A Closer Look at the Fundamentals of Commodities and Fiat Currencies
Cryptocurrency ignites the debate on fiat currency vs. commodity based money. With the SEC declaring that Bitcoin and Ethereum are commodities and not securities, this update strengthens the validity in the discussion between the pros and cons of fiat currency vs. cryptocurrency.
What is Commodity Based Money?
Commodity based money exists naturally and is independent of governments or banks. This form of money develops wherever and whenever people use things that they do not strictly need solely to trade them for another item.
4. Scarcity, i.e., rare and valuable.
Money is called a medium of exchange, a unit of account, and a store of value. Money must also be widely accepted. This acceptance can be achieved either through natural forces or coercion.
The supply of commodity based money naturally remains restrained in relation to the creation of other goods. The resources and labor needed to produce true commodity based money exist in relation to other economic resources required to maintain human life. The production of commodity based money subtracts resources that have survival value from separate economic activities.
The law that manages the production of commodity money is the “law of survival.” The “law of survival” is not a proscriptive law (declared by a human authority) but a definitive law based on observation. The production of commodity based money is directed according to the physiological demands of human beings.
Commodity based money is “tethered” to physical, economic activity in the material world in the equivalent way as building shelter. Human beings very rarely build extra shelter than required because the economic inputs needed to create more shelter are better spent in other ways once enough shelter exists. The price mechanism in modern economics is a reflection of this underlying reality.
Can anything be used as Money?
It is commonly thought that any token can be used as money, but this only refers to the medium of exchange, aka currency. Currency is a “money substitute,” which is a convenience but is not money. Land deeds can circulate as a currency, but they are not the land itself.
Creating more currency units in a vacuum, in this example in the form of un-backed “land deeds” with no land attached to the deeds, does not create more land. It also fails to create any other form of wealth in the physical world even if it increases the volume of transactions and the size of the economy measured in “land deeds.”
What is Fiat Currency?
Throughout history, there have been currencies that cost essentially nothing to produce, and possess no survival value. Most of the time they have been a replacement for commodity money.
This replacement is fake money, known as “fiat currency” has alleged “value” only because it is claimed to have a value by a government or central bank. Fiat currency replaces the survival value of commodity money with subjective value and substitutes as a mere medium of exchange for true commodity money.
Modern currencies, including the U.S. dollar, the British pound, the euro and the Japanese yen, are all fiat currencies. A fiat currency unit is valued by whatever it can buy. However, it is not a standard where value can be measured because its purchasing power is unstable. In fact, there are numerous fundamental problems with fiat currencies.
Have Fiat Currencies Failed?
History has shown that fiat currencies are regularly debased, and that confidence in them eventually fails. This lack of confidence causes substantial economic disruptions, loss of wealth, social and political chaos and even loss of life.
A return to commodity based money typically follows the inevitable disasters caused by fiat currencies. However, once stability is achieved, a new fiat currency is instated repeating a useless and destructive cycle that benefits a few and hurts the majority.
Ironically, commodity money is denigrated by those who benefit from fiat currencies. Alan Greenspan, the former Federal Reserve Chairman, said, “Gold still represents the ultimate form of payment in the world. Fiat money in extremis is accepted by nobody. Gold is always accepted.”
Supporters of fiat currencies claim that they promote stable prices and moderate economic volatility. When in fact the opposite is true. Fiat currencies not only destabilize economies but also weaken the moral foundation of society.
It’s been consistently seen throughout history when a currency has been decoupled from the objective world, i.e., from commodity based money, the result has been a disaster. Fiat currencies guarantee economic, social and political chaos indicated by brief intervals of calm between inevitable abuses, bubbles, and collapses.
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