Fiat Money

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Blog Author :

WallStreetMojo Team

Edited by :

Ashish Kumar Srivastav

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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Fiat Money Meaning

Fiat money is a government-released currency endorsed by the authority’s creditworthiness and not physical assets like silver or gold. Moreover, most countries solely utilize banknotes as fiat money or currency for payment purposes. The fiat money examples incorporate crucial international paper currencies such as the US dollar and the Euro. 

With no inherent worth, the value of the fiat money system is obtained from the supply and demand relationship. Furthermore, it substitutes commodity money (generated from valuable metals) and representative money (convertible funds). While it results in economic stability, it can lead to hyperinflation.

Table of contents
Fiat Money Meaning
  • Fiat money is a government-issued legal tender supported by the regime and not tangible commodities. For example, foreign currencies like the Euro and the US dollar.  
  • Fiat currency was first introduced in China in 1000 AD. It was retained in the US until President Richard Milhous Nixon ended the conversion potential in 1971. 
  • Its advantages include abundant supply, stability, and inexpensive production costs. Conversely, the disadvantages entail hyperinflation, government domination, and high prices. 
  • Concerning the fiat money vs commodity money system, both terms differ regarding payment implications, government interference, and currency type. 

Fiat Money Explained

The Fiat money system is backed by the reliability of the issuing government and is used as a means of payment. Moreover, its value relies on the nation’s commercial performance, leadership, and its effect on lending rates. Please note that the fiat money system is unredeemable and inconvertible. 

Furthermore, the administration must ensure its complete security against duplication and management of finances for a strong fiat currency. Thus, a politically stable country possibly has a strong fiat currency that facilitates purchasing power. Contrastingly, an unstable nation has weak money, hindering purchasing power.

History Of Fiat Money

In his book “The Laws,” scholar Plato suggested scrapping silver and gold coinage and endorsed a local authority-ruled fiat currency (probably iron-made). Nevertheless, the unfortunate consequences of his proposal had him imprisoned. Later on, China registered its earliest usage around 1000 AD.

Furthermore, fiat currency was instituted in the US amid the emergence of North American colonialism. Firstly, the government presented US notes (a type of paper fiat currency alias greenbacks) throughout the civil war. Afterward, the Bretton Woods Agreement (1944) set the valuation of 35 US dollars to one troy ounce of gold. 

The US federal initially assured citizens of retrieving the bucks in gold. Nonetheless, the existent President Richard Nixon finished the conversion potential in 1971 (Nixon shock) due to decreased gold stocks. Moreover, the Russian ruble and Chinese “flying money” are some instances of unsuccessful fiat currencies over the years. 

Examples 

Let us study these fiat money examples in detail:

Example #1

Here is the list of 10 global fiat currencies:

  1. US Dollar ($)
  2. Japanese Yen (ÂĄ)
  3. United Arab Emirates Dirham (ŘŻ.ŘĄ)
  4. Chinese Yuan (ÂĄ)
  5. Euro (€)
  6. Australian Dollar ($)
  7. British Pound (ÂŁ)
  8. Indian Rupee (â‚ą)
  9. Mexican Peso ($)
  10. Canadian Dollar ($)

Example #2

The author of “The Bitcoin Standard”, Dr. Safidean Ammous describes the reason behind Bitcoin being the next-gen money and the hidden charges of fiat currency on the stage of Bitcoin 2022. He also explains how the currency has been utilized to persecute ordinary citizens for centuries. Labeling it as “government-enabled,” he further highlighted the corruption embedded in most fiat nations. 

Moreover, Ammous states that the cost of total fiat currency is 3.5% of the entire international wealth. Nevertheless, the amount is used to fund wars, monopoly banksters, and government parasites. He also firmly mentioned how fiat currency helps broaden the economic divide. 

Fiat Money vs Commodity Money

Particulars Fiat Money Commodity Money
Definition Government-released legal tender backed by the regime’s creditworthiness. Money that derives its worth from the commodity of which it is manufactured.
Intrinsic value No Yes
Examples US Dollar Copper
Euro Silver
Japanese Yen Gold
Chinese Yuan Barley
Payment implications No final payment (only discharged) Payment in the form of commodity
Government involvement Subject to governmental interference No government intervention
Quantity calculation Governmental financial rules Market forces
Currency type Political currency Economic currency

Advantages And Disadvantages Of Fiat Money

The consumption of fiat currency has both, it's boon and bane. So, let us examine them thoroughly:

Advantages And Disadvantages Of Fiat Money

Advantages

#1 - Cheaper Production Costs

Regarding fiat money vs. commodity money, the former’s production cost is almost negligible, whereas the latter is costlier to manufacture. This is because fiat currency only comprises the price of papermaking. On the other hand, commodity money covers workforce expenses needed for commodity extraction. 

#2 - Unlimited Supply

The federal reserve bank can generate an ample amount of fiat currencies. This differs from the commodity-backed currencies because of the asset’s constrictive nature causing ineffective economic yield. 

#3 - Security

The commodity-backed currencies are volatile due to regular business cycle and periodic recessions. Conversely, fiat money meaning signifies a currency backed by the full credit of the government. Thus, it triggers immense security through decreased demand for commodities. This also helps consumers avoid their storage and brings in surged cost security. 

Disadvantages

#1 - Devaluation

The overabundance of fiat currencies may certainly create economic bubbles, hyperinflation, and devaluation. This leads to a decreased confidence level in the money and hence, low purchasing power. Please note that it is not a foolproof method for commercial security as tax evasion, theft, and unlawful payments are untraceable with fiat currencies. 

#2 - Government-Restricted Worth

The value of a fiat currency is undoubtedly dependent on the financial performance and political stability of the issuing regime. Hence, the currency’s worth may collapse (to zero) during a possible global recession. Therefore, this enhances the dependence on third parties for creation (government), possession (banks), and valuation (vendors).

#3 - Exorbitant Charges And Limitations

Federal banks fix regular cash expenditure and withdrawal limits. As a result, the charges for foreign transfers are exceptionally high and time-consuming. Also, converting one fiat currency to another is a long and tedious procedure. 

Frequently Asked Questions (FAQs)

What Is Fiat Money And Its Examples?

Fiat money is a government-validated currency not backed by any commodity but the issuing authority’s creditworthiness. Moreover, fiat money has no intrinsic value and is non-convertible and irredeemable. For example, the US dollar (USD), the Euro, the Japanese Yen, and the Chinese Yuan are fiat currencies.

Does Fiat Money Have Intrinsic Value?

No. Fiat money has no intrinsic value. Rather, it conveys a legal tender whose worth is fixed by the issuing government and the supply and demand relationship. Additionally, it is not supported by any physical commodity and is determined as per the administration’s stability.

Will Fiat Currency Collapse?

The collapse of the fiat currency remains a highly improbable event, except in the case of higher inflation. As the federal reserve controls the regulation of fiat currencies, the shortage of money is an unlikely scenario. However, it may collapse to even zero in a rare case of a global recession.