Part #2 - What is Fiat Currency?
Introduction
I like to think I am not alone in saying that most people I talk to about MAS-chains and cryptocurrency in general don't take well to the concept of "fake money", as they like to call it. While I absolutely love to constantly debate the how tokens backed by MAS-based chains hold value just as the U.S. dollar holds value, I figured I should create a series of posts discussing the matter. It is my hope that these posts will provide all of you a resource to show your friends, family, and any other non-believers to help educate them on how MAS-chains and their related currencies are valuable. As always, debating is promoted, but please keep it civil! If you have any questions or thoughts on this subject matter, please don't hesitate to comment below in the comment section - I am not an economist, thus I welcome professional viewpoints. Additionally, if you want to have this discussion with the Morte et Tributa community, you can join the MET Discord. This is Part #2 of the series, so if you have not already, make sure to read Part #1 before reading further!
These posts will cover the following topics:
- A Brief History of Money - Covered in Part #1
- The 3 Functions of Money - Covered in Part #1
- The Value of Fiat Currency - Covered in Part #2
- Factors Affecting Currencies' Exchange Rates - Covered in Part #2
- The Federal Reserve - Covered in Part #3
- The Value of Whaleshares - Covered in Part #3
Key Vocabulary
First, before we begin - it may be helpful to define some key vocabulary. The following terms are the same that were included in Part #1 (if you don't need a refresher, feel free to skip pas this section):
- Bartering - The act of trading one good or service for another.
- Commodity Currency - A commodity that has been established as a medium of exchange. Some examples include gold, beaver pelts, wheat, etc. These are commodities that have such universal value that they are widely accepted for goods and/or services.
- Gold Standard - A monetary system in which currency is backed by a fixed amount of gold. The currency, at any point in time, is redeemable for the underlying gold. Thus, if supply of the currency increases, the amount of gold it is redeemable for decreases. The U.S. began using the Gold Standard in 1879, initiated its removal in 1933, and ultimately severed all ties to gold by 1971.
- Legal Tender - Currency deemed as acceptable for the payment of debts in an economy/country. This currency must be accepted as valid payment for any legally enforceable debts.
- Fiat Currency - Currency that is deemed legal tender and is not backed by any physical commodity with intrinsic value. Instead, the currency is backed by faith in the government and the economy.
- Time Value of Money - A concept which states that money held in the present day is worth more than the identical sum of money held in the future due to its earning capacity, provided they money can earn interest.
- Scarcity - The gap between a limited amount of resources and theoretically limitless demand. Scarcity is required for currency to have value.
- Exchange Rates - The amount required of one currency to purchase one unit of another currency. (i.e. it costs .87 EUROS to purchase 1 U.S. Dollar).
- Gross Domestic Product (GDP) - The total value of goods and services provided by a country in a one-year time frame.
- Principle - The total amount of the initial investment or loan. (i.e. if you receive a loan of $1,000,000 and ultimately pay it off with $1,800,000, only $1,000,000 is attributable to the principle).
- Interest - The amount paid above and beyond the initial investment or loan. (i.e. if you receive a loan of $1,000,000 and ultimately pay it off with $1,800,000, only $800,000 is attributable to the interest).
- Network Effect - The correlation between value of a good or service and number of participants that participate in the good or service; as participation increases so does the value. A great example is the internet and Facebook. With few or no participants in these services, they would be worth nothing. However, as more people start to use the service the value of the service exponentially increases.
What Gives Fiat Currency Value?
At a base level, the reason money has value is because we, the people of the economy, have faith in the economy backing the money, thus providing demand. Unlike commodity-backed currency, there is no intrinsic value to Fiat currency. However, the U.S. dollar, for example, has been deemed Legal Tender by the U.S. government. This means that the U.S. government made the U.S. Fiat currency legal and accepts it for the payment of debts. Essentially, this makes a statement that, if you are a United States citizen we have, as your representatives, made the U.S. Fiat currency an acceptable form of payment anywhere within the U.S. economy.
Thus, everyday you go to work and you allow your employer to pay you in the local Fiat of whatever country in which you reside. This is because, you expect that the economy will continue to produce goods/services and accept your hard-earned currency. If the U.S. were to ever fail, the value of the dollar would become worthless - one of the pitfalls of Fiat currency.
Additionally, there is a limited supply (at any given time). While this limited supply is slowly growing no one other than a specified entity can print the currency, thus creating artificial Scarcity. If there were an unlimited supply of the currency there would be no value - just as with any other good/service. Remember, the fundamental economic principle of supply and demand still hold true with currencies!
A great example of what too much of a currency surplus, or lack of Scarcity, can do to an economy is Venezuela. While not the sole contributing factor, the over-supply of money has led Venezuela to hyperinflation and, as a result, the Venezuelan dollar has astronomically low buying power. 1 U.S. dollar is currently worth approximately 248,519 Venezuelan dollars! At the end of the day, money is a tool to provide for more efficient trade and Fiat could be (oh wait, it is) just a worthless piece of paper that people in the economy collectively decide has value.
Why Do Currencies' Exchange Rates Strengthen/Weaken?
Whaleshares is essentially just another economy, albeit a small (and growing one) at this moment in time. To better understand why the value of WLS/Whalestake (in USD, EURO, YEN, etc.) increases, we must understand why foreign currencies strengthen against one-another. To explain I will use the U.S., as this is my home country. Please keep in mind, these are only SOME of the factors that influence the exchange rates.
Since its inception we have all heard "the dollar has strengthened/weakened". This can happen because of multiple reasons, some of which follow. First, the U.S. economy is constantly growing and producing new value (most common measurement is Gross Domestic Product (GDP)). When the economy strengthens, other people have more incentive to participate in the economy - thus, the demand for the dollar increases and, along with it, the price of the dollar; this is one way the dollar strengthens.
On the contrary, what if the economy slows and GDP decreases? You guessed it! The demand for the dollar decreases and, as a result, other currencies can purchase more of the dollar for cheaper; this is one way the dollar weakens. Remember, the same situations occurring in other economies will result in the same effects on their currency.
"But @met, what do you mean by participate in the economy?" you might ask -
great question! As an economy's GDP rises, this means there are more goods and services for purchase from said economy. These goods/services will, for the most part, be purchased with the domestic currency of the seller. As such, if other countries wish to purchase the goods/services of the U.S., they are required to first purchase the U.S. dollar.
Additionally, countries and companies will often sell bonds to raise capital which are usually denominated in the country/company's domestic currency. Depending on the strength of the economy and its potential for growth, investors with capital may decide to purchase the bonds as part of their investment portfolio in return for a promised return on investment (again, denominated in the bond issuer's currency).
Remember, the U.S. dollar is (forcibly) backed by the U.S. economy and an accompanying culture that defines the currency as the primary medium of exchange. Thus, if there is more demand to become a U.S. citizen (again participating in the U.S. economy) due to the value and values its citizens support, the value of the U.S. dollar will strengthen.
While demand is one of the main factors in the price of a currency related to other countries' currencies, there is another crucial factor: supply. The supply of most Fiat Currencies are controlled by the Federal Reserve, referred to as the Fed here forth. As previously mentioned, supply and price have an inverse relationship. Just think - if your favorite celebrity only provided one autograph, it would probably cost much more to get than if he/she issued one billion autographs. If he/she were to mass produce autographs everyone would most likely have one, thus it wouldn't be unique, or Scarce. This leads us to another fundamental topic - what is the Fed and what does it do? I will discuss this in Part #3.
Conclusion
This concludes MAS-Chains: The Value in a New Economy (Part #2). Hopefully, after reading this you have gained basic conceptualization of the Fiat Currency we have all grown to know and "love". This newfound knowledge should assist greatly in understanding Part 3 where I will discuss the Federal Reserve and how MAS chains provide value. If you enjoyed this post, be sure to stay tuned for Part #3!
As always, have a wonderful day and, if you would like to learn more about Morte et Tributa (MET), continue to read below!
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About the Author
I hold a Master’s degree in Accounting with a concentration in Information Management. This degree has given me years of exposure to topics, as it relates to the USA, such as: financial reporting, financial statement audits, information systems audits, tax regulation, business law, and overall general business knowledge. Shortly after obtaining my degree I worked for a large public accounting firm for about a year, focusing on IT audits, only deciding to leave to put more focus on cryptocurrency.
While I am not technically a Certified Public Accountant (CPA), I have met the educational requirements and passed all four sections of the CPA on the first try; the only requirement left is to obtain the required experience hours, which I am extremely close to. All of this being said, I can safely say that I am well versed in business knowledge and am more than capable of learning business related concepts.
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