Concerns about this ‘fiat’ monetary system are the source of constant constant debate on the internet. And the question popped up at me again over the weekend:
“How Long Will This Fiat Monetary System Hold Up?”
So here is my take:
The monetary system, fiat or otherwise, will hold as long as we have reasons to trade between ourselves, and as long as we all generally accept that currency as a form of settlement…
The thing is: money is just a medium of exchange – and if the last half-century has proved anything, it’s that money doesn’t necessarily need to have a fixed value in order for it to function as a really good and really efficient medium of exchange.
But that’s not really the answer that you’re looking for, is it? It sounds as though you, like many people, might prefer to have money also hang on to its role as a ‘store of value’.
And if that’s how you feel, then fiat money seems weird – as though it’s all just an illusion, and it will all just collapse when everyone ‘wakes up’ to the fact that money is all an illusion. Or something.
The trouble is that this entire question is existential. Alternatives like the ‘gold standard’ are also illusory, because it ties money to a historically-selected yellow metal whose primary use is decorative, and if everyone ‘woke up’ to the fact that the metal is just another metal, then everything might collapse.
If it helps, just remember that everyone has a vested interest in maintaining a fiat monetary system. Investors and lenders do not want their investments debased – and most creditworthy borrowers do not want the instability that a debased currency would bring to their businesses. In short: fiat monetary systems work because we all want them to.
It’s only when you get madmen at the helm that you get the madness of hyperinflations…
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Rolling Alpha posts opinions on finance, economics, and the corporate life in general. Follow me on Twitter @RollingAlpha, and on Facebook at www.facebook.com/rollingalpha.
