Fiat or fiat money is the money that we all handle and are used to, after hundreds of years.
Money has 3 main functions in the economy:
- Exchange unit.
- Deposit of value.
- Accounting unit.
- Exchange unit. Instead of exchanging a cow for 100 chickens, we sell the cow for 100 coins and with the 100 coins we buy 100 chickens. Since time immemorial, money has greatly facilitated exchanges.
- Deposit of value. Money retains its value even if it is not used immediately. I can sell my cow for 100 coins and buy my 100 chickens a few weeks later.
- Accounting unit. A large and complex economy cannot function without a unit of accounting. Money fulfils this function. You pay your taxes with money no with chickens.
Who "makes" money?
Historically, the issuance of currency has been the privilege of kings.
Today they are the Nations.
Each Nation issues its own currency.
In its day, the value of each currency - that is, the confidence that each currency inspired in economic agents - depended on the wealth of each country.
It was the time of the “Gold Pattern".
The gold that the Nations accumulated in their Treasures, served as a backup to their currencies.
The Gold Pattern, as it is known, was abandoned by the Nixon Administration in the United States in 1971.
This has allowed the so-called "accommodative economic policy" and "monetary expansion", which allows Nations or groups of Nations that share currency - like the European Union- issuing more and more currency, in amounts far exceeding the wealth of the country.
Since money is basically debt, -a money loan from the Government, so we can pay taxes- the issuance of money is generating a debt as immense as it is unpayable.
The future? is to be written. Nobody knows.
But none of the 2 great mechanisms of "debt settlement", wars or inflation, are currently easily achievable.
Also, at the time, there was a certain separation and independence between the Political Power and the Institutions in charge of issuing currency -the Central Banks-.
Today, this no longer occurs. Central Banks only enjoy nominal independence, but not real.
And, Political Power loves to spend, especially in democracies, since it is a mechanism by which they buy votes.
1. The Governments.
Governments issue "identity cards" that guarantee that you are who you say you are. It is a centralized system, which preserves the information of its citizens. If you lose your "identity card" you can go and request a new one without problems.
Governments also control the "money supply", that is, the money in circulation. This allows them to manage the so-called monetary policy, to try to adapt to the needs of the economy. As we speak of Politics, we speak of human decisions, and therefore, of successes and mistakes.
2. The Banks,
The Banks which "guard your money."
Modern societies are heavily banked and it is almost impossible to manage yourself without a bank account.
The "identity card" provided by the government also serves the Bank to identify you and relate to your accounts.
If you have moved from one city to another, you can always go to a branch of your bank, identify yourself with your "identity card" and have access to the funds of your account.
In turn, Banks, are centralized.
They keep all the information of their clients in their databases, which will be in a physical place, well-guarded and with all the cybersecurity means that are at their fingertips.
The Banks are also heavily regulated.
We must add another fundamental aspect: to be able to operate with your money, deposited in the Bank, you need the Bank's permission.
And this is for 2 main reasons, related to security:
- Avoid handling more money than your balance reflects, or the credit limit that the Bank has granted you.
- Prevent unauthorized people from operating your accounts.
Banks authorize the transactions and keep the accounts, noting all the movements that occur, so that the balances of the different accounts are correct.
They are the validators of the transactions and verifiers of the account statements.
It is easy to understand that Banks are a fundamental piece in the development of the economy.
Less developed countries are underbanked. At the same time, this scarce banking system makes economic development quiet difficult, since it is very hard to transfer savings to credit and investment.
3. The Economic Agents
The economic agents, that is, the people and institutions that use money on a day-to-day basis.
This requires that the currency inspires confidence, and that its value enjoys stability - it can fluctuate, but within limits, excessive fluctuation or volatility makes the currency ineffective as a unit of exchange.
So, as a summary, we have:
- A centralized and hierarchical system, in a few Banks.
- These Banks are heavily regulated.
- The relationship between commercial banks, central banks and governments is one of mutual collaboration, and often against the interests of citizens.
- In order for citizens to be able to operate with their money, they need the “permission” of the Banks.
As there is still a significant part of the money supply that circulates in the form of cash - almost impossible to control - all governments aspire to be able to withdraw the cash and thus have full control of the money supply.
The so-called "cash limitation" is a trend in many economic press media in recent times. It is quite possible that governments will do everything they can to make cash disappear and make all monetary operations easily traceable.
This system has been operating for many years and has been a very effective instrument for the normal development of the economy and trade.
But it has some very important drawbacks that should be noted, especially when we compare it with cryptocurrencies.
Increasing attempts by governments to control the money supply as much as possible. This is not at all convenient for citizens, as it gives governments immense power.
Governments, for their part, have “reasonable” arguments, such as that it is necessary to fight against tax fraud or money laundering, as well as to have better control over monetary policy.
If tax policy were not so “confiscatory” there would be less tax fraud.
If politicians spent well the money of citizens, there would be less tax fraud.
Money laundering is practically impossible without the collaboration of the Banks -good allies of the Governments in general-
In fact, the vast majority of money laundering is in fiat money.
Governments can seriously harm your economy, your savings and your assets:
- They can confiscate or expropriate your assets.
- They can limit the use you make of your money, with the so-called “corralitos”.
- They can devalue the currency unilaterally, from one day to the next. This impoverishes you with respect to the outside.
- Eventually, you can be expelled from the financial system.
- It can generate inflation and even hyperinflation - a constant and exorbitant increase in prices, if it adopts an expansionary monetary policy, issuing currency continuously, without support in the national wealth.
You have to understand that inflation is not so much that the prices of products and services rise, as that it decreases the value of your money.
Your money depreciates as a result of the law of supply and demand. But, the result is the same.
The risks with Banks are different,...
With the Banks, apart from their continued abuses, their misleading advertising and their lack of scruples, the problem is rather one of security. Banks are generally quite safe, and even, in the case of bankruptcy, deposits are covered by the so-called “deposit guarantee”.
More problematic are the attacks by hackers to the databases of the Banks, the attempted theft of credentials when you operate on the Internet -the so-called phishing-, or the problems derived from the use of credit cards, such as failed purchases, identity theft, card replication and a long etc.