What Are the Top 3 Things People Get Wrong About Cash?

Misconception #1: Fiat is Backed by Gold (Or Anything)

The cessation of the gold standard introduced governments’ power to regulate the value of money – the fiat standard. Let’s first have a look at the characteristics that make up any given money. Those characteristics are durability, portability, divisibility, uniformity, limited supply, and acceptability. On the fiat standard, the trait of limited supply is thrown out the window. In the past, money backed by the limited supply of gold constrained governments’ ability to expand their national money supplies, which limited their ability to stimulate the economy in the case of adverse events. Modern economists commonly agree that the gold standard artificially prolonged the depression of the 1930’s for this reason.

If money was backed by gold before, what is it backed by on the fiat standard? Given that fiat currency is a legal tender solely because it is declared so by a government, the stability of that government and the associated national economy then become the backing for it. This implies that any unit of a fiat currency is a government guaranteed IOU (I owe you) that they support its value. Ultimately, money is money only because it is commonly agreed upon to be so. Therefore, if a population commonly agrees to trust a government, then that government’s fiat can take hold as money.

Modern economics is premised on the idea that the volume of the monetary supply can be increased or decreased to stabilize an economy in response to the market. This practice has demonstrated its merits, but has historically never proven to be a sustainable option.

Misconception #2: Fiat Never Dies

“Paper money eventually returns to its intrinsic value – zero.” These are the words of the French philosopher and writer Voltaire who lived during the 18th century. You may be surprised to hear this insight originated so far back in history. Not only does Voltaire’s quote illustrate how antiquated the fiat standard is, it reveals that this is not the first time humanity has been in this position. According to historians, the first fiat currency was created by China in the 11th century after they ran short of copper, and was continued into the succeeding mongol empire of Kublai Khan. Marco Polo, the Venetian traveler who observed Klublai Khan’s empire, had this to say about fiat:

“All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver… and indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan’s dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold.”

— Marco Polo, The Travels of Marco Polo

The first fiat to have existed, known under Kublai Khan as “jiaochao”, eventually met its demise due to hyperinflation.

The fate of the jiaochao has turned out to be a prophecy that would plague each fiat to have existed thereafter. Have a look here for a list of more than 500 fiat currencies that have lived and died; succumbing to war, obsolescence, hyperinflation, and the like.