What is Fiat Currency? | Learn more about Fiat Money
Fiat currency or junk money like the US dollar is a legal currency that derives its value from its exporting government and, unlike commodity money, its value does not depend on a physical commodity. Fiat is derived from the Latin word for “let it be done”. The government that prints Fiat money is the determining factor in its value. Many countries currently use the Fiat currency system to purchase goods, services, investments, and deposits. This monetary system has replaced the gold standard and commodity money.
The Genesis of the Fiat Money
The origin of Fiat money genesis dates back centuries to China when Sichuan province decided to print its paper money in the 11th century. Initially, this money could be converted into silk, gold or silver. But eventually, with the advent of the Kubla Khan, he established the Fiat currency system in the 13th century. This currency system ended up being expensive for the Mongol empire, with historians blaming the over-spending and the resulting hyperinflation as the main reasons for the collapse of the empire.
In the 17th century, Fiat money was used in continental Europe and Spain, the Netherlands, and Sweden. Fiat’s currency system in Sweden failed and the government replaced it with the silver standard. Over the next two centuries, New France and the Thirteen Colonies in North America also adopted the system and were later used by the US federal government.
In the 20th century, the US government once again shifted to the commodity system, and from 1933 onwards the government stopped exchanging paper money for gold. In 1972, at the behest of then-President Richard Nixon, the United States abolished the gold standard and introduced the collapse of the monetary system backed by Fiat money on a global scale.
Fiat currencies and the gold standard
The gold standard allowed the conversion of paper notes to gold. All paper money backed by the limited gold reserves held by the government. Under the gold-backed currency system, governments and banks were able to introduce equity to the economy only if they had gold reserves. This monetary system prevented the government from creating money and increasing its value solely based on economic factors.
Under the Fiat currency system, on the other hand, money can no longer be converted into an asset or a commodity. Governors with Fiat-money can directly influence the value of national currencies and link it to the country’s economic conditions. In this monetary system, government and central banks play the most crucial role in dealing with various financial events, such as creating fractional reserve banking or small facilities.
Proponents of the gold standard believe that the currency system is more stable because of its support for a valuable physical asset. In contrast, Fiat-money holders believe that the price of gold is volatile in itself. In this sense, the value of both types of monetary systems will fluctuate. But in the Fiat-currency system, the government will need more flexibility in times of economic emergency.
Advantages and disadvantages of Fiat money
- Financial experts and economists do not agree on supporting Fiat currencies. Its defenders and opponents point out the following advantages and disadvantages of Fiat-currencies:
- Scarcity: Fiat-money is not affected by the scarcity of commodities or physical assets such as gold.
- Cost: Creating Fiat money is more economically advantageous than commodity money.
- Reactive: Fiat money gives the government and central bank the power to be flexible about economic crises.
- International Exchanges: Fiat currencies are used by many countries around the world. This has provided an acceptable form of money for business transactions.
- Convenience: Unlike gold, Fiat money does not have the physical resources it needs to maintain, protect, monitor and other costly matters.
- Lack of intrinsic value: Fiat currencies lack intrinsic value. This allows governments to “make money out of nothing” that can lead to hyperinflation and ultimately the collapse of a country’s economic system.
- Dark Background: From historical examples, the implementation of the Fiat currency system has usually led to the collapse of financial systems, indicating that the use of this monetary system is risky.
Fiat currency and digital currency
The only similarity between Fiat currency and digital currency is their lack of physical support. While is controlled by governments and central banks, digital currencies are decentralized.
The obvious difference between these two monetary systems is how they make new money in each of them. Bitcoin, as a prime example of digital currencies, has a limited supply and number of coins compared to Fiat’s money-controlled banks, which can be created without any basis.
As a digital form of money, digital currencies have no physical boundaries and are not limited to any boundaries. Besides, transactions in digital currencies are irreversible, while in Fiat_currencies they are not.
It should be noted that the digital currency market is much smaller and more vibrant than traditional markets and currency exchanges. This is one of the reasons that have prevented the widespread adoption of these currencies internationally. But with the growth of the digital currency market, it is likely to be less and less volatile.
The future of any currency system is uncertain. While digital currencies have a long way to go to overcome various obstacles, the history of Fiat currencies has shown that this type of currency is vulnerable.
This is one of the main reasons some people move to the digital currency system and use it in financial transactions.
One of the main ideas of bitcoin and digital currencies has been the discovery of a new form of money on a distributed, peer-to-peer network. Bitcoin can play an important role in the future of the global economy as an alternative economic network. You can contact Expay24 to make any cryptocurrency exchanges, ask your questions and get advice from our experts about digital currencies. You can contact us by online chatting, sending emails and direct calling every day from 9 AM to 24 PM. It’s worth mentioning that our services are 100% automatic!