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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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[–] jacksilver 2 points 11 months ago

Yes technically there is no material object backing the US dollar (and oddly enough some think that the Wizard of Oz is an allegory for that - https://en.m.wikipedia.org/wiki/Political_interpretations_of_The_Wonderful_Wizard_of_Oz). However the main difference between crypto currencies and fiat currencies, in my opinion, is the backing of state actors. The US dollar has value because it's backed by the US government and they can leverage the monetary supply to exert some control over things like inflation.

One of the big issues, in my opinion, with crypto currency is that there isn't centralized control. Without the ability to regulate the scarcity of the currency crypto currencies aren't able to easily respond to changing global factors (although some do adapt to fluctuations in activity on the block chain). That may not matter when people primarily see them as investment vehicles, but can cause significant issues when trying to use them as actual currency.

Last note: what makes gold valuable anyways? Even gold was just a placeholder for value. At the end of the day we really just want a vehicle for value that we can agree on.