Reflecting Anti-Cryptocurrency Arguments: What Actually Backs the US Dollar?

There are three certainties in life: Death, taxes, and old-man finance telling cryptocurrency to get off his lawn.

Scientific rigor serves a critical purpose in evaluating economic systems. As does a healthy skepticism toward progressive solutions. Yet when it comes to traditional and emerging blockchain-based finance, it’s hard not to notice the inconsistent application of critiques exclusively towards the latter.

So naturally, a healthy skeptic wonders: “Just how well does traditional finance stand up to its own criticisms of cryptocurrency?”

Under consideration today is one of the most popular critiques of blockchain finance: “Cryptocurrency isn’t backed by anything.”

If financial experts are going to present this “lack of backing” as a distinction between cryptocurrencies and fiat, due diligence requires we understand the contrast or lack thereof.

How Does Monetary Policy Affect Us?

The effects of monetary policy go far beyond economic theory and into the realms of social, military, and political control. At the macroeconomic level, economic power can alter global foreign policy. Closer to home, changes to monetary policy affect grocery costs, mortgage rates, job opportunities, and much more.

You may have noticed that inflation continues to decimate the buying power of the average American, as shown in Figure 1:

How could this happen in a fiat system carefully maintained by financial experts?

The short answer: human and political incentives tempted financial experts and government administrations to spend money they did not have. All citizens were forced to co-sign a loan that, statistically, did not benefit the average American.

As a matter of perspective, Figure 2 shows the sheer size of US COVID-19 relief spending as compared to all post-9/11 wars:

In the cryptocurrency world, imperfect humans simply cannot spend money they don’t have. Nor can they dilute money saved, or cut off political opponent fund-raising.

With fiat, the rules of the global monetary game are instantly changed by a microscopic representation of people susceptible to ego, bribery, self-interest, and all of the other uniquely human faults we share.

Transparency is Mandatory for a Fair System

Choruses of public opinion continue to sing the dirges of inflationary concerns in the hopes of inflating the possibility of a transparent conversation. Yet the transparency never comes.

A strikingly homogeneous chorus of government officials and media experts respond with the assurance that inflation worries are, “grounded more in theory than data” and that “there [wasn’t] an obvious link between spending and inflation.”

Reality has a way of exposing what is and isn’t true. In the case of COVID-19 spending, the exposition took the form of a 40-year high inflationary spiral.

As government officials and traditional financial experts worldwide demand transparency about blockchain enterprises, I have no doubt they’ll respond to the moral and intellectual demand that they hold up a mirror to the same critiques.

The claim that cryptocurrency isn’t backed by anything implicitly implies that traditional fiat does have a backing. What tangibly backs fiat currency, if anything?

Gold, the US Dollar, & Green Paper

On a practical level, anything can represent money. Paper, physical assets, database values, or tokens to name a few. However, useful money has the specific properties shown in Figure 3:

So why green paper instead of blue stones? What gives a 100-dollar bill more value than my kid’s artwork on a green piece of paper?

Faith. And little else.

Vast discussions can exist around the reasons, good and bad, for having faith in one particular currency over another. But the stubborn fact remains: faith alone backs the currency’s value – and fiat is no exception.

Grasping at Golden Straws

In the past, faith in green paper was aided tremendously by the backstop of the gold standard. Green paper once represented a specific amount of gold, thus being ‘backed by gold’. Even if every merchant on earth decided to stop accepting green paper, one could still exchange it for the amount of gold it represented.

The limited supply of gold fulfilled a crucial property denoted in Figure 3. Requiring a currency to be backed by a limited asset prohibits the government from manipulating the money supply.

The appeal of a gold standard is that it arrests control of the issuance of money out of the hands of imperfect human beings.

Yet, where there’s a will to spend money one doesn’t have, there’s a way.

The US dollar hasn’t been backed by gold since the gold standard was phased out at the beginning of 1933. Bretton Woods accelerated the departure of USD “backing” shortly after World War II.

Ironically, the gold standard was retired to bail out our government from the very thing we were so recently told not to worry about – inflation.

Full Faith & Credit

If not gold, then what backs the US dollar? The technical answer is the full faith and credit of the United States government.

Yes, faith.

We value green paper because we believe the next person will value it. Because… faith. (And a healthy dose of the ‘appeal to tradition’ logical fallacy).

I’d like to take this opportunity to hold up a mirror to the “Ponzi scheme” rhetoric with which traditional finance routinely targets cryptocurrencies. If a decentralized currency is a “Ponzi scheme” reliant on the next sucker, what might one call the faith-based exchange of green paper in the hopes that the next person will accept it?

In a transparent world, time wouldn’t be wasted on this “Ponzi scheme” mudslinging. Currencies, virtually by definition, are abstract representations of value insofar as everyone has faith in the “next sucker.”

The science behind thousands of years of studying currency mechanisms either supports or does not support its foundational merit of representing value while intrinsically holding none.

It truly boggles the mind to see proponents of one currency dismiss an alternative because it has no intrinsic value – you know, like the definition of currency.

This isn’t to say there aren’t superior currencies or that we shouldn’t try to understand the differences. It’s simply highlighting the breathtaking intellectual laziness of financial experts keen on deploying the “not backed by anything” argument.

If one were to pursue a healthy economy by currency differentiation, the crucial question becomes, “if the currency can be useful, but requires faith to achieve its aims, what am I willing to put my faith in?”

Math vs Politicians: The Age-Old Competition for Trust

It’s puzzling that people are willing to credit years of labor and talent to a green paper contract backed by the “faith and credit” of a government that has lost the trust of 75% of its citizens.

Since 1960, Pew Research reports a drop from 75% to 25% in the number of people who trust the government to do the right thing “most of the time”.

Is it a surprise that there are grassroots efforts to launch trustless financial systems? After a government-led global economic crisis in 2008, endless quantitative easing, and a $20+ trillion debt, the “trust and credit” of the United States government plays best as a punchline.

What, Precisely, Backs the US Government?

That people will accept government fiat for their labor and allow the dilution of their savings in perpetuity are two dangerously naive assumptions of the fiat framework.

Furthermore, the US Government isn’t a primitive in the backing-of-currency conversation. If the full faith and credit of the government back fiat currency, what ‘backs’ the US government?

We the people.

The transitive property then suggests the US dollar is backed by the full faith and credit of the people of the United States. And a large number of “We the People” distrust the current, politically corrupt fiat framework for extremely tangible reasons.

For those that haven’t yet crossed this Rubicon of distrust, I’ll willingly pay for your goods and services in Papiermarks. Or Denari. Or Pengoes. Or Bolivares. Or… the list goes on.

For this introspective mind, thousands of years of documented human greed and currency manipulation provide ample evidence that we should try to do better.

But who knows? Maybe currency in the hands of imperfect, powerful, human beings will work this time.

The Reality of Currency “Backing”

I submit that nothing unique backs the US Dollar, its issuance, or any fiat currency. Are cryptocurrencies not also backed by the “faith and credit” of the people that use them?

The true currency debate lies in whether we trust the mechanisms for issuance and oversight.

It turns out that a vast number of “We the People” view mathematical currency issuance and decentralized bookkeeping as far more trustworthy than the Federal Reserve, the words of politicians, or their collective historical actions.

Majorities & Self-Interest

Yes, those willing to give cryptocurrencies a chance are currently in the minority – like the proponents of every other remarkable invention.

And it’s certainly the prerogative of traditional experts to protect their own interests through fallacious appeals to tradition.

But the rest of us are starting to see automobiles in the streets. Just as we see the self-interest of the horse and buggy experts advising we ignore our eyes.