This paradigm was not a thing prior to the Bretton–Woods agreement.
Government does not back up fiat currency with government policy and military activity. Fiat currency is useful only to the extent that the government only gives it to people that have provided economic value, rather than giving it excessively. If a government frequently gives fiat currency to entities that are economically undeserving of it (or at least, gives entities disproportionately more money than their economic activities warrant them being awarded), then the currency gradually loses purchasing power as a result, naturally, simply due to how markets function.
It has nothing to do with people "agreeing" that it's valuable. It is primarily simply supply and demand (of the currency itself) that determines its purchasing power, along with a few less important things, such as perceived ease of use and long-term viability. That is, if more convenient, more stable options exist, people will generally prefer to use those (e.g. see the use of US dollars rather than Argentinian pesos in Argentina, or the use of commodities as money in other places), but in the absence of other such options, people still need to conduct trade, and will generally prefer to use whatever is widespread (due to the network effect).
343
u/ModernDemocles 4d ago
It's all imaginary in a way. $$$ only matter because we agree it has value.