The Structural Problems of Fiat Money

What cost $1 to buy in 1971 now costs about $8. The Korean won tells an even more dramatic story. A bowl of 자장면 cost 1,000 won in the early 1990s, but in 2026 you need to pay an average of 7,500 won. The face value of money has not changed, yet what it can buy keeps shrinking. Many people accept this as a natural economic phenomenon, but it is not natural at all. It is the result of a specific system — fiat currency — operating exactly as designed.

The Birth of Fiat Money: The 1971 Nixon Shock

The word “fiat” in fiat money comes from Latin, meaning “let it be done.” It refers to currency that becomes money because the government declares, “This is money.” It maintains its value not through the backing of a physical asset like gold or silver, but solely through the authority of the government and the trust of its people.

The 1944 Bretton Woods Agreement pegged the dollar to gold. One ounce of gold was $35, and other countries’ currencies were pegged to the dollar. This system imposed a physical limit on currency issuance. Governments could not print money beyond the amount of gold they held. This served as a natural constraint on inflation.

But on August 15, 1971, President Richard Nixon unilaterally suspended the convertibility of the dollar into gold, and everything changed. As U.S. gold reserves were depleted by the cost of the Vietnam War, Nixon had no choice but to abandon the gold standard. From that moment on, every major currency in the world became pure fiat money, unbacked by any physical asset.

Fifty-five years have passed since then. What have the consequences been? The dollar has lost 87% of its purchasing power compared to 1971. The Korean won, the Japanese yen, the British pound, and the euro have all followed similar trajectories. This is no coincidence.

The Temptation of Unlimited Issuance: A Monetary System Without Constraints

Under the gold standard, if the government wanted to issue more currency, it had to acquire more gold. This was a process that took time and money. The fiat money system eliminated this constraint entirely. Governments and central banks can theoretically issue currency without limit. There are no physical constraints. All that remains is political will.

History clearly shows how this power has been used. The United States spent approximately $8 trillion on the wars in Iraq and Afghanistan. Most of this was funded not through tax increases but through currency issuance and government bonds. Raising taxes provokes public resistance, but printing money hides the pain in the short term.

After the 2008 global financial crisis, the Federal Reserve issued approximately $4.5 trillion of new money under the banner of Quantitative Easing (QE). The purpose was to bail out banks on the verge of failure and prop up asset prices. Rather than allowing the market to self-correct, the central bank printed money to intervene in the market.

Then came the COVID-19 pandemic in 2020. In just two years, the United States issued approximately 40% of all the dollars that had ever existed in history. The M2 money supply surged from $15 trillion at the start of 2020 to over $21 trillion by the end of 2021. More than $6 trillion was created in just 20 months.

Korea was no exception. According to the Bank of Korea, the M2 money supply increased from approximately 2,900 trillion won in 2019 to approximately 3,800 trillion won in 2023. That is 900 trillion won — a 31% increase — in four years. During the same period, Korea’s real GDP growth rate averaged only about 2% per year. Money supply grew far faster than the economy.

If more money is printed but the total quantity of real goods and services in the economy does not increase proportionally, the value of each currency unit inevitably falls. This is a matter of arithmetic.

Inflation: Taxation Without Legislation

When the government raises taxes, people get angry and resist. But when it dilutes the purchasing power of existing currency by printing money, most people do not perceive it as a tax. Economist Milton Friedman called inflation “taxation without legislation.”

Let’s look at a concrete example. Suppose you deposited 100 million won in a bank. If the interest rate is 2% per year and inflation runs at 3–5% (Korea’s recent average inflation has been 2–3%, but the inflation rate that people actually feel is higher), after one year your nominal balance is 102 million won. But your real purchasing power has shrunk to approximately 97 million won. You received 2 million won in nominal interest, but you lost 5 million won in purchasing power to inflation. The real loss is 3 million won.

Over 10 years, approximately 30 million won in purchasing power vanishes. Over 20 years, approximately 50 million won disappears. You spent nothing, yet half your savings evaporated. Who takes it? The government and banks that issued the new currency. They receive the new money first and purchase goods and services before prices have risen. This is known as the Cantillon Effect.

The cruelty of inflation lies in the direction of wealth redistribution. The hardest hit are those who saved in cash and deposits — the diligent and frugal. Meanwhile, those who hold assets (real estate, stocks, businesses) or who carry low-interest debt benefit from inflation. This is a structure that punishes hard work and thrift while rewarding consumption and speculation.

The Structural Instability of a Debt-Based Monetary System

Another fundamental problem with the fiat money system is that currency itself is created through debt. In the modern banking system, new money is born through lending. When a bank issues a loan, new money is created; when the loan is repaid, that money disappears.

This structure can only be sustained when the economy is perpetually growing and debt is continuously expanding. If growth stops or debt repayments pile up all at once, the money supply contracts sharply and an economic crisis erupts. The 2008 global financial crisis was precisely this mechanism exploding. As mortgage loans turned toxic, cascading defaults followed, and central banks had to issue trillions of new dollars to stop it.

Korea’s situation is no exception. Korean household debt exceeded approximately 100% of GDP as of 2024 — one of the highest levels among developed countries. Households that took on massive loans to purchase real estate during the era of low interest rates face severe burdens the moment rates rise. This is how the structural vulnerability of the fiat money system affects individual lives.

The Double-Edged Sword of Fiat Money’s Flexibility

Of course, the fiat money system has its advantages. It allows rapid response through monetary policy during recessions, and central banks can act as lenders of last resort to prevent financial panics. However, the lesson that history repeatedly teaches is that this flexibility ultimately leads to abuse.

The Exit Bitcoin Offers

Bitcoin is a technical response to all of these problems with the fiat money system.

Its supply is mathematically fixed, making unlimited issuance impossible. No government and no central bank can print additional Bitcoin. Through the halving mechanism, the amount of newly issued Bitcoin decreases over time, and after the last bitcoin is mined around the year 2140, new issuance ceases completely.

It is not created through debt. Bitcoin is issued only through mining and is not connected to any lending contract. Bitcoin does not vanish when a loan is repaid.

Understanding the problems of fiat money is not merely an academic exercise in economics. It is understanding the structural reasons why your savings lose purchasing power each year, and why money you worked hard to save makes you poorer than someone who bought real estate. That understanding is the starting point for seeing Bitcoin not as a simple investment asset but as an exit from the system.