Fiat Money Meaning System Examples Vs Commodity Money

Fiat Money Meaning

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.

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Key Takeaways

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 greenbacksGreenbacksGreenback refers to the first paper money issued by the United States government in the 19th century to finance the expenses of the American Civil War.read more) throughout the civil war. Afterward, the Bretton Woods Agreement (1944) set the valuation of 35 US dollars to one troy ounceTroy OunceA troy ounce (oz t) refers to a unit of measurement used to represent the weight of an object. It is different from the standard ounce and optimal for noting the weight of precious metals like gold, platinum, and silver.read more 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:

US Dollar ($)Japanese Yen (¥)United Arab Emirates Dirham (د.إ)Chinese Yuan (¥)Euro (€)Australian Dollar ($)British Pound (£)Indian Rupee (₹)Mexican Peso ($)Canadian Dollar ($)

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

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

#1 – Cheaper Production Costs

Regarding fiat money vs. commodity money, the former’s production costProduction CostProduction Cost is the total capital amount that a Company spends in producing finished goods or offering specific services. You can calculate it by adding Direct Material cost, Direct Labor Cost, & Manufacturing Overhead Cost. read more 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 cycleBusiness CycleThe business cycle refers to the alternating phases of economic growth and decline.read more 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, hyperinflationHyperinflationHyperinflation is merely an accelerated level of inflation that tends to quickly destroy the actual value of the local currency since there is a rise in the cost of all products and services, and it causes people to lower their holdings in that particular currency as they opt to participate in foreign currencies that are relatively more stable.read more, 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 evasionTax EvasionTax Evasion is an illegal act in which the taxpayers deliberately misreport their financial affairs to reduce or evade the actual tax liability. This includes using multiple financial ledgers, hiding or representing lesser income, gains, or profits than actually earned, overstating deductions, & failing to file returns. read more, 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 recessionGlobal RecessionGlobal recession refers to a condition when the countries across the globe experience an economic downturn for an extended period. It is a form of synchronized economic downfall encountered by the various interrelated economies throughout the world.read more. Therefore, this enhances the dependence on third parties for creation (government), possession (banks), and valuation (vendorsVendorsA vendor refers to an individual or an entity that sells products and services to businesses or consumers. It receives payments in exchange for making items available to end-users. They constitute an integral part of the supply chain management for providing raw materials to manufacturers and finished goods to customers.read more).

#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.