## Why Fiat Currency Became the Foundation of Modern Economies

The modern world operates on principles that seem to be taken for granted and not subject to reform. However, the fiat currency we use daily is not a natural constant but the result of deep historical upheavals and deliberate economic experiments. Let's analyze how a legally established payment method, devoid of material backing, has gained such undeniable influence over the global economy.

### From paper to power: how a Chinese invention changed the world

The history of fiat currency does not begin with Western central banks, but rather in the East — in China during the Song dynasty. The province of Sichuan began experimenting with paper money as early as the 11th century, although initially it was nothing more than a promise to exchange for real values: gold, silver, or silk.

The real turning point occurred twenty years ago when Kublai came to power. In the 13th century, he definitively introduced a system of paper money, completely devoid of material backing — the first true fiat currency in world history. Paradoxically, this monetary revolution, researchers believe, accelerated the decline of the Mongol Empire: uncontrolled money printing caused hyperinflation and economic collapse.

Europe implemented similar systems later. In the 17th century, the Netherlands, Sweden, and Spain experimented with fiat currency, but with mixed results. The Swedes quickly abandoned it in favor of the silver standard, while colonial New France and British settlements in America had an ambiguous experience.

### American Turn: from gold to pure paper

The USA oscillated between two systems for a long time. Until the 20th century, the state adhered to a certain form of commodity backing, but in 1933, a presidential decree finally severed the link between paper money and gold. The final step was taken by President Nixon in 1972: the USA completely abandoned the gold standard, which meant the collapse of this system on an international scale. Since then, the world has lived in the era of pure fiat currency.

This transformation was not accidental. The gold standard strictly limited the ability of states to expand the money supply — new money could only be issued if there were equivalent gold reserves. Fiat currency gave governments and central banks an unprecedented flexibility. They gained tools to respond to crises: fractional reserve banking, quantitative easing, direct injections into the economy. This is a powerful tool of macroeconomic management, but also a potential threat.

### Two worlds of currency: stability versus control

Critics of the gold standard are wrong in one respect: gold prices have never been stable, so "commodity security" is not a guarantee. However, the appeal of this system lay not in stability, but in limitation. When ruling circles cannot print money without restriction, inflation remains under control.

Fiat currency removes this limitation. Governments have the right to create money, but they also bear the risk. Historical experience shows that when states abuse this ability, the consequences are hyperinflation, the collapse of savings, and the destruction of economies. But when they act prudently, the fiat system provides the necessary flexibility for growth.

### The advantages that allowed the world to switch to fiat money

Why have almost all countries in the world abandoned commodity backing? There are several reasons:

**Simplicity of production.** Unlike gold, paper does not require extraction, authenticity verification, and expensive storage. This democratizes the very possibility of having one's own currency.

**Flexibility in Crises.** When the economy faces the unpredictable — a financial crisis, a technological leap, a pandemic — the state can quickly introduce new money for stabilization.

**Independence from deficiency.** The amount of gold on the planet is fixed, but the economy is growing. Fiat currency allows the money supply to evolve alongside production.

**Global Acceptance.** When all countries use a similar system, international trade, investment, and financial flows operate without the constant exchange for precious metals.

**Practicality.** Fiat money does not require protection, monitoring, and physical reserves. Digital accounting systems make all this possible.

### The dark side: risks that no one can fully overcome

But fiat currency carries its own threats:

**Hyperinflation.** When governments print money uncontrollably, the currency loses its value. History knows many examples: from Germany in 1923 to Zimbabwe and Venezuela in modern times.

**Lack of intrinsic value.** Paper itself is worth nothing. Its value depends solely on trust in the issuer — the government or central bank. If that trust disappears, the currency can collapse instantly.

**Historical Recurrences.** Every time states introduced fiat currency without clear limitations, the result was financial catastrophes. This is not a coincidence — it is a symptom of systemic risk.

**Concentration of Power.** The right to create money is absolute power. In the hands of a few people, (the leadership of the central bank) holds the ability to influence the well-being of millions.

### Against fiat currency: how cryptocurrencies offered an alternative

Against the backdrop of these shortcomings, cryptocurrencies emerged, primarily Bitcoin. At first glance, they resemble fiat currency: none of them is backed by a physical commodity. But the resemblance ends there.

**Decentralization instead of control.** Fiat money is created by centralized entities — central banks, governments. Cryptocurrencies operate in a distributed network based on blockchain, where no single entity has absolute power.

**Limited supply instead of infinite printing.** Bitcoin has a maximum limit of 21 million coins. This is hard-coded and cannot be changed. Fiat currency does not have such a limitation.

**Irreversibility instead of control.** Transactions in cryptocurrencies are irreversible and difficult to trace. This is both an advantage for privacy and a challenge for regulation.

**Volatility as the price of freedom.** Crypto markets are significantly less stable than traditional ones. This is one of the reasons why cryptocurrencies have not yet gained mass recognition. However, this volatility is often seen as a transitional phenomenon: as the crypto ecosystem matures, fluctuations are expected to decrease.

### The Future: not a competition, but parallel evolution

It would be a mistake to think that cryptocurrencies will come and completely replace fiat currency. Most likely, Bitcoin and its analogs will remain an alternative for those who seek money free from centralized control. Fiat currency will continue to function as the basis of national economies, but it will also evolve: central banks are developing digital versions of their currencies.

The history of fiat currency demonstrates both the strength of centralized economic management and its vulnerabilities. Cryptocurrencies offer a new answer to an old question: how to organize a monetary system so that it serves the people, rather than the other way around. One of the main motivations for creating Bitcoin was not to dismantle the entire fiat currency system, but to show the existence of an alternative peer-to-peer economic network.

Both systems are likely to evolve in parallel. And this could turn out to be the best scenario: the competition of ideas fosters the improvement of both.