To understand the word fiat in relation to money, we need to establish first in a compact way what came before. In history, and also in these days when money systems break down, many things could be money, meaning stuff that gained some extra value compared to its use value, just because people wanted to hold it in reserve. But when gold and silver is available in the market, these tend to be used.
When the gold owner leaves his gold with a storage facility, he owns it, he decides when it is going to be sold or rented out. It can be sold in place, but this is the same as gold used as money, even if it depends on the storage facility.
The gold can also be stored, but each piece not allocated to a specific owner. The receipts circulate the same way as with the allocated gold, but this I will call a money system fully backed by gold.
In the classical gold standard, the storage operator issued more receipts, and a common conservative rule was to issue three times more receipts than the backing. In itself a bit dangerous, because you never know when the market starts to distrust the money manager, and such distrust can come from changing economic conditions. It is difficult to withdraw the paper from the market, because the added money units was of course spent. The money manager, who profited from it, regarded it as a splendid system. The note owners under the classical gold standard had the right to go to the bank and get the amount of gold promised. Everyone could not do it, because there was only about a fourth of the necessary backing, which was the source of varying degree of trust in the system.
At some point, the mistrust would take over the minds of the note owners, and they would create a run on the bank, the money manager, who could be the state itself. The value of the paper money would diverge from gold. A private bank would just go bust, but if it was the king (in any form, including a republic or a democracy), the king would first declare that the paper was worth exactly as much as the gold itself: A mark is a mark is a mark. A dollar is a dollar is a dollar. In addition, the king would create hurdles for exchange, require paper in its own business (taxes - the robbing business), and on money movement over the borders.
But in addition to that, he would intrude into private contracts, declaring that even if a payment was agreed on to be in gold, it should mean paper, and this was included in the laws. (This is the reason that land rents agreed on a hundred years ago, now seems laughably low. The contract was to be paid in gold, either implicitely, or expressly written, and there was of course no inflation adjustments. Resolving conflicts regarding these contracts continues to this day).
After some time, when the gold and paper money separated completely, no one would conflate gold and paper, the difference is obvious. (Although since the fiat laws still exist, making a contract with payment in gold could be somewhat risky, but if you expressed the amount in grams or troy ounces it would probably walk around the fiat law).
So the decree was appeal to trust in the sovereign, appeal to morals and support of the country, intrusion into independent money changing trades, raising walls for money movement, the tax payment requirement, and the intrusion into private contracts specifying gold as payment. Later these points became irrelevant, and it is more correct to call it a fiat moment, when the classical gold standard fell, the modern money is best called national paper money,
The austrians want free market money, and it seems we have had it all the time, because the state can not really decide, it is the savers and traders who decide what money to use, it has always been. Had I known this when I was young, it might have made a difference.
[link] [comments]
source https://www.reddit.com/r/btc/comments/988nyb/the_meaning_of_fiat/
Comments
Post a Comment