The monetary system has evolved over many years and there are many things that can confuse people. In addition to the monetary system we know today, alternative forms of currencies are also developing, which are definitely good to know. So let’s take a look at what you should know about the monetary system and its alternatives.
If you missed the first part of this article, you can find it here: What you need to know about the monetary system – Part 1 History
Alongside cryptocurrencies, fiat currency is also mentioned a lot. This is a currency with forced circulation, where money is created by an officialy appointed authority. Thus, the value of such money is set by law. Fiat here is understood as “warrant” (in English) or “so be it” (in Latin). Such a currency is a legal tender, can be used to repay loans and financial bonds, and we consider all current state or national currencies to be fiat currencies.
These currencies can also be backed by gold or other commodities, but this is no longer the case since the abolition of the Bretton Woods system. However, even this can have exceptions, it can be so-called representative money, where these coins can be minted from gold or silver. But it is important to know that unbacked money cannot spontaneously arise on the market. Only the governments control their creation.
Some fiat currencies can operate supranationally, such as the Euro, which is issued by the European Central Bank and used by some European Union countries. In contrast, the US or Australian dollar is a currency that can be used by several independent states as a legal tender, but issued only in the country of origin (for example, El Salvador).
Cryptocurrencies come to mind for many people when it comes to alternative options or systems. Cryptocurrencies are increasingly popular in today’s world and are finding their way to more and more people. Recently, El Salvador enacted Bitcoin as legal tender alongside the US dollar. With cryptocurrencies, one of the features that makes people seek them out is decentralization. No one owns these currencies, no one centrally controls their issuance, an algorithm does. At the same time as cryptocurrencies, a new blockchain technology has come along.
Many people consider that cryptocurrencies were created in 2008 and the first one was introduced in January 2009 under the name Bitcoin. This is not entirely true. One of the first attempts predates Bitcoin by about 20 years. It involved gas stations in the Netherlands that suffered from nightly thefts. Instead of increasing security, a group of developers tried to link the money to newly designed smart cards. Truck drivers would then pay with chip cards and there would be no cash at the stations. This could be seen as the first example of electronic money with a link to digital currencies.
Blockchain, on the other hand, has just come up with Bitcoin. Satoshi describes it as “the network time-stamps transactions by hashing them into a continuous chain based on hashing proof of work, creating a record that cannot be changed without re-executing the proof of work”. It is therefore a transparent network whose history cannot be changed and where participants decide for themselves what they want to share with the world.
Money and monetary systems as we know them today have undergone some major developments and now the possibility of alternative currencies is available as a new generation of a fairer system.