Understanding Non Fiat Money and Its Impact

Non fiat money, also known as commodity-based money, has been used throughout history as an alternative to fiat currency.

Commodity-based money, like gold and silver, has a tangible value and can be used to purchase goods and services.

Historically, commodity-based money was widely accepted as a medium of exchange due to its rarity and durability.

The use of commodity-based money has declined in recent times, but it still holds value in certain markets.

A different take: Does Fiat Money Have Intrinsic Value

Commodities like gold and silver have been used as alternatives to fiat money for centuries. They have intrinsic value and can be used as a store of value.

Historically, commodities like gold and silver were used as a form of currency in many countries. They were valued for their rarity and durability.

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In a country without fiat money, everyone would receive a monthly allowance based on their job and position within their workplace. This allowance would be in the form of currency points, with a construction worker receiving 100 currency points, for example.

A construction worker would be able to buy food, pay rent, and live with all the basic necessities covered, with a few points left over for entertainment. This system is actually quite similar to how government accounting systems worked in the past.

The expiration of currency points would mean no long-term savings are possible, which would lead to a partial barter black economy. People would buy things they didn't personally need to exchange, because they had to use the money by a particular date.

This is actually how "communist" economies operated, with the extra feature of no savings. The economies worked in the short term, but could not keep up with growing population, partly due to lack of technological progress.

Some examples of tradeable items that people might hoard include dry & canned foods, alcohol, cigarettes, and light bulbs. This is because these items would be valuable even after the currency points expire.

A real-world example of a similar system is Truck Wages, which was outlawed due to its similarity to wage slavery.

Historical experience shows that gold has a nearly flat long-run supply curve, which helped stabilize its purchasing power over time.

The gold standard allowed for slow average growth in the supply of monetary gold, responding to the current purchasing power of gold. This variation kept the purchasing power of gold close to a flat long-run trend.

Bitcoin, on the other hand, has a vertical supply curve, making its purchasing power much more volatile in the face of demand variations.

Fiat monies are performing poorly, with the euro experiencing 10.6% inflation in October 2022, the US dollar CPI inflation rate reaching 9% in June 2022, and the British pound CPI inflation rate reaching 10.5% in December 2022.

Persistent 9-10% inflation imposes a serious tax on holders of money and disrupts an economy by making the price system noisier.

In contrast, gold has a stable purchasing power over time, which is a desirable trait in a monetary standard.

Bitcoin has the advantage of being intangible and transferable peer to peer without custodians, making it harder for governments to restrict or shut down.

However, governments can drive Bitcoin underground by outlawing its open use, as seen in China where Bitcoin use and mining decreased significantly.

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Non-fiat currencies are gaining traction as a competitive differentiator in various industries. In the airline industry, United customers received $22 billion in value as points that can be used as a secondary currency to buy flights, upgrades, or services.

The airline points system is a prime example of a closed-loop payment system, where the issuer can devalue the currency at whim. This gives airlines a significant advantage over countries that issue fiat currency.

Fintechs and mobile phone makers are entering the financial services landscape, disrupting traditional payment systems. Consumers are looking for more value from their bank or issuer, and a secondary currency that spends like cash but is even more valuable could be the key to loyalty.

Representative money, valued based on the instrument backing it, is another form of currency that is not backed by commodities. However, it's still possible to exchange representative money like checks, money orders, and bank drafts for the value listed on the instrument.

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Representative money has a long history, dating back to the 17th and 18th centuries when furs and other commodities with recognized value were used in lieu of cash in transactions.

In the past, precious metals like gold and silver were weighed and used as currency, with the coins having actual value equal to the value stamped on them. The coins were a direct representation of the value they represented.

Until 1970, much of the world followed the gold standard, where a country set a fixed price for gold, buying and selling it at that price, which determined the value of the currency. This meant that the value of the dollar was 1/500th of an ounce of gold if Britain set the price at £500 an ounce.

Representative money was not influenced by inflation, as governments were only able to print money up to the value of the gold they held in their vaults. This made representative money a more stable form of currency.

Representative money can take many forms, including checks and credit cards, which are used today in place of paper money. These forms of payment are still backed by a physical commodity, such as a bank deposit.

In 1971, the U.S. abandoned the gold standard, turning its currency into fiat money. This led to other national currencies being valued against the U.S. dollar.

Fiat money is not backed by any physical commodity, such as gold. It has value only because the government says it does.

If a government becomes unstable, the population may lose faith in its currency, leading to hyperinflation. This can happen when the government prints too much paper money.

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Fiat currency gets its name from the Latin word fiat, which means a determination by an authority.

The value of fiat currency is decreed by a government, even though it's not backed by a tangible asset like gold.

A government attaches value to fiat money, but it doesn't represent a store of equal value like gold did in the past.

Fiat money has been the dominant form of currency since the US dropped the gold standard in the 1970s.

The value of fiat currency is based on a promise to pay, but it's not backed by a deposit of cash or a commodity like gold.

The U.S. severed its ties with the gold standard in 1971, turning its currency into fiat money. This means the money has value because the U.S. government says it does.

The value of other national currencies is often determined by how much they're worth in U.S. dollars. This system can be fragile if a government becomes unstable.

Hyperinflation can occur when a government prints too much paper money, causing people to lose faith in the money. A dollar is no longer worth a dollar in gold.

The government's decision to print more money can lead to a decrease in the value of the currency, making it harder to afford everyday items.

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