Fiat Money

Trotsky is writing a great series on fiat money. Fiat money is money created by governments out of thin air, not backed by any tangible asset like gold. This installment is particularly good at showing the history of the creation of fiat money, and hinting at some of the consequences.

So what's wrong with fiat money? It can be answered in one chart (click to enlarge):


This chart shows, over time, just how many of each item it takes to buy "something". Put another way, it displays the loss in purchasing power of different currencies vs. gold. That in itself is not a huge problem as long as a person's income grows at an equivalent rate and at the same time. Moving decimels points is not a problem, as long as it's done evenly across the board.

Right.

Of course it's not. The price of things always moves ahead of income representing a defacto tax. The higher the rate of inflation (the real rate, not the one reported by government) the higher the tax, and the greater the loss in personal buying power.

One other interesting sidenote. In the history of fiat money, it seems that major failures in the system have historically occurred when countries used fiat money, and more fiat money, to finance wars. Sound familiar?