Musings on fiat currencies
I was recently considering how unbacked currencies can lose value: In the old days of the gold standard, the fact that a dollar was theoretically convertible into gold kept the value of a dollar more-or-less stable. (The occasional suspension of convertibility and mining improvements notwithstanding.)
With a fiat currency, there's nothing in particular to keep the value from slowly (or quickly!) inflating away. But there may also be nothing to restrain volatility. Certainly after the Bretton Woods system collapsed the currency movements have been much wilder. The question that I don't have an answer for is to what extent is the mere fact that the currencies aren't backed responsible. Certainly there are other possible reasons: Transactions in general are faster and easier than they used to be, etc.
With a fiat currency, there's nothing in particular to keep the value from slowly (or quickly!) inflating away. But there may also be nothing to restrain volatility. Certainly after the Bretton Woods system collapsed the currency movements have been much wilder. The question that I don't have an answer for is to what extent is the mere fact that the currencies aren't backed responsible. Certainly there are other possible reasons: Transactions in general are faster and easier than they used to be, etc.