Traditional national currencies such as euros, dollars or rubles are called fiat or fiat money.
Sometimes we can find it identified as paper money or inconvertible money.
What does fiduciary mean?
According to the fiduciary RAE, it has 4 meanings, of which the first 2 already make clear what this adjective applied to money means, especially to a specific currency.
From lat. fiduciarius.
- adj. That depends on the credit and trust you deserve. Fiduciary circulation.
- adj. Right Said of a business or a contract: Based mainly on trust between the parties.
And what does this adjective applied to a coin mean?
- F. Econ. Currency that represents a value that intrinsically does not have.
Fiat money in the XNUMXth century
This article is not intended to be an essay on money as we know it, or even a summary of its history, but it is intended to recall a couple of important milestones that cannot be overlooked when talking about fiat money.
Throughout history, money had an intrinsic value, that is, the coins of each specific currency were worth the same as the material from which they were made.
This is obviously why the gold doubloons were worth more than the silver doubloons.
Right now this is impossible, since the expansion of human society has been brutal and the amount of fiat money in circulation is stratospheric. In fact, it is currently impossible to measure and know how much fiat money there is.
The opposite of fiat or fiat money is commodity money, where the value of the currency is determined by the material from which it is made.
Globally, we have operated with merchandise money for centuries and it has been just in the XNUMXth century that this form of money was eliminated in day-to-day transactions and even for high-volume commercial transactions.
This transition was not by chance, nor did it happen overnight.
Fiat money had been invented for a long time but it was not the most widely used form of money, since for this you had to trust third parties, who also benefited from others using fiat money.
The beginning of the end of commodity money
With gold you should not trust another person to guarantee the value of what you have.
Nor do you depend on a central power entity (bank or state) to issue or prove the authenticity of that money.
Unlike fiat money, it retains its value over time.
It all started when the American Federal Reserve (FED) was created in the early 23th century on December 1913, XNUMX.
The Fed was created to avoid major financial crises and to ensure that the economy is removed from political power.
However, it is curious that with these two very ambitious missions the FED is a private entity (and in theory autonomous from the Government) and was created in secret by representatives of the largest private banks of the United States at that time.
The creation of the American Federal Reserve (FED)
One of the most decisive meetings to create the FED took place in what is already known as the Jekyll Island Club, a select private club of businessmen (bankers and big businessmen)
The private meeting that has been left for the history of fiat money took place on November 22, 1910, and as known the following people attended:
-Nelson Wilmarth Aldrich: Businessman and banker. He had different political positions of weight, among them Senator, at the end of the XIX century
-Frank A. Vanderlip: National Bank of New York (Rockefeller partner)
-Henry P. Davison: JP Morgan Senior Partner
-Benjamin Strong: JP Morgan representative
-Charles D. Norton: President of the First National Bank of New York
-Edward M. House: Coronal of the US Army and subsequent adviser to Woodrow Wilson, 28th President of the USA
-Paul Warburg: German-born American banker. Representative of Kuhn, Loeb & Co.
The reasons (or the excuse) for the creation of the FED were short-lived and the crash of 1929 showed that the failure of the system was a structural issue, they closed the Jekyll Island club and dedicated themselves to maintaining their fiduciary business; and so until today.
The end of gold as currency
En 1931 model was removed from 'Gold standard' devised by David Hume in 1752 where, in short, debts contracted with fiat money could be paid in gold.
This system ruled in Europe from the XNUMXth century to the XNUMXth century but today it is no longer viable and the system that uses fiat money today is based on trust.
En 1971 President Nixon makes it official to end compliance with the Bretton Woods agreements by eliminating the gold-dollar standard, whereby the United States will no longer keep its promise to exchange dollars for physical gold to its citizens. President Nixon's measures, known as the Nixon Shock, had irreversible consequences for the global economy, which fully entered a 100% fiduciary international financial and banking system.
Current bills and coins have a value based on the number printed on it, but it is not backed by anything. The value they have is a represented value. And this value will be maintained or decreased depending on the confidence of others in the economy of your country.
One of the main characteristics of fiat money is that it is controlled by authorized organizations and entities such as the central banks of each country or, in the case of the Euro, by the European Central Bank.
What does all this mean in practice?
This situation allows banks and governments to have absolute control over fiat money and can print more banknotes according to the needs of each State and the (political) strategy they want to follow.
This means that fiat money currently does not have a fixed number of units that can be issued, nor a certain and predictable pattern of when more will be issued and how it will be distributed; In addition, fiat money is always the property of the issuing state, therefore any form of digital money you have in a bank account or card is not yours.
In other words, we do not own the fiat money, but only holders of it. For all this, fiat money will always be affected by inflation. Today, every fiat banknote is much more like a debt certificate than a store of value.
In fact, the value of fiat currencies is easily manipulated, since in case of need a government can devalue a currency.
That of which there is much has less value than that of which there is little. For example, by issuing more euros, they increase the amount of euros in circulation. So the value (purchasing power) is reduced.
This, handled incorrectly, is a problem since this devaluation in turn raises the exchange rates between currencies and makes it more expensive to change the money to other fiat currencies. This entails a loss of purchasing power and even States can prevent the withdrawal of capital, an action that has been called 'corralito'.
Precisely, cryptocurrencies empower users over their own money:
For starters, a user of pure cryptocurrencies, for example Bitcoin, is not only the direct owner of his money, but also the owner of it. Only he decides how, where and how much money he sends or receives.
No one can censor you in any way.
Also it is the users who decide how much a cryptocurrency is worth based on the real and free utility of it. Said utility is stipulated in relation to the need that it covers and to the extent that it does so. The more and better the need for the exchange and safekeeping of value is met in humans, the more useful it will be.
Governments do not give you freedom, they force and force pointing you with weapons and jail to pay in the currency that they decide through the payment of taxes. And if you don't pay the taxes, you know what happens ...
Governments are the collectors of the tailcoat of a macabre game in which you did not decide to play with fiat money from which they try not to escape.