Why do people accept pieces of paper as money? What makes us believe we can spend numbers on a screen? Why do they believe such money has value? And what happens if any of that changes?

Questions like these didn’t really matter much to investors when we didn’t have a choice. It you wanted to buy, sell, get paid, invest and participate in the economy, you had to use the government’s money. And that was the end of it. No point arguing about it.

Indeed, people like me were who warned about the fickle nature of our financial system were routinely ignored. You can’t be something with nothing.

Sure, if the government completely mismanaged its currency, your only real alternative was to use another government’s money. That’s what happens when currencies break down. First people begin using foreign currencies in everyday transactions. And then governments are forced to abandon their own money and use someone else’s too – usually US dollars.

During the German hyperinflation, there was a clamour for foreign currencies. They gave Germans their only hope at preserving purchasing power and being able to conduct transactions without wheelbarrows.

Of course, the countries seeking reparations from Germany were clever enough to specify they’d be paid in goldmarks, not papiermarks. But the German citizens got stuck with the paper money. Which eventually became worth more as paper than money.

No wonder they clamoured for Swiss francs and US dollars. But those were still just another form of fiat money – money by decree of a government. Their value eventually fell by ninety something percent over subsequent decades. Since the 90s, when inflation targeting was invented, that goal even became an official one. It’s just a question of how long it takes, these days.

Back to our topic – the questions we began with. Believe it or not, economists’ answer to the question of why we accept such valueless government money is surprisingly simple: taxes.

If you must pay taxes to avoid being put in prison, and the government defines how those taxes are to be paid (in their government money), then the obvious response is to use that form of money in all transactions. Otherwise you could be caught out without enough government money to pay off the government. Not to mention the accounting challenge of using any other currency to figure out your taxes…

Thus, fiat money rules by fear and convenience. A powerful combination, as those working from home since 2020 now know.

But lately, people are beginning to fear fiat money’s loss of value. It’s becoming a real pain in the neck too.

Companies that contracted work are facing huge cost spikes due to inflation. In Australia, not a week goes by without a news story of a property developer that goes bust. They’re contracted to build houses at fixed prices. Delays and cost spikes from inflation have made those contracts… problematic.

And the inflation isn’t even that bad Down Under. In the UK, the much larger inflationary spurt has made itself felt in wages and strikes.

But the strikers are still stuck using the government’s money…

What’d happen if there were alternatives? What if the government’s money had to compete with other options?

If nurses could denominate their wages in gold, as the allies did their war reparations, then they would’ve been busy going shopping at David Jones with their gold pounds instead of protesting. The gold price is up 23% in two years in terms of pounds…

If train drivers had contracted to be paid in US dollars, they would be laughing all the way to the currency exchange. The pound is up 10% in two years and was up 22% at one point.

And the government would be the one struggling to make ends meet instead.

Perhaps our politicians would go on strike…?

All of this is just fantasy though. We’re stuck with the fiat pound. Not to mention its legacy financial system.

Isn’t it just typical of the government to not only force us to use its rather dodgy currency, which it can create out of thin air, but also to use the banking system which it regulates into uselessness?

I mean, forcing us into an industry that is extraordinarily inefficient, incompetent, expensive and periodically goes bust is just outrageous. And yet, if you want to pay your taxes and participate in the modern economy, you have no choice. Your banker must get his cut too.

Heck, they can lend out the money you keep on deposit thanks to the government’s banking laws. Thankfully, the government’s deposit guarantee cleans up the mess this results in. But the problem is still the initial sleight of hand, even if it is legalised if your business has a banking licence bought from the government.

But let’s not go down that rabbit hole. Because we have some good news instead.

You see, competition is finally here. And it might just change everything. For better or for worse, I’m not sure yet.

Bitcoin was created to compete with the fiat money financial system. Well, to outcompete it.

2008 reminded us that the banking system is liable to periodic implosions, just as 2022 reminded us that fiat money is liable to periodic inflationary bursts.

Bitcoin, by doing away with intermediaries like banks, and by having a pre-determined level of supply, did away with these downsides when it was launched in 2009.

It came with different downsides instead, of course. Although the primary weakness seems to be in the exchanges with the mainstream financial system.

The point is, people can now transact and do business in an alternative to fiat money. Innovation in the sector is making it ever more convenient too.

Already facing the threat of a faster, cheaper and easier transactions than via the banking system, governments have responded. Their plan is to launch CBDCs, which should be able to compete with cryptocurrencies by many measures. It’ll be the pound, but as snappy as bitcoin, or even better.

If you think that’s good news, click here.

So competition has already forced the government and their shoddy banking system to wake up and smell the new millennium.

But I suspect this is only the beginning. Because now that we have competition, government money is going to have to raise its game.

Do you think it can outcompete the private sector? If not, find out tomorrow what’ll leave government money in the dust.

Nick Hubble
Editor, Fortune & Freedom