In the world of cryptocurrencies, why do most nations use fiat money today? People often try to compare crypto with the standard national currencies of individual countries. It is no wonder because it is the most common means of exchange they come into contact during their lives.
In these debates, it can also be read that fiat currencies are better and safer because they are managed and controlled by the state. This argument is fascinating, especially since it is, in fact, probably their most significant disadvantage. However, it often hides behind “harmless” inflation and will only become fully apparent when the great crisis comes. Today, therefore, we will look at a very current topic and historical moments that have exposed fiat currencies and opened many people’s eyes.
why do most nations use fiat money today after post-war Germany?
During the First World War, Germany (we will not deal with the historical names of this country, what is at stake) decided to abolish the gold standard, which served as a support for the national currency. They wanted liquidity to finance armaments, and they planned to cover these fictitious funds with post-war reparations. The exchange rate of the Reichsmark against the dollar fell almost immediately from 4.2 to 7.9, and it was just a taste of what awaited the German economy.
Germany’s plans for victory in World War I did not turn out as he had hoped, and the victorious states demanded war reparations. Of course, they could not afford to repay these debts, and they continued to print vast amounts of new money to sustain the domestic economy. All this is without any underlying assets that would support this process. In 1919, the exchange rate reached 48 marks per dollar, and the situation escalated further. At the end of 1922, Germany found itself where its national currency was virtually completely lost in value, and the exchange rate against the dollar was 7,400. Billion marks! Yes, one loaf of bread! At this time, you could buy a dollar for about 4 trillion (that’s 12 zeros for four) marks.
For another example, we don’t have to go far – Hungary
After the First World War, Austria-Hungary, of which we were apart, also fell apart. Among the new states that emerged from its subsequent division was Hungary, which had problems with good governance from the beginning. Like Germany, they decided to solve their financial issues by thoughtlessly printing money. The pre-war exchange rate of the national currency against the dollar of 5 crowns (then the Hungarian currency) became a thing of the past, and in 1924 70,000 crowns were needed to buy 1 dollar. It even forced a change in the name of the domestic fiat currency to pengo, with one pengo equaling 12,500 crowns.
The situation worsened after World War II when Hungary was one of the main battlefields, and the war almost destroyed the local industry. The government has once again stimulated the economy by printing new money. However, the situation spiraled out of control so much that goods that cost less than 400 pence in 1945 were sold for one septillion pence (one and 42 zeros) in 1946. Due to hyperinflation, the economy got into a situation where prices rose by 150,000% per day. The government was no longer worth collecting taxes because the funds collected were practically worthless the next day. After several more currency exchanges, they finally got to today’s forint to make it work. It was issued at 400 quadrillions (24 zeros) pengo. So why do most Nations use fiat money today in the world of cryptocurrencies?
Let us also mention the former Yugoslavia and Zimbabwe
Even in this case, these were countries that were destabilized by a long-standing geopolitical conflict. Yugoslavia made history with the second-longest period of hyperinflation (22 months), and the dinar moved from 15 to 1370 in exchange rates against the dollar within a few years. Inflation peaked in 1994 at 313 million percent. Interestingly, up to 50% is considered hyperinflation. The currency officially collapsed on January 6, 1994.
Zimbabwe can undoubtedly be considered the country that has experienced one of the most brutal hyperinflations in 20 years. Its economy was in deep trouble for several years before hyperinflation in 2007. In its final phase, the government had to stop using the national currency altogether, and goods/services could only be bought in foreign fiat currencies.
Where else got fiat currency badly hurt?
Countries with similar experiences include Venezuela, Chile, Peru, Argentina, and Angola. In all cases, of course, the ordinary working people were the only ones who created real value and bore the brunt of the consequences of the loss of fiat money. Subsequently, however, they were forced to exchange it for consideration (salary), the proper functioning of which was to ensure the representatives of their governments, and here we come to the main problem.
Fiat currencies are dependent on the management and decisions of specific people who have their interests. However, these often fall far short of the interests of the population. If you think that this is not possible in our latitudes and is currently possible, you are probably very wrong. We do not live here under the rule of dictators who can do what they want, but the printing of uncovered money takes place constantly and in huge volumes. The maturity of Western economies and cooperation between countries ensures that we could spread potential problems geographically and better over time. Still, in principle, one wrong decision can separate us from hyperinflation.
This threat is further emphasized by the current situation on the European continent, where Russia, as the aggressor, has unleashed an open military conflict in Ukraine. One month ago, who among you could have imagined that a war would break out in Europe and drive millions of refugees out of the country? Who could have imagined that Russia would close its stock market, raise interest rates to 20% and ban cash exports over $ 10,000? Who expected us to face a disruption in the supply of strategic raw materials from Russia, which could cause the collapse of all the affected economies?
Therefore, supporters of cryptocurrencies do not rely on fiat currencies, the stability of which depends on policy decisions. Of course, they are volatile because they are still a relatively young and small market. But all we have to rely on for cryptocurrencies is math, and it always works the same way. It doesn’t matter who you are, where you are from, or how much money you have. This is the real strength and one of the main advantages of cryptocurrencies. We hope that now you can understand better the question of why do most Nations use fiat money today.