I don't understand how people can talk about fiat currency and call it 'backed by nothing' without mentioning that the central banks do in fact have assets whose value exceeds the amount of their currency in circulation. The dollar would not in fact lose its value if we all stopped believing in it, because the Fed would hit their inflation target by selling off their bonds until the price came back up.
Fiat currency was originally intended to be the promise to pay the bearer the stated amount in precious metal. Today it is "backed" by bonds, as you put it. Now what is a government bond? It is an IOU from the government promising to pay back the stated amount of fiat currency plus interest. So the currency created out of thin air is backed by IOUs denominated in the very same currency they're supposedly backing.
In America during the late 1600s through early 1700s fiat currency was placed into circulation as the loan or mortgage held by the governor secured by the property of the borrower. There was no promise, advertisement, or intention to pay in metal. In a public land loan office system, the value of the currency is backed by the value of the property which the borrower does not wish to lose if they fail to collect back currency in the same unit of account after spending and investing to avoid default or foreclosure.
The promise which governors and colonial assemblies made to the borrowers was primarily that the government would continuously spend the revenues brought in by interest payments back into circulation on local infrastructure, and that new loans would be regularly issues at low interest rates of 3-4%, so that the money needed by borrowers to repay their debts was easy to come by, and that the debt would not be held or sold to private lenders engaged in usury.
So accepting the scheme was a good deal to borrowers, and provided immigrant farmers with cash & credit which would not otherwise be available to them without borrowing form European lenders at high rates. The government acted as a public bank and the money was a public utility.
Fiat currency wasn't invented in the US but most likely in China hundreds of years before the dates you cite (and let to hyperinflation almost right away).
You're right about central banks, but this is not what being backed means. When a currency is backed by another asset, it means that the issuer promises to redeem the currency for a pre-determined quantity of the underlying asset, which is not the case of fiat currencies (or crypto-currencies for that matter).
Sure, but central banks do typically promise to hit an inflation target, which is similar in the sense that it's a promise for the money to have a certain value.
If a bank bought and sold gold to make a currency hit an inflation target, would that be commodity money or fiat?
The ECB bought a lot of dubious bonds from countries such as Italy precisely because they were unsellable in the private market (because of the low interest rate). If they had to sell them, few private buyers would be interested.
So, do these bonds cover something or do they just paper over a huge systemic problem?
Did they buy them at par or at market rates? Either way, I assume they value them on their books at market rates, so it's still true that their assets are sufficient to 'back' the Euro.
I'm imagining that people still have the dollars, they just believe they're worhtless. So people are happy to trade them away to anyone offering something valuable in exchange for them.
The question I expected you to ask is why people wanted the bonds, since all they're backed by is future dollars. The circularity is resolved by the fact that people know that there will be some demand from the government for dollars, since the government has outstanding dollar-denominated debt.
My point is that taxes are a key factor in creating demand for dollars.
> the government would still need to exchange those bitcoins for dollars in order to pay its debts
That is not true. The government does not collect taxes to pay its debt, as it can simply spend its own currency which it creates. Taxes are relevant to spending in that it keeps dollars valuable.
