Potential shifts of responsibility and problems with regular currencies.
The second problem with centralized financial systems giving out money to large corporations is that essentially the bailouts shift the responsibility from a small number of people that made a lot of mistakes yet earned a lot of money to the shoulders of regular taxpayers who didn’t do anything wrong and who were not making million-dollar salaries.
After the collapse of the housing market in the United States, the federal government of the United States decided to implement a monetary policy known as quantitative easing. Simply speaking, quantitative easing is when a central bank of a country starts buying government securities. When this happens, the interest rates start going down (because the risk is also going down) and the market experiences an increased supply of money. Financial institutions in a country get access to money, which means that they can lead more and have more liquid capital.
When many countries engage in quantitative easing, they also essentially start currency wars, which is when a country is trying to devalue its currency so that it makes economic sense to manufacture products in the country and buy products in the country. For example, during the periods of weak United States dollar sometimes it is actually cheaper to buy a European car in the United States than it is to buy the same car in Europe even though the car is manufactured in Europe. The problem with currency wars and quantitative easing is that they may lead to inflation, which means that ordinary people would be able to buy less products with the money they have.
In essence, the monetary policies of quantitative easing and currency wars transfer the bill for the mistakes of the banks from the banks themselves to the ordinary taxpayers and all to the future tax liabilities of a country.
Regular modern currencies as fiat currencies
A fiat currency is a currency that a government of a country declares to be a medium of payment but this medium of payment does not have any backing in the form of a physical commodity. This means that in essence, fiat money is simply paper that is backed by a promise of a government to honor it is a form of payment.
In the past, the value exchanges first went from barter to commodity. Commodity money is money that has value because of the material is it made of, such as gold, silver, and copper. Historically, societies have also used salt, tea, peppercorns, shells, and other materials to exchange value.
The next step in the development of the monetary systems in the world has been an introduction of representative money.
Representative money is money that has features of both commodity money and fiat currencies. The United States dollar while it was backed by gold was representative money. It was still paper that was not worth much from the standpoint of the value of the paper itself, but it was worth a lot because the United States government was backing the paper with gold. The US government stopped allowing people to exchange the US dollar for gold in 1933. The gold standard in the United States has ended completely in 1973.
The biggest benefit of fiat money is also is its biggest disadvantage, which is that unlike commodity money, fiat money is easy to create and this gives central banks a lot of control over a currency. This may become a problem when a central bank is making decisions that do not align with the interests of people in the country. One of the examples of such behavior is Zimbabwe during the end of the twentieth and the beginning of the twenty-first century.
Hyperinflation in Zimbabwe as an example of what can go wrong with a fiat currency
When the government of Robert Mugabe came to power in 1980, it decided to change the pattern of land management in the country and redistribute the land among the residents who have not owned any land before. However, such residents did not know how to manage farms, which is one of the main reasons why the economic situation in the country started to decline. In the 1990s, inflation has reached 17%. In both 1990s and 2000s, the unemployment kept going up, wages kept declining and the standard of living was going down. The inflation in the country started to skyrocket in the second half of 2000s and has reached five hundred billion (billion with a “b”) percent in 2008. This is when one trillion of Zimbabwe dollars was equal to about USD$0.40 (forty cents). The last bill that the government of the country has introduced was one hundred trillion. Because of the hyperinflation, people had to carry bags of money with them even when they needed to buy small necessities. The government of the country first stopped publishing the numbers about the rate of inflation and the rate at which it was adding money to the circulation and then it has scraped the currency altogether in 2009 and switched to using the United States dollar.