Source: Fiat money is very effective, a minitalk for the Silicon Valley Ethereum Meetup, by Steve Randy Waldman, 2017/10/08
For now, in my view, the fiat currencies of major economies beat every existing form of crypto hands down on effectiveness
- We want a unit of account that helps us to solve the economic calculation problem, that helps us to reason about our future receipts and obligations
- We want a unit of account and store of value that hedges our risk, inherent in the fact that our contractual obligations and the prices of goods and services we require may fluctuate over time and leave us unable to meet our obligations.
- The unit of account that we choose will sometimes form the basis of our assets
- we will hold or contract for claims on this unit
- But it will frequently form the basis of our liabilities!
- we will contract to make future payments in this unit
- It will not be desirable for the value of this unit (in terms of actual goods and services) to unexpectedly collapse, as that inflation would devalue our assets
- But it will also not be desirable for the value of that unit (in terms again of actual goods and services) to unexpectedly spike, as that deflation would cause the burden of our liabilities, our debts, to balloon!
Money is defined by the unit of account in which obligations payable into the future get denominated
Fiat prices are stable because they are actively managed to be stable.
- Price stability is about managing valuation risk, and makes a money useful for economic calculation and hedging the risk humans face of finding themselves unable in the future to afford the real goods and services they require
- Fiat money banking systems also enable effective means of managing counterparty risk. Most obviously, payments are often reversible.
The management of fiat provides state actors with incredibly powerful, ultimately discretionary, tools which significantly affect who wins and who loses and how equal or unequal a society is. Fiat money and associated banking systems are the technology that enables the finance of war on scales that would have been unimaginable a few centuries ago. Price stability, the primary advance fiat offers users over other forms of money, is often purchased at the expense of workers and the unemployed, on behalf of those who have the luxury of worrying about economic calculation for their businesses or hedging with their savings horde