The Achilles Heel of the Fiat Money System

The Achilles Heel of the Fiat Money System

 Thorsten Polleit

The fiat money system will not disappear just like that. Any expectations or hopes to that end should be tempered. Yes, the fiat money system could collapse; yet there is a significant likelihood it will persist longer than most people might think. This prolonged existence may come at a cost: a fascist state encroachment on the freedoms of citizens and entrepreneurs would be more profound than most people realize.

Much ink has been spilt about the impending collapse of the international fiat money system. It is a debate that naturally gains momentum in times of crisis—as witnessed in the aftermath of the 2008/9 global financial market debacle or the politically dictated global lockdown crash of 2020/21.

At the same time, however, it is entirely justified to harbor significant concerns regarding the fiat money system. After all, it is plagued by blatant economic and ethical defects.

Are you wondering about the essence of fiat money? Let’s break it down into three characteristics:

• State-sponsored central banks wield a monopoly over the production of fiat central bank money. Upon obtaining fiat central bank money, commercial banks are allowed to generate their own money, known as fiat commercial bank money.
• Fiat money is typically created through lending without the backing of real savings. It is essentially created out of thin air (or ex nihilo, as it is called in Latin).
• Fiat money predominantly exists in dematerialized form. While it may manifest as colorful printed pieces of paper, its primary existence resides in digital entries on computer systems, represented by bits and bytes.

Whether we’re talking about the United States dollar, euro, Chinese renminbi, Japanese yen, British pound, or Swiss franc, they are all fiat money. We know from monetary theory that fiat money is not “natural” or “innocent.” Unlike moneys emerging from voluntary agreements in the free marketplace, fiat money was introduced through state intervention—involving coercion and violence—leading to many negative effects.

Fiat money is inherently inflationary, gradually losing its purchasing power over time. This phenomenon disproportionately benefits a select few at the expense of the broader population.

Moreover, fiat money causes economic instability by perpetuating cycles of boom and bust that disrupt market equilibria and create societal inequalities. It drives excessive indebtedness within economies and fuels the unchecked expansion of the state, often at the expense of citizens’ and companies’ freedoms.

Last, but not least, fiat money is dishonest money, and engaging with fiat money daily erodes the morals and values of the people involved in its circulation. However, despite these considerable drawbacks, once fiat money has been put into circulation, it is here to stay; it won’t disappear just like that. Why?

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