Bitcoin Forum

So I'm slowly working to a solid understanding of economics and I've got most of it down except one thing that I can't seem to answer:

What gives a fiat currency its initial value?

Let's take the US dollar for example. When the dollar was first issues after the founding of the Federal Reserve, what decided what its purchasing power was? Was it some arbitrary number set by the Federal Reserve? Was it a collusion between the US central bank and others around the world?

Thanks!
Rage

Coercion and credible threat of force/violence.

Bitcoin is not backed by any state or entity with access to taxing power, central authority or a military,
so there is nobody to protect it or forcing people to use it.

BTC price against fiat currency is solely determined by demand (and speculation).

Thank you! That basically answers my question and is actually what I suspected.

Just to add to Jack of Diamonds response, fiat currencies are backed by coercion and thread of violence, like he said. But usually the population does not accept a monopolly on money easily (we do because we are very used to it and have not seen anything different, hopefully Bitcoin will change that), so what governments usually do to impose a fiat currency is to slowly regulate and ultimately monopolize the existing majoritary currency.

Usually gold and silver is used as currency spontaniously, so the government starts by declaring gold and silver legal tender. Then they start emiting notes supposedly backed by gold and silver, until people is used to the paper and they can break the link with gold and silver. This sequence is a extreme simplification and there are particular variations in every case, but still its quite accurate of what usually happens over decades.

the barrel of a gun, unfortunately.

Contrary to the posters above, it is always the market the sets the value.

Historically, during gold/silver standard, currencies were just a title to some weight of gold or silver. The value of currency was linked to commodities value.

Currently, when currencies are not backed by any commodity, it is also the demand and supply of money that sets the price. The supply of money is to some extent (but not completely) controlled (one may say "manipulated") by the central bank, by the demand is not and the market entities decide whether it is worth to hold the currency given this price or not based on interest rates, central bank/government trustworthiness, economy situation, etc. Sometimes central banks try to fix the value of currency (or rather fix it relative to something else). That can be successful if the supply side of the money is carefully controlled. But if the market value would have been different, quickly a black market will appear with a different price.

This is false. The demand for government currency is not a voluntary act, but due to the regulations imposed by force by the government.

There is some market action that set the value of the currency, but certainly is not a free market outcome, it a completely regulated outcome.

Acceptable for paying tax.

All this barrel of a gun stuff is exactly the same as what protects private property. Law.

The full faith of the government, which provides a useful service to the society: a commodity specifically designed to facilitate trade. Fiat money is in theory superior to precious metals and societies should switch to fiat currency naturally, not due to coercion.
As all things related to government, it can go wrong in two main ways:
- democracy fails because access to power is severely limited, say by a closed plutocracy that derives wealth from monetary control
- democracy works but the average voters don't understand economics

In most societies these days a combination of the two problems make fiat money fail to meet it's theoretical potential.

I concur.

Interest rates.

I believe this is an incomplete explanation. In order to survive the government has no use for pieces of paper, it needs to derive wealth and resources from the society  it controls. The government will always trade your taxes for goods and services at least as fast as you can pay them.
Denominating taxes in a specific monetary unit creates supply of that unit, usually oversupply (inflation), not demand. As any good with oversupply the value falls fast, so being acceptable for paying tax does not give value to fiat. If you have goods and services, say denominated in another, better, currency, you can always buy the tax currency on the cheap.

To actually give value to it's currency the government needs to refrain from spending it, it's not enough to require it for taxes.

Not only acceptable for payint tax. Also, legal tender laws, which is basically a violation of the right to contract.

But even if you believe in taxes, why should the government only accept one currency for paying taxes? Why not charge 30% of your wage, whatever that wage is payed on? History is full of examples of governments payed in different types of currencies.

The requirement of having taxes payed in only one currency, the government one, comes from the same objective as legal tender laws: create a currency monopolly.


Defending yourself, is not the same as agression.


Sorry, this is nonsense by definition. If a currency is not imposed by force its not a fiat currency. Its the definition of fiat currency.


Wrong again. People need the currency to pay for taxes, therefore creating a demand for the currency. The fact that governments abuse the currency and supply overcomes demand does not mean that taxation creates supply and does not create demand.

BubbleBoy if you continue this way I might have to take away from you the title of most interesting troll of the forum.

Indeed. As the state is its taxes, it will defend itself should anyone attempt to deprive it of taxes. I have a problem with taxes when the state imposes itself overmuch upon the citizen, and when the state spunks itself on bombing foreign nations or serving the interests of powerful cliques that have co-opted it to their own purposes. For this reason democracy, education, individual rights and the devotion of the state to all those that would pay taxes are important to me.

Furthermore if a person deprived of opportunities and dis-enfranchised from the economy were to engage in theft to support themselves, the agents charged with the protection of private property can come down very hard on that person. I consider this aggression, in a system were people have no other recourse to survive.


Here you seem to be saying anyone who doesn't agree with you is a troll, and anyone whose arguments you find challenging to your own position is merely an interesting troll.

I have never called you a troll.

Challenging? Saying that fiat currency, defined as a currency imposed by force, can exists without force? That is challenging? You know you are on the wrong and you are just trying to make it personal (and derail the conversation talking about property rights). Answer to my arguments.

I guess it depend on whether you believe democracy is a valid way to agree on societal issues. Libertarians and anarcho-capitalists reject democracy as violence, and I don't want to open that old debate. The use of a stable fiat currency sure does seem to correlate well with being a successful society, and in the end people will vote with their feet - and that too is a form of democracy. I hear Somalis put good price and gold these days ;)


Taxation is a process, not an event. If the govt. wants 50% of the potatoes you produce at your ranch, they will get it, and it makes absolutely no difference if those potatoes cost 1 govt monetary unit or 1 billion. Sure, taken in isolation, the act of you selling potatoes and paying tax will create demand. But since throughout history the supply of govt money was always higher than the demand, we can safely conclude that the tax process, the process by which govt derives wealth from the productive society, does not give value to tax money. That's why I'm saying "being acceptable for tax" is an incomplete explanation for the value.

Wrong again. Fiat currency is a currency imposed by force. That is its definition. What you are arguing now is the morality of the use of force, but whatever your opinion on this moral issue, your statement saying that fiat currency can appear without force is still wrong.


Its the other way around. Fiat currency (and also democracy) always happens at the end of civilizations. And sadly, history shows that societies almost never scape from the collapse that fiat currency brings about. Once the inflationary forces are in motion its very hard to scape. The collapse can last decades or even centuries in the case of something as big as the Roman empire, but almost never there is a way back.


Well, Somalies are better off by a big difference in anarchy than with the previous socialist government they had. And you can check this with the data from the ONU and other international organizations.


You are trying to justify the unjustificable. Government spending creates supply. Government taxation creates demand. Then there is a process with relations and consequences, as you say, but it does not change the fact that government spending creates supply and government taxation creates demand.

Democracy is not use of force.
Supply and demand does not give value. Only certain relationships between supply and demand give value.

It's not personal, just telling you how you come across with the troll statement. Indeed, answer to the arguments.

If you think force is the defining element of a societies laws, then your outlook strikes me as overly reductionist to say the least. To me, libertarians, an-caps and people with even worse political ideologies often sound as if they would like the world to be far simpler and less complex then it is, so that their arguments can seem to make sense.

Dont try to redefine force. Democracy includes the use of force. But this is not about democracy. Its as simple as saying that you were wrong when you said that fiat money, that is defined as a currency imposed by force, could appear without force. Its false by definition.


Yes, suply and demand does not give value to an object. That is correct. So?


Yes, this personal opinion is your default mental refuge when a logical argument that contradict your views is presented. You are still not answering. And btw, I dont think force is the defining element of a society law. Tradition or emergent social arrangements (however you want to call it) are an important part of law. But all of this does not answer the issue of the currency.

Emergent social arrangements, like state, government and taxes for instance...

By the way, I beleive there was a time when something called the Tally Stick (http://en.wikipedia.org/wiki/Tally_stick) was fiat, and used to pay taxes. Eventually the bankers managed to overturn the Tally Stick system and replace it with gold fiat instead. The bankers like gold and always have done, because it's easier to control than notches on sticks I guess, warehousing the stuff is after all how bankers started out...

Your definition is wrong. Fiat money is the rational choice of democratic societies (*. Democracy does not require the use force, take for example consensus. Therefore, fiat money is not imposed by force.
If I and my beer buddies agree to settle our drinking debt by marking it in a notebook, we've just created a rudimentary form of fiat. No force required. The notebook has no intrinsic value and is not a binding contract, yet the full faith of the participants give it value.

(* that is, if your renounce 100 year old economic fallacies, and come to accept mainstream economics; I have't expanded on this point and don't intend to in this thread.




So by connecting the two quotes, you are agreeing with what I said all along, that using a currency for tax purposes does not give it value.

I had enough of your trolling for today. Another day more.

The original poster is asking what gives fiat its initial value.

In the United States, the market set the initial value of currency. Originally, no force was used on the American people. They used British pounds and other currencies even after the revolution. Americans were not "forced" to use dollars. See A Midwife's Tale, a diary by Martha Ballard (1734-1812) who details among other things, every trade and purchase she made in the last 27 years of her life.

Other countries may have used force to initially impose currencies, but not in the United States.

What gives a fiat currency its initial value is the legal and social infrastructure surrounding its use, including but not limited to taxes. Legal tender laws generally don't directly force you to actually use legal tender except in the case of a debt. If you offer to pay off a dollar denominated debt in something other that "legal tender", that party can successfully argue in court that you refused to pay. In some countries including mine, even small denominations of the national currency are not considered legal tender in larger amounts. You can opt to accept them but you don't legally have to.

I don't have a car, but if I did I would undoubtedly be incurring more dollar denominated debts at least temporarily, at minimum some recurring insurance cost which becomes mandatory for me to pay. Essentially this amounts to a private tax. If I was a good/lucky enough driver I could go decades without an accident and I would still have to pay towards others' claims and the company's operating costs and profits. Insurance companies could opt to accept something other than money (or credit) as payment but there seems to be nothing compelling them to do so at the moment.

Alternatively I could use gov't monopoly public transport, and pay fares that increase faster than inflation in spite of considerable subsidies because the union is constantly striking for more money and doesn't have to worry about competition from people who might do the job a lot cheaper. Or I could walk or bike for free aside from food and general wear and tear, but I'd better look out when using or crossing public roads because someone who kills me with a car through their own fault could quite easily get off with no legal penalty. Even in a small car I'm still at a safety disadvantage because essentially "might makes right" for heavier vehicles when law enforcement is not physically present.

In a real sense there is nothing forcing me to get a car, but anyone who drives their own vehicle in a country where insurance is mandatory incurs debts that pretty much have to be paid in legal tender or credit, unless they break the law and drive without insurance. To fuel the car, if you know somewhere you can buy gas with silver or something then great, but I know of no such place near me. Unless you arrange something before filling up at a gas station, you incur a debt that must be paid with legal tender.

Aside from transportation, it's certainly quite possible to eat without incurring any debts or making any form of payment to anyone. On the other hand, arranging shelter without owing rent or property taxes to anyone is likely to make life quite difficult for anyone who doesn't have some benefactor covering those costs, unless they are free to build somewhere on public land without anyone bothering them.

In some ways using the "coin of the realm" is optional, but in practice most people would find life quite difficult if they exercised their option to avoid using it whenever possible. Taxes are supposedly unavoidable but they can only really be enforced when you are documented to have earned or spent money, or if you own something subject to an ownership tax such as real estate. Owning as little as possible is one way around that but for many people the option is unappealing.

If you profit on a stock sale you are forced to pay US dollars as tax.
If you profit on a gold bar sale you are forced to pay US dollars as tax.

If you generate any sort of economic activity involving any sort of tangible or intangible goods (such as Tibanne Ltd that exchanges bitcoins), you are forced to pay US dollars as tax (or in the case of Mt. Gox, Japanese yens).

Failure to pay those taxes gets you dragged out of your house at gunpoint if necessary, and imprisoned.
How is that not forcing people to transact in, and own fiat currency?

Canadian dollars in my case, but ok.
You can only be forced to do so if there is a record of the transaction taking place. You may be legally obligated to pay taxes after selling some gold to your buddy, but that doesn't necessarily mean the law is enforceable in that situation.

So you basically say people are not forced to use fiat, because they can violate their "legal obligations" ?

You can also sell firearms off-the-record to a 'buddy' or a shady character, even if a license or transfer fee is required by the ATF.
You might grow pot at home, sell it to some friends and not tell anyone about it because it's 'harmless'.

You are still taking a risk of imprisonment every time no matter how small you perceive the risk to be.

I'm just drawing a distinction between being forced to do something and being potentially threatened with force. You could say that in 1933 all US citizens were "forced" to give up their gold, but in reality they did not all do so and the coins are still around to prove it. If you are a law abiding citizen and categorically refuse to pay capital gains taxes, you do have the option not to perform trades that would result in you owing such taxes.


No argument there. Life is full of risk though.

Before reading this topic, I was under the impression that taxes, collected by force if necessary, is what gives fiat money its value. However, it seems there is a debate about whether it is taxes or force that is most responsible for the value of fiat money. Anyway, I think it is possible to build hypothetical scenarios where either force is the reason a fiat currency has value or taxes are the reason for the value.

An example of force giving fiat money value is easy. Imagine a society where there are no taxes but the government can print up new fiat money at will. If the government forced everyone to use the currency for all transactions then the currency would have value purely by force without requiring any taxes.

An example of taxes giving fiat money value isn't so easy but perhaps it is possible. Imagine a society where the government decreed each citizen should pay a head tax using government issued head tax coins. Paying the head tax was completely voluntary, but people who didn't pay the head tax would have their name posted for everyone to see including voluntary government employees such as fire fighters, police, snow plow operators, pot hole repair people, etc. These voluntary government employees would receive head tax coins as payment for their public services. The public display of people who didn't pay the head tax would also be seen by family members, social organizations, places of businesses, patrons of business, employers, employees, etc.  In this example nobody would be forced to pay the head tax and nobody would be forced to us head tax coins as currency. However, I believe the head tax coins would be government issued and would be valued as a currency. Would the government issued head tax coins be considered fiat currency? If it were considered fiat currency, then it would be fiat currency that got its value without force.

Both are the same thing. In the present system what gives fiat money its value is that they are the only means to pay taxes (collected by force or thread of) and legal tender laws (same).

In general fiat currency is defined as a currency imposed by force, usually by governments. In the present system the specific mechanism are the two noted above.


In this case said organization is not a government (it does not imose monpollies by force) and the currency is not a fiat currency.

Aside from taxes and and certain types of debts that may not be strictly voluntary, how do legal tender laws impose anything on someone who hasn't willingly incurred a debt?

It destroys your right to contract and makes it useless to create a contract in a currency that is not the legal tender one. Imagine that you sign a contract with me: You do some task in exchange for me paying you 3oz of silver. Now you do the task, and when I comes to pay you, I tell you that Im not going to pay you with silver, but with fiat currency. You dont agree and you demand silver because the contract specifies it. Your only option now is to take me to court where the judge will force you to accept fiat currency to settle my debt with you. You see there is no point on setting the contract in something that is not legal tender since you are going to be forced to accept it anyways.

This is a big incentive towards not using any other currency. Add that you can only pay taxes with fiat currency and you have a de facto monopolly.

I see the point you are making in this topic and agree that if you analyzed all fiat money around today you will ultimately find that force is ultimately the defining feature that gives today's fiat currencies value. However, pursuing my hypothetical scenario further, what if this same said organization also forced people to pay a different tax that was mandatory and that could only be paid in gold and the tax revenue paid in gold was used to fund the enforcement of various government imposed monopolies. This said organization which is clearly a government that imposed monopolies by force could also still issue the head tax coins that nobody was forced to pay, use, or accept. Would these head tax coins still not be considered fiat money?

Yes. In that case, and only in that case, that gold money is fiat money.

The thing is governments try to avoid using gold as money because they can not print it. They only adopt gold as fiat money, because gold is what people was alreaady using and it is a way to get people used to a government money monpolly. Then later they go slowly breaking the tie with gold. History is a bit more complicated than this, but it is a good basic idea of what they do.

My question about something being fiat currency wasn't directed at the gold example, but instead at whether you thought "head tax coins" in my hypothetical scenerio were fiat currency. The only reason I brought the gold example into this hypothetical scenario was to convince you that my "said organization" was a government that clearly imposes monopolies by force. The government clearly uses force in the gold example, but the same government would not use any force for the head tax coins. Basically, I want to challenge your definition of fiat currency being a currency imposed by force by bringing up a counter example, the government issued and completely voluntary "head tax coins" that have no commodity value, no representative value, and the only value would be derived from them being able to be used to pay a voluntary tax to the government. Nobody would be forced to pay the head tax, use the head tax coins, or accept the head tax coins. Is the hypothetical scenario of head tax coins an example of a fiat currency that is an exception to your requirement of fiat currencies needing to be imposed by force or are these head tax coins viewed as something else by definition like merely government issued tokens that people happened to use as currency? I'm just trying to understand what makes something a fiat currency, and I am not convinced force is theoretically required 100% of the time by definition.

Then the answer is no, its not a fiat currency, but I think you wont find an example in history of such a thing because it does not make sense. Why would anyone would accept that currency? And why would the government create that currency if it does not benefit in any way?

Thanks for following my hypothetical. I guess I'll go with the definition that fiat currency is "by definition" currency that is declared by government to be legal tender which ultimately goes back to your insistence that force is part of the definition. I guess it takes more for something to be a fiat currency than for it to be issued by government, not be redeemable for any commodity, and to be accepted as payment of taxes. I agree my hypothetical head tax coin currency is unlikely to happen, but I think social pressure has the potential to give something like head tax coins value. Of course, a publicly displayed list of who has paid or who hasn't paid their voluntary tax would be important.

Valid points but additional clauses to a contract could assign a penalty to settling the debt in cash. Either way it's quite possible that, rather than getting paid in unwanted fiat, I might never get paid at all, even if I had the resources to take the matter to court. If all of a sudden you just disappear off the map and I have no way of locating you, the smartest thing for me to do may just be to eat the loss and try to be a better judge of character in my future dealings. It may not be fair but it's a reality whether or not we have the "safety net" of the court system.

what no one seems to be realizing in this forum is that fiat currency gets its "initial value" in the same way as any currency, and that regulation and taxation are neither necessary nor sufficient to explain its value. (Of course they aren't, if you put any stake in the idea that bitcoin has value!) There has been a lot of research on this subject for decades, and there are many different theories on what gives fiat it's value, including the state theory to the commodity theory. The commodity theory says that currency such as fiat which has no intrinsic value (this is actually the central concept behind the definition of a fiat currency), is valuable only as an intermediary between other goods, i.e. because it is expected to be tradeable for another asset in the future. Consider an economy of three people: A, B, and C. A has something B wants, B has something C wants, and C has something A wants, so that if they were to trade in a circle, the total utility of the economy would increase. However, assuming that all transactions in the economy must be pairwise (an exchange between two parties), there is no way to actually make the optimal trades in this economy, since there is no coincidence of wants. Now suppose we introduce a fiat currency into the market by giving it to one of the people. This extra degree of freedom allows for the 3 parties to complete their trades in pairwise exchanges, and increase the total utility of the economy. This increase in total utility is exactly the value of currency.

That is really the simplest answer to the OP's question. Of course, that oversimplified explanation has its problems. Most importantly, there is the built in assumption that the other people in the economy will accept the currency. It isn't rational to assume this, so it seems that the commodity theory of currency value, while sufficient to explain the VALUE of currency, is not sufficient to explain its existence, which I think is an important distinction to make. This is where the state theory comes into play.. the regulation and enforcement of this currency provides the requisite trust system that allows for the currency to take hold. However, this idea is also considered a vast oversimplification. There have been other ideas proposed that would allow us to get around this trust problem without the use of regulation and law enforcement.  You see, the main problem in the example with only three people is that after the first two trades have taken place, the third person will not be able to trade the worthless currency with anyone, everyone else has already received what they want, and no longer have interest in the new currency. This disadvantage for being the last guy "holding the bag" is precisely what destroys the viability of the currency, since there is no way of knowing if you will be last. A theory proposed by (Kovenock and De Vries, 2002) gets around this problem by making the number of players in the economy sufficiently large, though still finite.  This theory says that if the economy is large enough, there is a very low probability of being the last person holding the currency, and since you know that all of the other parties know that as well, your expected utility from using the currency outweighs the uncertainty about being the last person holding it. It has been proposed that this type of model is exactly what gives bitcoin currency value despite its lack of regulation or instrinsic value. Or said differently, the thing that gives a currency its "initial value" is simply the fundamental utility argument above, provided a sufficiently large core number of people trading said currency.

To sum up, I think it is kind of ridiculous that in a forum about bitcoins, where people assume that a currency can have aggregate value even if it is instrinsically worthless and has no regulation, almost no one has stopped to think that largely the same forces are at work in fiat currency. Yes, of course government can use force to make you pay your taxes, and that this kind of aggression can alter the value of the currency. But that is not what the OP asked. The OP didn't ask what forces us to use one currency over another (regulation/taxation), or what causes the value of currency to be stable (regulation), or what causes currencies to be homogeneous within a certain nation-state (taxation). As some posters have pointed out, there are many examples, such as the USD, of currencies that started out without strong legal enforcement, and there are countries without taxes, like somalia, which still use currencies. Does it really seem plausible that fiat currency and digital currency like bitcoin really derive their value in completely, fundamentally different ways? Of course not. Yes, bitcoin is radically different, but it is still a currency and the way it derives its value is fundamentally the same as fiat. All of the posters here who claim that the only reason fiat has value is because someone tells you at gunpoint that it does are really just fueling an "us and them" mentality while ignoring the hypocrisy of turning around and saying that bitcoin is valuable without regulation or taxation.

personally, i think it is the pointing of guns which creates the "us and them" mentality.  as well it should.  otherwise, i found that post most excellent - thank you.

I didn't see the correct answer. I had to stop reading by page 3.

I think the correct answer to OPs question is direct convertibility.

Nigel Farage gives a pretty good account of fiat currencies in his book The Ascent of Money

Notes, currency, were first circulated as "warehouse receipts", circa 1600's if i remember correctly.
People wanted to safely store their gold and silver. The warehouse aka "bank" gave them a receipt.
Rather than go claim their precious metals before every purchase, people found it more convenient to just hand over the receipt itself. They handed over the ownership claim to an amount of metals stored in the warehouse. This is how paper money was born. (ignoring chinas story that goes back earlier but is unrelated)

Unfortunately unsavory characters realized that they could create more receipts than there was metal backing for and then lend the receipts out at interest. This process is inherently risky and precious metal bankers are truly skilled people at matching lenders with borrowers. Unfortunately, like most humans, greed won out and the warehouse operators realized they could apply usury with receipts to defraud their customers. There bankers used paper receipts to match lenders and borrowers.
Fractional reserve banking was born. By which characters of what descent is for you to learn about. When one factors in that bankers harmed millions of people... well it changed my understanding of history.

Certain families grew wealthy thru this form of fraud.
Others didn't manage their receipt creation so well and were subjected to warehouse runs.

The founding fathers of the American colonies knew the evils of paper money. It was first introduced 200 years before their time. This was plenty of time to see multiple warehouse runs, booms and busts (tulips for example as people wanted to get a return on their inflationary paper)

The United States has had three central banks.
The first is hardly known to us today unless one is a avid student of history. The first note circulated was called "the continental" which gave birth to the phrase, "not worth a continental", https://en.wikipedia.org/wiki/Early_American_currency

The 2nd central bank was shut down by President Andrew Jackson. The famous quote this central bank gave birth to is "You are a den of vipers and thieves. I have determined to rout you out and, by the Eternal, I will rout you out!"
Also something along the lines of "you bankers tell me that if I shut down the central bank 100 families will starve and it will be on me, but if I dont shut down the bank, 10,000 families will starve, and that will be on you." Then he went on to call them snakes.

Finally in 1913 we have a secret meeting on Jekyll Island between Senator Aldrich and other cronies.
The result of this meeting was a plan to again give a private bank a government sanctioned monopoly over money creation.

If i remember correctly, prior to 1913, there were state banks and private banks acting as "warehouses". They each issued their own notes. This led to problems of acceptability outside of a certain range, also this led to multiple "wildcat banks".
They open up, take peoples real metal money, they issued receipt notes, created notes without metal backing, lent these notes, people exchanged for metals and the last ones to arrive found the warehouse empty, and the warehouse bank went bust leaving everyone holding the bag with useless notes. Mt.Gox is a modern day wild-cat bank!!!. The warehouses were the very first exchanges. Literally exchange the receipt note for real money. They stored real money and gave out receipts. Then they defrauded their customers by issuing more receipts at interest for which there was no metal backing.

There was no limit to the amount of receipts printable.

Even if US citizens were aware of this... As many posters before me said....  once 1913 hit.. it was the barrel of a gun that forced acceptance of the warehouse notes.

The US dollar was originally backed by physical assets. Then once people were psychologically conditioned to use  paper as currency, they left the gold/silver standard and just went on printing. This will one day be understood to be the biggest scam in the history of the world.

There is only one thing that gives any currency (include fiat) its value, and that is: public acceptance of the currency as means for payment to buy crap. If, for example, Americans all of sudden decided that they will not accept the USD as payment for stuff, then the USD would be worthless.

Therefore, the real question is: how do you convince the population to accept a currency as payment?

You force them to pay their taxes in USD. 

There is one little problem with the payment of taxes as an argument for giving fiat currency its initial value. Tax authorities have taken all sorts of things over the centuries for non payment of taxes. Here is just a small sample from the US Government. http://www.treasury.gov/auctions/IRS/index.html (http://www.treasury.gov/auctions/IRS/index.html). My favourite example is brothels https://en.wikipedia.org/wiki/Mustang_Ranch (https://en.wikipedia.org/wiki/Mustang_Ranch). Are brothels a form of fiat currency in the United States because the IRS seized one?

Well in the case of the almighty dollar I'd say it was gold and silver, now however not so much. 

I believe having  healthy circulation system and the cap is also another important role in that too

Taxes didn't give USD its initial value. But in the present day, taxes insures a demand for USD

pizzas!

Magic words give every fiat currency it's initial value.
"I ....... promise to pay the bearer on demand ........."
If enough people believe it then its game on.
 

 

the dollar started as a receipt for gold thus its value was the same as the value of gold you could get for it.
over time to finance public works and war the government started printing more dollars and eventually had to give less and less gold per dollar in existence (they couldn't print gold to back up the paper).
eventually in 1971 the government had so little gold and so much paper in circulation that it had to stop redeeming paper for gold altogether.
since then more and more paper was printed the the purchasing power is declining ever since.

No it didn't. The dollar was merely a weight of silver. Later on they fixed a specific silver to gold ratio, which led to redefining the dollar in terms of gold. The government has always fucked around with what money was, namely in the interests of the usury(capitalist) class centered in New York. Gold was replaced with the government bond as a "risk free asset". Essentially the Fed and the Treasury began engaging in check kiting in the 1920's. By the 70's this scheme was fully accepted.

"Fiat" is not really fiat. It is in places like Zimbabwe, however in the US it is credit money. Every single credit dollar in existence is backed by collateral. The federal reserve asset column consists of mainly US government bonds. What are US government bonds? These are future claims on the sweat equity of 310 million Americans. So every dollar the fed lends into existence is collateralized by the future productivity of American's which will be extracted via taxation. Now ask yourself, does future productivity have "intrinsic value"? Of course it does.

Do you understand this concept? It is not  by decree. It is not by coercion. It is by DEBT. The collateral "backing" the credit(dollars) gives them value. If the collateral is of poor or dubious quality the value of the dollars decreases(inflation). Total debt + interest also exceeds available dollar credits in existence, this places an almost perpetual BID for them. Someone in the economy is constantly in need of dollars to repay old debts.

Commercial banks essentially produce dollar derivatives. They lend out claims to federal reserve dollars, every-time you get a loan for XYZ. What are those claims backed by? The collateral you post(house, car) and your sweat equity(income). When these institutions engage in counterfeiting of credit you get inflation.

For this system to work it requires perpetual economic growth, as new wealth must act as collateral for new loans. Hence the obsession with constant GDP expansion. Obviously, this is impossible. The economy never grows as fast as the rate of interest. This places a certain class of people(usury) to essentially rent seek. When the economy can no longer produce new wealth fast enough they simply begin recollateralizing existing assets. Ie homes, stocks, education, sweat equity gets revalued(hence inflation occurs). Anything that can be borrowed against must rise in price in perpetuity to expand the total debt pool. When this system begins breaking down 2008 happens.

Hyperdeflation will occur before hyperinflation.

The end game is when you cannot trade a US government bond for gold. Meaning there is no exchange rate between Gold and US treasuries. No bid. That is when the credit dollar system implodes. We are still far away from this scenario, and it does not have to happen. Also since the majority of global fiat currencies are pyramided off of the dollar, the USD will be the LAST to fail. So betting on the US dollar to collapse, you won't survive the journey.

Bitcoin will also be next to worthless under this scenario. Why? Because bitcoin requires a sophisticated civilized society to function. It requires electricity, high bandwith, communication, smart phone networks. Under a fiat collapse trade essentially grinds to a halt, multilateral trade turns into bilateral trade ie BARTER. The last thing people will be concerned about will be some virtual units on the internet that have no value outside of their exchange. All of you hoping on a fiat collapse, are essentially cheering on your own misery.

 

this is not true, the dollar has no collateral backing it, not even government bonds (who are nothing but papers as well anyway), commercial banks are allowed to create as much currency as they want they don't need any government bonds to back that currency.

+1 great post!

A generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.

Generally speaking, each country has its own currency. For example, Switzerland's official currency is the Swiss franc, and Japan's official currency is the yen. An exception would be the euro, which is used as the currency for several European countries.

Investors often trade currency on the foreign exchange market, which is one of the most heavily traded markets in the world.