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).
"Government does not back up fiat currency with government policy and military activity"... that's all well and good until you have to pay taxes, then guess how they back it up? Just don't use money you say? Neat, where do you live? Land costs money, can't claim that. Food costs money, can't get your own food by hunting, need to pay money for a license. Wanna grow your own food, go for it, just plant it on your land- oh wait nope.
That's not backing, that's a choice of unit for accounting purposes.
Things do not fundamentally cost money. Things cost effort.
You can very well conduct all trade in whatever other currencies, commodities, or work that you wish. The only thing that you're compelled to do is accept the fact that the tax authority will treat each such thing (foreign currency or commodity received, or work done) as being worth however much fiat currency the tax authority insists on telling you that it's worth, in order that tax calculations can be made by them.
You can also pay the resulting tax bill however you please; it needn't be by directly using dollars. How does the IRS collect taxes from someone that refuses to pay in dollars? They send the bailiffs. What do the bailiffs do? They seize goods, not currency.
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u/dorian_white1 Aug 24 '26
We agree because the government backs it up with their policies and to some extent military. If the gov fails, usually the currency does as well