and democratically integrated.

Imho the biggest threat to the status of the dollar is the sense that the democratic integrity of the US is no longer unquestioned: the republican frontrunner overtly doesn't buy the whole 'laws' and 'elections' thing. That is undermining the conditions in the paragraph above.