Fiat money is a kind of money that is used as a means of exchange and accepted in society as a payment means. It is not based on a physical commodity like gold but on the government that issues it. This paper will discuss the history of fiat money and how it is different from other forms of money.
Fiat money has been in use for many centuries, even as the term ‘fiat’ itself has its roots from the Latin word ‘fiat,’ which literally means ‘let it be done.’ In the context of money, this means that fiat money is created by a central authority, such as a government or a central bank, and is accepted in exchange for goods and services by the very power of that authority.
Commodity money is different from fiat money since commodity money is money that is based on an asset. In the past, many societies used commodity money since the value of the commodity itself determined the value of the money. However, this type of money has its disadvantages such as the fact that it is difficult to carry around, the value of the commodity may change and the commodity can be lost or stolen.
Fiat money was introduced in the United States in the early 20th century when the country abandoned the gold standard and started using fiat money. Before this, the United States had used gold and silver coins as its currency but the government realized that it was not easy to fix the value of the money when the prices of gold and silver changed.
Some characteristics that are associated with fiat money are as follows: A typical feature is that it is not backed by a physical commodity. This means that it is based on the government or central bank that produces it and it is acceptable because people use it as a means of payment. This means that fiat money is not tied directly to the value of a physical commodity and the value is determined by the stability of the issuing authority.
The other feature of fiat money is that it is usually in the form of paper currency such as banknotes and coins. This makes it easier to carry around and use than other forms of money because it can be carried with the owner and kept safely. Contemporary forms of fiat money include debit and credit cards which are also in use today to make purchases.
A central bank creates fiat money and it has the right to issue new money and regulate the supply of money in the economy. The central bank has a number of tools at its disposal including the setting of interest rates or the purchase and sale of government bonds. The objectives of these tools are to maintain price stability of the currency and thus ensure economic growth.
There is one possible drawback of using fiat money and that is inflation which is an increase in the general price level. When the supply of money increases faster than the demand for goods and services, it will lead to an increase in prices. This can erode the value of the currency because people will need more of it to purchase the same goods and services. Inflation is a concern to governments and central banks because it can lead to instability in the economy and erode the value of savings. However, most modern economies have fairly low and relatively constant inflation rates and most central banks aim to keep inflation within a certain band of target rates.
Fiat money is used in almost all the countries of the world and is the most popular form of money in the world economy. This is because it is accepted almost everywhere and is a crucial part of the work of modern economies. However, just like any other form of money, using fiat money has its pitfalls, including the problem of inflation. But it has some advantages over the other forms of money such as ease of use, ease of transportation, and the ability to be sent and received electronically.
Therefore, fiat money is a kind of money which is used as a means of exchange and has value because it is accepted as a means of payment. It is not backed by a physical commodity but by the government or central bank that offers it. Fiat money is convenient and easy to carry, can be sent and received electronically and is accepted in trade. However, it has the disadvantage of having inflation, which affects the value of the currency and the savings.