| I was trying to avoid the term "fiat money" to describe bitcoin, because the term has several meanings, and some argue that bitcoin is not a fiat currency because it is decentralized. What I mean by "commodity currency" is a currency that is (or is backed by) a currency. Gold would be the obvious example. >why is it desirable for a currency to be a non-commodity currency? One of the most important tasks of a monetary system is to regulate the money supply. This can be done via various methods. This can be done with monetary policy as in the case of the US dollar. Or it can be done by leveraging a commodity with a (hopefully) predictable market, as with gold. Or it can be done, as with bitcoin, by creating an artificial process which is provably predictable. Now, when you use a commodity, you have a problem which is that you are hoping that no new developments will come about that completely throw off your assumptions about the market. If you were using precious aluminum as a currency in 1850, your economy would have collapsed in 1886 when the Hall–Héroult process was invented, causing rapid inflation. That's a supply side problem. But a demand side problem is also possible. Imagine if indium had been our currency, for example. Indium is a rare element and was rather useless until the latter half of the 20th century. The rapidly increasing demand for indium as a useful commodity would have caused severe deflation. A fiat currency system works on the assumption that there is no market effect of demand for the money outside of its function as money. In the case of American currency, this assumption is mostly true, but there are small exceptions such as coin collection which have a negligible impact on the money supply (a collected quarter is effectively 25 cents taken out of circulation). If the assumption were rendered totally invalid, the Fed could completely lose control of the money supply. |