- Published on
Thought on the Fiat Money Systems and Decentralization
Historically, the United States operated under a gold standard, where the dollar’s value was tied to a specific amount of gold. This system was fully abandoned in 1971, transitioning the U.S. to a fiat currency system, which is now the standard for most country. This shift enables the implementation of monetary policies through central banks aimed at achieving clear economic goals through controlled management of the money supply and interest rates—executed through mechanisms such as lending to commercial banks and influencing the issuance and pricing of government bonds. In this system, money is deeply intertwined with credit and born in debt, as its creation and circulation primarily rely on lending and borrowing. A striking example of this is when a bank deposits a loan into a borrower’s account—money is effectively created out of thin air, as banks are allowed to issue loans far exceeding the actual reserves they hold. This newly created money enters the economy, enabling the purchase of goods and services. When the principal is repaid, it reduces the money supply, as the corresponding deposit is withdrawn by the bank. However, the interest earned by the bank remains in circulation, contributing to its profits and operational funds.
In a fiat monetary system, the national government (often through its central bank) issues and controls the currency. The government sets rules for supply (via monetary policy), enforces legal tender laws, and manages other aspects of finance like interest rates. Essentially, it’s a top-down, centrally governed system in which the state is the ultimate authority over money creation and regulation. A nation controls its economy through its fiat money. The strength of a nation’s fiat currency is closely tied to its economic performance: robust economic growth and stability fosters confidence in the currency. At its core, modern monetary systems rely on belief—belief in governments, central banks, financial institutions, and in the nation as a whole. Yet, the cornerstone of the entire system remains the fundamental belief that debts will be repaid.
Fiat money’s value depends on legal frameworks and trust that these institutions will maintain economic stability. Likewise, cryptocurrencies derive value from trust in their decentralized protocols and the network effect. In both cases, trust (or belief) is central: if confidence in fiat currencies diminishes, and confidence in decentralized alternatives grows, the relative value of each will shift accordingly.
Public trust in institutions and governments has shown signs of decline over time, as history reveals the vulnerabilities of centralized systems. The concentration of power within the fiat monetary system has often been exploited, enabling the financing of wars and contributing to numerous financial crises. Examples such as hyperinflation, debt crises, and banking collapses demonstrate how poorly managed policies can erode public confidence. This erosion of trust lays the foundation for the growing appeal of decentralized alternatives, which aim to reduce the risks associated with central authority and offer a more transparent, censorship-resistant system.
Bitcoin’s critics often claim it has ‘no intrinsic value’. Yet, fiat currency itself isn’t backed by a physical commodity and also relies on belief—specifically, trust in government and central banks to manage the economy. Legal tender laws and regulatory frameworks bolster that trust. Similarly, Bitcoin derives its value from belief in its decentralized protocol and the utility it offers (e.g., scarce supply, borderless transactions). In both cases—fiat and crypto—value ultimately stems from collective confidence in the system’s stability and usefulness. When faith in a sovereign currency declines, a decentralized alternative may gain credibility, demonstrating that ‘intrinsic value’ is largely about shared belief and perceived utility.