The problem with fiat currency is the fact it doesn’t have any intrinsic value. Worth of fiat currencies, like the United States dollar, is judged entirely on the decree of the issuer. For example the $5 bill is worth $5 only because the state, which issues the currency, says it’s worth $5. On the other hand commodity based currencies hold intrinsic value, they have actual worth through their utility. If a culture decides to base its currency on wheat, probably not the best commodity to use as it spoils but that’s beside the point, each currency unit would be a fixed amount of wheat. Let’s call this hypothetical currency the Whollar (wheat dollar because I’m super creative), and each Whollar is fixed at 1 pound of wheat. If you take your Whollars to a bank you can exchange them for their value of wheat, so taking 100 Whollars to the bank would result in you walking away with 100 pounds of wheat. Since wheat is a staple foodstuff it has actual value in its utility.
Fiat currencies are easily manipulated but fail to hold value once trust in the currency is lost. While the state may say the $5 bill is worth $5 sellers in the market place may assign it a value of zero. Once faith in a fiat currency is lost it no longer because usable for the exchange of goods and at that point real trade resumes. The faith most people hold in Greek money has vanish and in its place comes the return of barter:
In recent weeks, Theodoros Mavridis has bought fresh eggs, tsipourou (the local brandy: beware), fruit, olives, olive oil, jam, and soap. He has also had some legal advice, and enjoyed the services of an accountant to help fill in his tax return.
None of it has cost him a euro, because he had previously done a spot of electrical work – repairing a TV, sorting out a dodgy light – for some of the 800-odd members of a fast-growing exchange network in the port town of Volos, midway between Athens and Thessaloniki.
In return for his expert labour, Mavridis received a number of Local Alternative Units (known as tems in Greek) in his online network account. In return for the eggs, olive oil, tax advice and the rest, he transferred tems into other people’s accounts.
The only common item everybody has to make exchanges is their labor and the reason people make exchanges is to fulfill wants. Why would I work for two hours programming a computer in exchange for something that won’t allow me to fulfill my wants? If United States dollars or euros won’t buy me food, shelter, and clothing then they are of no use to me. On the other hand I can directly exchange my labor for those wants.
Bater isn’t ideal as it can be complicated but it’s far better than exchanging your goods and services for worthless paper that won’t buy you similar goods and services due to inflation and lack of faith in the currency.
As fiat currencies continue to collapse we’re going to see more people resorting to barter.