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What exactly does it mean when people say that a currency is backed by a government? ”Backed” to me implies, e.g., redeemable for gold which is clearly not the

by sedeki 7y ago

What exactly does it mean when people say that a currency is backed by a government? ”Backed” to me implies, e.g., redeemable for gold which is clearly not the case for the US dollar. Is it that the government issue bonds denominated in that currency? But that has nothing to do with the money supply per se...? Please explain.

Pinckney 7y ago
The US government accepts payment for taxes in USD. Even if an American wants nothing to do with USD, and conducts all their exchanges through bartering, they will need to acquire some at some point in order to make tax payments. The value of USD can't fall to 0 as long as the federal government retains the ability to impose taxes.
- Udik 7y ago
  That sounds like a strange argument. Nobody can pay their taxes in gold, still gold has a value, right? And on the other hand, the value of the USD can fall to practically zero, as it happened to many other currencies before, despite the governments of the respective countries imposing taxes in those currencies. Bitcoins are, of course, nothing. But it's a nothing that is pretty guaranteed to stay, to be in rigidly limited supply, and that is easily exchangeable. People give it a value that depends on their expectations of other people's willingness to buy them. Would you buy 10 bitcoins from me at $1000 each? I bet you would without hesitation. We're talking of giving a $1k value to something that is useless and completely immaterial, yet you just know it's an excellent deal.
  - pmiller2 7y ago
    Gold has value because it’s useful, among other things. That base level of value is why people started making coins out of it in the first place. It’s properties as a physical metal make it easy to store, transport, and protect, all of which are good properties to have as a currency.
    - mopsi 7y ago
      Industrial demand is only half the story. The value of gold also lies within the fact that unlike fiat currency, it cannot be created out of thin air. Global stockpiles of gold are well known, annual production is small and predictable. This means that if you sell a car for gold, you can expect that gold to be worth the value of a car a year or two from now. Fiat money does not offer such assurance, it can lose most of its value almost overnight if government turns on printing presses or fucks up in some other way (see Turkish lira or Venezuelan bolivar). Cryptocurrencies mimick the same properties of gold. Their "base value" comes from the speed/ease of transactions and other useful features (eg cannot be confiscated). Their supply is algorithmically limited and well-known in advance.
      - pmiller2 7y ago
        Industrial demand isn’t the entire source of gold’s value, that’s true. I was more referring to it’s usefuln being the source of its value 2700 years ago when people started making coins out of it. I would argue that, beyond industrial demand and use in jewelry, the thing driving the price is primarily speculation. > ...if you sell a car for gold, you can expect that gold to be worth the value of a car a year or two from now. What you’re saying is that the car to gold ratio should be constant if your understanding is correct, right? I don’t have data for cars, but I do for houses, and your conclusion is false: https://www.jmbullion.com/investing-guide/pricing-payments/us-house-to-silver-ratio-us-home-to-gold-ratio/ https://www.jmbullion.com/investing-guide/pricing-payments/u... Re:your criticism of fiat money, I would accept that if I lived in Venezuela, Zimbabwe, or Turkey. But, I’m talking about specifically the USD and other established currencies such as GBP and EUR. There is literally no danger that the US, UK, or EU is going to experience hyperinflation short of near total governmental collapse. Oh, and if you think BTC can’t be confiscated, I have news for you: https://www.theblockcrypto.com/2018/11/07/analysis-the-u-s-has-seized-nearly-200000-bitcoins-to-date-global-confiscations-are-up-to-453000/ https://www.theblockcrypto.com/2018/11/07/analysis-the-u-s-h...
        mopsi 7y ago
        > What you’re saying is that the car to gold ratio should be constant if your understanding is correct, right? No. I am aware that the value of gold fluctuates, but it is safer than many national currencies, stocks of failing companies or overvalued real-estate. The amount of gold in the world is known and stable and there's no way to massively "print" gold to crash its value. This stable supply is mimicked by algorithms built into cryptocurrencies. As long as there is demand for a something, and there is limited supply of it, it will be worth >0. Cryptocurrencies satisfy both requirements: they are limited in supply and have demand because of their usefulness (fast & cheap transactions). > Re:your criticism of fiat money, I would accept that if I lived in Venezuela, Zimbabwe, or Turkey. But, I’m talking about specifically the USD and other established currencies such as GBP and EUR. There is literally no danger that the US, UK, or EU is going to experience hyperinflation short of near total governmental collapse. No need for hypotheticals. The government of Cyprus confiscated 47.5% of all holdings above 100 000 EUR in 2013 during its banking crisis. https://eu.usatoday.com/story/money/business/2013/07/29/bank-of-cyprus-depositors-lose-savings/2595837/ https://eu.usatoday.com/story/money/business/2013/07/29/bank... Cyprus is full member of the EU and Eurozone, so these risks are not limited to corrupt and failing third-world countries. > Oh, and if you think BTC can’t be confiscated, I have news for you: Most cryptocurrencies cannot be confiscated by network nodes like traditional banking institutions can freeze or rewrite payments and accounts (see Cyprus above). Only the one who has private keys controls the assets. This is a major feature.
- mopsi 7y ago
  So do cryptocurrencies acquire their value through market demand. For example, XRP is the cheapest and fastest way of sending money between the EU and China. Standard wire payment would not arrive before Monday the earliest, but XRP is there in seconds for a fraction of a cent. In military, even a pack of cigarettes functions well as a currency. It does not need to be government-backed. It needs some kind of useful property to ensure demand.
pmiller2 7y ago
It means it’s legal tender for all debts, public and private.
- sedeki 7y ago
  The Zimbabwe government forced everyone to use their currency (Zimbabwe dollar, up until 2008 iirc, pretty sure they still have problems today...). Of course forcing everyone to use this currency created artificial demand for it. However, I don't see why adding "artificial demand" is an argument against bitcoin. EDIT: But sure, if government-backed means they force people to accept the currency, then it will have value. I don't see this as a good selling point though. Not trying to be sarcastic.
  - pmiller2 7y ago
    Having value isn’t a selling point? You’re digging yourself into a hole here.
    - sedeki 7y ago
      I was referring to government force. "Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith." https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
      - pmiller2 7y ago
        You said it had value. That’s literally what you wrote. The reason is irrelevant. Value is value. If you could think of a way to show BTC has value, I’d accept that as a selling point of BTC.
        sedeki 7y ago
        By that reasoning the Zimbabwe dollar had value, because it was ”””backed by the government””” according to your own definition! Of course it did not! Money or money supply should not be determined by government, it should be a result of market mechanisms!
ProblemFactory 7y ago
Backed by a government means that it's backed by the ability of a government to tax work and production happening in the country. Every year the US government collects about 25% of all economic activity as taxes payable only in USD. Every person and business in the country must sell on average 25% of their productive output for USD, and you can buy all those things with USD.
mdorazio 7y ago
In addition to the other responses here, the US government (through FDIC) guarantees that you won't lose your money in a bank account if something bad happens to the bank. That's a lot more important than most people give credit for.
- icebraining 7y ago
  That gives value to the banks, not to the currency. I could create my own currency and give you the exact same guarantees as the FDIC (since I can always print more), yet that wouldn't give it value, because all you get is more units of the same thing. If you disagree, I have some $IBs to sell you, and an insured account to store them!
  - pmiller2 7y ago
    No, it doesn’t give value to the banks. Banks only have value because you can use them to store and borrow money which has value. Your theoretical bank has no value because your theoretical currency does not, either. FDIC insurance reinforces the value that banks (and the currency one can access through them) already have.
simonsarris 7y ago
> What exactly does it mean when people say that a currency is backed by a government? I think the de facto meaning of backed, despite what people say about gold/silver/etc is actually this: American dollars have value because the US Government taxes things, like land, and if you do not pay those taxes they will send you mean letters (trust me) before resorting to other means (trust Al Capone). You pay these taxes in US dollars. You just having dollars does not make them valuable. And dollars are not valuable because they are backed by gold or silver or sea shells. What makes dollars valuable is that the government wants them back. From something I wrote a while ago about why being "backed" is important: https://medium.com/@simon.sarris/the-guns-of-bitcoin-1f779309a718 https://medium.com/@simon.sarris/the-guns-of-bitcoin-1f77930...

by sedeki 7y ago

Pinckney 7y ago

The US government accepts payment for taxes in USD. Even if an American wants nothing to do with USD, and conducts all their exchanges through bartering, they will need to acquire some at some point in order to make tax payments. The value of USD can't fall to 0 as long as the federal government retains the ability to impose taxes.

Udik 7y ago
That sounds like a strange argument. Nobody can pay their taxes in gold, still gold has a value, right? And on the other hand, the value of the USD can fall to practically zero, as it happened to many other currencies before, despite the governments of the respective countries imposing taxes in those currencies. Bitcoins are, of course, nothing. But it's a nothing that is pretty guaranteed to stay, to be in rigidly limited supply, and that is easily exchangeable. People give it a value that depends on their expectations of other people's willingness to buy them. Would you buy 10 bitcoins from me at $1000 each? I bet you would without hesitation. We're talking of giving a $1k value to something that is useless and completely immaterial, yet you just know it's an excellent deal.
- pmiller2 7y ago
  Gold has value because it’s useful, among other things. That base level of value is why people started making coins out of it in the first place. It’s properties as a physical metal make it easy to store, transport, and protect, all of which are good properties to have as a currency.
  - mopsi 7y ago
    Industrial demand is only half the story. The value of gold also lies within the fact that unlike fiat currency, it cannot be created out of thin air. Global stockpiles of gold are well known, annual production is small and predictable. This means that if you sell a car for gold, you can expect that gold to be worth the value of a car a year or two from now. Fiat money does not offer such assurance, it can lose most of its value almost overnight if government turns on printing presses or fucks up in some other way (see Turkish lira or Venezuelan bolivar). Cryptocurrencies mimick the same properties of gold. Their "base value" comes from the speed/ease of transactions and other useful features (eg cannot be confiscated). Their supply is algorithmically limited and well-known in advance.
    - pmiller2 7y ago
      Industrial demand isn’t the entire source of gold’s value, that’s true. I was more referring to it’s usefuln being the source of its value 2700 years ago when people started making coins out of it. I would argue that, beyond industrial demand and use in jewelry, the thing driving the price is primarily speculation. > ...if you sell a car for gold, you can expect that gold to be worth the value of a car a year or two from now. What you’re saying is that the car to gold ratio should be constant if your understanding is correct, right? I don’t have data for cars, but I do for houses, and your conclusion is false: https://www.jmbullion.com/investing-guide/pricing-payments/us-house-to-silver-ratio-us-home-to-gold-ratio/ https://www.jmbullion.com/investing-guide/pricing-payments/u... Re:your criticism of fiat money, I would accept that if I lived in Venezuela, Zimbabwe, or Turkey. But, I’m talking about specifically the USD and other established currencies such as GBP and EUR. There is literally no danger that the US, UK, or EU is going to experience hyperinflation short of near total governmental collapse. Oh, and if you think BTC can’t be confiscated, I have news for you: https://www.theblockcrypto.com/2018/11/07/analysis-the-u-s-has-seized-nearly-200000-bitcoins-to-date-global-confiscations-are-up-to-453000/ https://www.theblockcrypto.com/2018/11/07/analysis-the-u-s-h...
      - mopsi 7y ago
        > What you’re saying is that the car to gold ratio should be constant if your understanding is correct, right? No. I am aware that the value of gold fluctuates, but it is safer than many national currencies, stocks of failing companies or overvalued real-estate. The amount of gold in the world is known and stable and there's no way to massively "print" gold to crash its value. This stable supply is mimicked by algorithms built into cryptocurrencies. As long as there is demand for a something, and there is limited supply of it, it will be worth >0. Cryptocurrencies satisfy both requirements: they are limited in supply and have demand because of their usefulness (fast & cheap transactions). > Re:your criticism of fiat money, I would accept that if I lived in Venezuela, Zimbabwe, or Turkey. But, I’m talking about specifically the USD and other established currencies such as GBP and EUR. There is literally no danger that the US, UK, or EU is going to experience hyperinflation short of near total governmental collapse. No need for hypotheticals. The government of Cyprus confiscated 47.5% of all holdings above 100 000 EUR in 2013 during its banking crisis. https://eu.usatoday.com/story/money/business/2013/07/29/bank-of-cyprus-depositors-lose-savings/2595837/ https://eu.usatoday.com/story/money/business/2013/07/29/bank... Cyprus is full member of the EU and Eurozone, so these risks are not limited to corrupt and failing third-world countries. > Oh, and if you think BTC can’t be confiscated, I have news for you: Most cryptocurrencies cannot be confiscated by network nodes like traditional banking institutions can freeze or rewrite payments and accounts (see Cyprus above). Only the one who has private keys controls the assets. This is a major feature.
mopsi 7y ago
So do cryptocurrencies acquire their value through market demand. For example, XRP is the cheapest and fastest way of sending money between the EU and China. Standard wire payment would not arrive before Monday the earliest, but XRP is there in seconds for a fraction of a cent. In military, even a pack of cigarettes functions well as a currency. It does not need to be government-backed. It needs some kind of useful property to ensure demand.

pmiller2 7y ago

It means it’s legal tender for all debts, public and private.

sedeki 7y ago
The Zimbabwe government forced everyone to use their currency (Zimbabwe dollar, up until 2008 iirc, pretty sure they still have problems today...). Of course forcing everyone to use this currency created artificial demand for it. However, I don't see why adding "artificial demand" is an argument against bitcoin. EDIT: But sure, if government-backed means they force people to accept the currency, then it will have value. I don't see this as a good selling point though. Not trying to be sarcastic.
- pmiller2 7y ago
  Having value isn’t a selling point? You’re digging yourself into a hole here.
  - sedeki 7y ago
    I was referring to government force. "Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith." https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
    - pmiller2 7y ago
      You said it had value. That’s literally what you wrote. The reason is irrelevant. Value is value. If you could think of a way to show BTC has value, I’d accept that as a selling point of BTC.
      - sedeki 7y ago
        By that reasoning the Zimbabwe dollar had value, because it was ”””backed by the government””” according to your own definition! Of course it did not! Money or money supply should not be determined by government, it should be a result of market mechanisms!

ProblemFactory 7y ago

Backed by a government means that it's backed by the ability of a government to tax work and production happening in the country. Every year the US government collects about 25% of all economic activity as taxes payable only in USD. Every person and business in the country must sell on average 25% of their productive output for USD, and you can buy all those things with USD.

mdorazio 7y ago

In addition to the other responses here, the US government (through FDIC) guarantees that you won't lose your money in a bank account if something bad happens to the bank. That's a lot more important than most people give credit for.

icebraining 7y ago
That gives value to the banks, not to the currency. I could create my own currency and give you the exact same guarantees as the FDIC (since I can always print more), yet that wouldn't give it value, because all you get is more units of the same thing. If you disagree, I have some $IBs to sell you, and an insured account to store them!
- pmiller2 7y ago
  No, it doesn’t give value to the banks. Banks only have value because you can use them to store and borrow money which has value. Your theoretical bank has no value because your theoretical currency does not, either. FDIC insurance reinforces the value that banks (and the currency one can access through them) already have.

simonsarris 7y ago

> What exactly does it mean when people say that a currency is backed by a government? I think the de facto meaning of backed, despite what people say about gold/silver/etc is actually this: American dollars have value because the US Government taxes things, like land, and if you do not pay those taxes they will send you mean letters (trust me) before resorting to other means (trust Al Capone). You pay these taxes in US dollars. You just having dollars does not make them valuable. And dollars are not valuable because they are backed by gold or silver or sea shells. What makes dollars valuable is that the government wants them back. From something I wrote a while ago about why being "backed" is important: https://medium.com/@simon.sarris/the-guns-of-bitcoin-1f779309a718 https://medium.com/@simon.sarris/the-guns-of-bitcoin-1f77930...