Fiat currency
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Banking basics
A recap of a few things you’d think financial professionals ought to know
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Fiat currency
(n.)
Money that has value by legal decree — literally, government fiat —and not because it is backed by a precious metal or a physical commodity.
History
Towards the end of the late 8th century, a pound sterling was an IOU: a promise on the King’s treasury to deliver one pound weight (240 pennyweights) of silver of a specified fineness. This is where the name “pound” comes from. The one-to-one relationship implied by the name did not last. Over centuries, the silver content was incrementally reduced through deliberate debasement, changes in monetary policy and the coinage system to the point where, by the introduction of the gold standard in 1816, the pound sterling represented a specific amount of gold, not silver, and it was quite a lot less than an imperial pound of the stuff. It was 123.27447 grains or about 7.98 grams of pure gold).
When Britain permanently suspended the gold standard the pound went from being theoretically a promissory currency to a true fiat currency with no fixed commodity value.
Today, no major national currency maintains convertibility to precious metals or other commodities, making the entire global monetary system based on fiat currency.
But then ...
Enter cryptocurrencies
Fiat currency is to be contrasted with a cryptocurrency, which is not really currency at all and isn’t backed by anything either.
The expression “fiat currency” is often preceded by the adjective “degenerate”, especially in the mouths of Bitcoiners, who regard it as an enabler of the “capitalist strip mine”:
The argument typically goes:
- Central banks and, actually , commercial banks can “print” or buy back and thereby cancel) fiat currency at will. This changes the “money supply”.
- Changing the amount of currency in circulation naturally depresses (or inflates) the value of a given amount of a currency not backed by anything through simple laws of supply and demand. This can be inflationary.
- Inflation erodes savings and reduces purchasing power.
- This transfers wealth from individuals to the government and financial institutions.
- This process is likened to “strip mining” because it extracts value from the broader economy and puts it in the hands of a gilded few in the same way real strip mining extracts resources from the land enhance it to capitalists.