Why Does Fiat Money Seemingly Work? Introducing Money Imagine three men living on a small island. Toni is mining the local salt selgin bitcoin mining, and apart from him there are Pete the fisherman and Tom the apple grower and their families. They have a barter trading system set up: Toni exchanges his salt for Pete’s fishes and Tom’s apples, who in turn exchange fishes and apples between each other.
Papyrus grows in great quantities nearby, but has so far not been of practical use to any of the islanders. This will make it easier for us to trade among ourselves. We won’t have to lug fishes, apples and salt around all the time. However, the others would immediately realize that there is a problem: the papyrus per se is not of any value, since none of them have found a use for it as yet. Since papyrus grows in great abundance on the island, Pete could easily issue money by the bucket load. Both Toni and Tom like Pete, but they can see that the idea of installing him as the island’s papyrus banker would likely tempt him into taking advantage of them.
In fact, it is unlikely that any of the islanders would ever propose such an idea. In short, in a free market, only be something that enjoys an already established demand due to its use value would emerge as a medium of exchange. An object widely considered as worthless would never become money in a free market. However, today, we all use irredeemable paper money. How did essentially worthless objects come to be widely accepted as money? Let us take a brief detour and look at a few slices of monetary history. AD 301 Rome’s long history of inflation and monetary debasement actually started with Cesar’s successor Augustus, whereby his method was at least not a prima facie fraud.
He simply ordered the mines to overproduce silver so as to finance the empire that had grown greatly in size under Cesar and himself. Under Augustus’ successors, the situation deteriorated at a rapid clip. Claudius, Caligula and Nero all embarked on enormous spending sprees that depleted Rome’s treasury. It was Nero who first came up with the idea to actually debase coins by reducing their silver content in AD 64 , and things quickly went downhill from there.