What is Fiat money?
Fiat money is also known as fiat money, which is a currency whose value is set by the government rather than a commodity with physical properties. The power of government to help establish the value of fiat money is key to it. Most countries around the world use a fiat money system to buy goods and services, invest and save. Fiat money has replaced the gold standard and other commodity-based systems in establishing the value of fiat money.
The most famous and powerful fiat currency in the world right now is the USD issued by the US Federal Reserve (FED) under the guarantee of the US federal government. To be more precise, the US Government “pledges” the future tax money of the people to the FED, and the FED prints the greenback for the Government to spend.
Origin of fiat money (Fiat)
Today, we use both coins and banknotes, but that was not always the case. Before coins and paper money were available, people used many unusual things to buy what they needed.
For example, in one part of the world, people use shark teeth as money. In many other places, money can be colorful bird feathers and rare shells. In some places, people also use the stiff hair on the elephant’s tail to make money. Feather is the lightest coin ever. They are used on Santa Cruz Island. Stone is the heaviest coin ever. They are used on Yap Island in the Pacific Ocean. There are stones weighing over 500 pounds (1 pound = 0.4536 kg). In prison, a cigarette can also be money or an object of equal value, for example, the price for one time is 5 Thang Long cigarettes.
The smallest coin ever discovered in Greece. Money is made of metal, but is smaller than an apple seed. No one knows exactly when people started using money in the form of coins. Archaeologists have discovered coins dating back to 600 BC, so we know they’ve been around for a long time. At first people used precious metals like gold and silver to create coins. They print a human or animal (animal) image on each coin to determine its value. In the 1200s, the Chinese minted iron coins.
These coins are of little value, so people have to use a large amount when making purchases. Because it was inconvenient to carry a large number of heavy iron coins, the government printed receipts. These receipts were taken to the bank to be exchanged for coins. This is the first example we get of the issuance and use of paper money.
Fiat money was used in Dai Viet after the millennial period of Northern domination, it was the coins strung together, the first paper currency in the history of our country was issued by King Ho Quy Ly in the early 15th century. , but not used by people. In the 19th century, the Indochinese silver coin was forced by the French colonialists to use, this is the second paper currency and also the legal currency for the whole Indochina (Vietnam, Orange, Laos).
Fiat money was also used in Europe during the 17th century, adopted by Spain, Sweden, and the Netherlands. The system failed in Sweden and the government eventually abandoned it in favor of the silver standard. Over the next two centuries, New France in Canada, the American colonies, and later the US federal government also experimented with fiat money with mixed results.
In the 20th century, the United States reverted to a limited use of commodity-based money. In 1933, the government stopped exchanging paper money for gold. In 1972, under President Nixon, the United States completely abandoned the gold standard, putting an end to it on an international scale, switching to a fiat money system. This leads to the use of fiat money globally.
The gold standard system allowed the conversion of paper money into gold. Practically all paper money is backed by a finite amount of gold held by the government. In a commodity-based money system, governments and banks can only bring more money into the economy if they hold an equal amount of gold in reserves. With this system, the government is limited in its ability to print money and add value to capital based solely on economic factors.
On the other hand, in the fiat money system, money may not be converted to anything else. With fiat money, authorities can directly affect the value of money and tie it to economic conditions. Governments and central banks have more control over the monetary system and can respond to various types of financial events and crises with different tools, such as fractional reserve banking and implement quantitative easing.
Proponents of the gold standard argue that a commodity-based money system is more stable because it is backed by something that is truly physical and valuable. Supporters of the fiat money system protest because of the volatility of the gold price. In the context of the gold standard, the value of commodity and fiat money can fluctuate. But with a fiat money system, the government has more flexibility to deal with an economic emergency.
What is the original, then convert it to that. The world’s first oil standard coin is the Venezuelan Petro coin, converted at a ratio of 1:1 , one Petro is equivalent to 1 barrel of oil. But this state-owned coin is embargoed by the US, and also goes against the decentralized nature of cryptocurrencies, which are government-controlled and issued coins.
What determines the value of fiat money?
The value of fiat is based on usability. Money can be used and has value because it is based on a trusting relationship between the issuer, the holder, and the recipients and users of them.
If confidence in the value of money is lost, it will lose demand which will lead to a decrease in value. The trust comes from the fact that many people around the world believe it will be worth it. The value of money is not like other assets like precious metals or a commodity.
For example, when the Venezuelan government started issuing too much money, the supply exceeded demand and people no longer trusted the currency – so it collapsed.
Where can fiat money be used?
Fiat currencies are widely accepted around the world and you can use them to buy almost any kind of goods or services. Fiat money includes paper money, coins, credits, loans or bonds. If you apply for a credit card or personal loan and it is approved, the credit or amount you receive is a form of payment because you are using the funds on a guaranteed and agreed basis. that you’ll pay it back – often with interest attached.
You can also convert fiat into other currencies while you are on vacation, traveling or sending money around the world. An international money transfer service that allows anyone to pay and transfer money for a fee.
Pros and cons of using fiat money
Economists and other financial experts disagree in favor of fiat money. Defenders and opponents enthusiastically debate the pros and cons of this monetary system.
Scarcity: Fiat money is unaffected and limited by the scarcity of a physical commodity like gold.
Cost: The creation of fiat money is more affordable than commodity-based money.
Flexible response: Fiat money gives governments and central banks the flexibility to deal with economic crises.
International commerce: Fiat money is used in countries around the world, making it an accepted currency for international commerce.
Convenient: Fiat money does not depend on gold reserves. Storing gold requires expensive storage, protection, monitoring, and other requirements.
No intrinsic value: Fiat money has no intrinsic value. This allows the government to create money from nothing, which can lead to inflation and the collapse of the economic system.
Risks in history: History has seen financial collapse due to the implementation of the fiat money system. That suggests that it does have some risks.
Fiat Money and Cryptocurrencies
The one thing that fiat money and cryptocurrencies have in common is that the two are not backed by a physical commodity – and that’s all. While fiat money is controlled by governments and central banks, cryptocurrencies are essentially decentralized, mainly due to a distributed digital ledger known as the Blockchain.
One notable difference between these two money systems is the way they are created. Bitcoin, like most cryptocurrencies, has a controlled and limited supply. In contrast, fiat money can be created by banks from nothing, based on their judgment of the economic needs of the country.
As a form of digital currency, cryptocurrencies have no physical characteristics and are borderless, making them less restrictive for transactions around the world. Furthermore, transactions are immutable, and the nature of cryptocurrencies makes it more difficult to trace than the fiat money system.
Notably, the cryptocurrency market is much smaller in size, and therefore more volatile, than the traditional market. That is one of the reasons cryptocurrencies are still not widely accepted.
The future of both of these currencies is uncertain. While cryptocurrencies still have a long way to go and will certainly face many challenges, the history of fiat money shows the potential for vulnerability posed by this currency. It’s a big reason many people are exploring the prospects of moving towards a cryptocurrency system for their financial transactions – at least within a few percentage points.
One of the main ideas behind the creation of Bitcoin and cryptocurrency was to find a new form of money built on a distributed peer-to-peer network. Chances are Bitcoin was not created to replace the entire fiat money system, but it does offer an alternative economic network that has the potential to help create a better financial system for a better society.
According to Tapchibitcoin
Follow the Twitter page | Subscribe to Telegram channel | Follow the Facebook page