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Encyclopedia > Fiat money

Fiat money or fiat currency, is money that is current or legal tender as satisfaction for money debts by government fiat, that is by law. It is often associated with paper money unbacked by fixed assets or issued without the promise of redemption in some other form, and can be contrasted with money which is accepted by tradition or social convention. Legal tender or forced tender is payment that cannot be refused in settlement of a debt by virtue of law. ... A £20 Ulster Bank banknote. ...


As of 2004, most currencies in the world are fiat money. However, the situation with major currencies, such as the euro, the United States dollar and the Swiss franc is more complex, which is why a distinction is made for hard currencies. Fiat money is called "fiduciary money" in many languages. 2004 is a leap year starting on Thursday of the Gregorian calendar. ... The euro (symbol: €; banking code: EUR) is the currency of twelve European Union member states: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain, collectively known as the Eurozone. ... USD redirects here. ... The Swiss franc (ISO 4217: CHF or 756), CHF, the Confœderatio Helvetica franc, is the currency and legal tender of Switzerland and Liechtenstein. ... Hard currency, in economics, refers to a currency in which investors have confidence, such as that of a politically stable country with low inflation and consistent monetary and fiscal policies, and one that if anything is tending to appreciate against other currencies on a trade-weighted basis. ...


The word fiat when considered in the context of "fiat money" is generally considered to stem from the Latin for "let it be", although there is an alternative school of thought that believes the word to be a corruption of the past tense of the latin fidere which means "to trust". Latin is an ancient Indo-European language originally spoken in the region around Rome called Latium. ...

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Debate over the term

What exactly is a "fiat" currency is a matter of some debate, with a spectrum of opinion that runs from hard money advocates which declare that anything other than fixed commodity such as gold is "fiat money", to a range of economic theories which hold that market dynamics enforce fiscal discipline, other heterodox schools of thought reject the veil of money and define all monies other than the goods themselves to be equivalently fiat. In most modern usages of the word spectrum, there is a unifying theme of a variety of possible cases between extremes at either end. ... The word commodity is a term with distinct meanings in business and in Marxian political economy. ... General Name, Symbol, Number gold, Au, 79 Chemical series transition metals Group, Period, Block 11, 6, d Appearance metallic yellow Atomic mass 196. ... Veil of money describes a problem in economics, which centers around the question of whether money is a commodity like other commodities, such as oil or gold or food - or whether it has special properties. ...


In general, ultra-conservatives define fiat money stringently, and an opposition to fiat money is coupled with an opposition to fractional reserve banking and governments having a central bank. There is disagreement among them as to whether representative money backed by specie is fiat money, with many conservatives arguing that notes can have payment in specie suspended by law. In economics, particularly in financial economics, fractional-reserve banking is the near-universal practice of banks of retaining only a fraction of their deposits and notes as reserves to satisfy demands for withdrawals, investing the remainder at interest to obtain income that can be used to pay interest to depositors...


Advocates of "debt-free money" argue that money which requires the issuing of central bank debt is a burden on the public. In essence, just as there is a school of thought which opposes any money which is not linked to specific, countable, and measurable reserves, there is a school of thought which denies the value of any encumbrance on the government's ability to issue notes at all.


The problems of maintaining a currency not linked to a fixed and redeemable asset dominate modern political economy, and are a feature of open currency macroeconomics. Nations whose currency is devalued or under attack (See financial crisis, capital flight, hyperinflation) are often encouraged or required to link their currency to an external currency or basket of currencies. Political economy was the original term for the study of production, the acts of buying and selling, and their relationships to laws, customs and government. ... Macroeconomics is the economics sub-field of study that considers aggregate behavior, i. ... A currency crisis (also known as a financial crisis) occurs when the value of a currency changes quickly, undermining its ability to serve as a medium for exchange or a store of value. ... Seen in Asian markets in the 1990s capital flight is when assets and/or money rapidly flow out of a country. ... In economics, hyperinflation is inflation which is out of control, a condition in which prices increase rapidly as a currency loses its value. ...


Historical summary

Historically, specie based money — generally gold and silver — was the unit of account that governments would accept as "legal tender", and was struck into coins which were the "circulating medium". That is, the government would accept it as payment, and would enforce others accepting gold and silver coin, usually at fixed rates. Notes backed directly by currency became used by private banks and holders of specie, which were used as "drafts" to move or lend money. This system of drafts has never completely disappeared, and there are today high tech equivalents of it that use fax machines in place of bank notes. However, such hard currencies were frequently in short supply, leading to alternate currencies based on a promise to pay, such as "notes of credit", "bank notes" or stock in companies. Such money becomes fiat money when the central government accepts, or requires others to accept, such notes as legal tender. Examples include stock in government monopolies and military scrip issued to soldiers. The general term "paper money" was used to cover such fiat money during the 18th and early 19th century, and its tendency to inflate led to hardened political opposition to any use of paper, even if backed by promise to pay, because such promises were easy to break, and hard to hold accountable. A commodity metal, historically gold and silver, backing money or currency. ... General Name, Symbol, Number gold, Au, 79 Chemical series transition metals Group, Period, Block 11, 6, d Appearance metallic yellow Atomic mass 196. ... General Name, Symbol, Number silver, Ag, 47 Chemical series transition metals Group, Period, Block 11, 5, d Appearance lustrous white metal Atomic mass 107. ... Legal tender or forced tender is payment that cannot be refused in settlement of a debt by virtue of law. ... word coinage Coín (a town in Malaga province in Spain) 25¢ Canadian coin A coin is usually a piece of hard material, generally metal and usually in the shape of a disc, which is issued by a government to be used as a form of money. ... Scrip is any substitute for currency which is not legal tender. ...


The first historical example of fiat money was in China. Chinese governments would produce "notes of credit" which were valued as tender for limited periods of time, in order to prevent inflation. The Song dynasty (10th through 13th centuries), however, created unlimited legal tender paper money, good throughout their empire, as a way of centralizing financial control, and preventing external trade. This money, however, was only as stable as the mandarinate that enforced it, and only as safe as the rigidity and integrity of the people who created it. Since it was both easy to counterfeit, and communication was slow, the Song experiment with paper money collapsed, as individuals preferred doing business through bank drafts, or checks, which were backed with gold or silver. Alternative meaning: Song Dynasty (420-479) The Song dynasty (Chinese: 宋朝) was a ruling dynasty in China from 960-1279. ... The word check has these meanings: In finance, a check is an order for transfer of money. ...


In the 19th century, there was an increasing demand for international trade, which made monetary standards based on more than one kind of specie less and less stable, as individuals would take advantage of government determined exchange rates to buy silver where it was cheap, and then redeem it for gold where it was overvalued. This led to the gradual adoption of the gold standard among industrialized nations. While exact dates are often hard to fix, Britain's adoption of the gold sovereign in 1816 began their move to a gold standard, and 1844 is generally dated as the establishment of the practical gold standard in the United Kingdom. Previously silver had been the standard against which gold was measured, because Europe had had an influx of silver from mines in Germany and silver looted from the Inca and Aztec empires. The word "dollar" comes from the name "Thaler" for a silver coin from the mines near the town of Joachimsthal in Bohemia. These mines were the first significant discovery of silver in Europe since antiquity. Alternative meaning: Nineteenth Century (periodical) (18th century — 19th century — 20th century — more centuries) As a means of recording the passage of time, the 19th century was that century which lasted from 1801-1900 in the sense of the Gregorian calendar. ... 1922 U.S. gold certificate The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold and currency issuers guarantee, under specified rules, to redeem notes in that amount of gold. ... A satellite composite image of Europe Europe is the worlds second-smallest continent in terms of area, covering around 10,790,000 km² (4,170,000 sq mi) or 2. ... For other meanings of Inca, see Inca (disambiguation). ... The word Aztec is usually used as a historical term, although some contemporary Nahuatl speakers would consider themselves Aztecs. ... The dollar (represented by the dollar sign: $) is the name of the official currency in several countries, dependencies and other regions. ... Examples of German and Austrian thalers compared to a US quarter piece The Thaler was a silver coin used throughout Europe for almost four hundred years. ... Jáchymov (originally Thal, later Sankt Joachimsthal in German) is a spa town in the Czech Republic, located at the St. ... Bohemia This article is about the historical region in central Europe; for other uses, see Bohemia (disambiguation). ...


Governments would often produce notes which were fiat currency, with the promise to allow holders to pay taxes in those notes, in effect, assuring at least one future trading partner for the note. These notes were also referred to as "debt" based money, and included the issuance of notes in the British colonies in America, particularly in Virginia and Massachusetts. Such debt based money was sold at a discount of silver, which the government would then spend, and would expire at a fixed point in time later. However, even this more restricted form of fiat money was prone to inflationary or deflationary cycles, as those entities which could tax in specie would do so, leaving the debt based money to be devalued as its expiration grew nearer. ... State nickname: Old Dominion Official languages English Capital Richmond Largest city Virginia Beach Governor Mark R. Warner (D) Tim Kaine (D-Governor Elect) Senators John Warner (R) George Allen (R) Area  - Total  - % water Ranked 35th 110,862 km² 7. ... State nickname: Bay State Official languages English Capital Boston Largest city Boston Governor Mitt Romney (R) Senators Edward Kennedy (D) John Kerry (D) Area  - Total  - % water Ranked 44th 27,360 km² 25. ...


The repeated cycle of deflationary hard money, followed by inflationary paper money continued through much of the 18th and 19th centuries. Often nations would have dual currencies, with paper trading at some discount to specie backed money. Examples include the "Continental" issued by the US Congress before the constitution; paper versus gold ducats in Napoleonic era Vienna, where paper often traded at 100:1 against gold; the South Sea Bubble, which produced bank notes not backed by sufficient reserves; and the Mississippi Scheme of John Law. The abuse of paper money issued by banks led most industrialized nations to either outlaw private currency, or strictly regulate its printing, such as the United States National Banking Act of 1862. The Congress of the United States is the legislative branch of the federal government of the United States of America. ... The ducat was a gold coin that was used throughout Europe. ... Vienna (German: Wien [viːn]; Hungarian: Bécs, Czech: Vídeň, Slovak: Viedeň, Romany Vidnya; Serbian: Beč) is the capital of Austria, and also one of Austrias nine states (Land Wien). ... Hogarthian image of the South Sea Bubble by Edward Matthew Ward, Tate Gallery More well known than The South Sea Company is perhaps the South Sea Bubble (1711 - September 1720) which is the name given to the economic bubble that occurred through overheated speculation in the company shares during 1720. ... State nickname: Magnolia State Official languages English Capital Jackson Largest city Jackson Governor Haley Barbour (R) Senators Thad Cochran (R) Trent Lott (R) Area  - Total  - % water Ranked 32nd 125,546 km² 3 Population  - Total (2000)  - Density Ranked 31st 2,697,243 23. ... Jean Law John Law (1671 April 21 - 1729 March 21) was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself, and that national wealth depended on trade. ...


Each cycle of inflation and panic would leave citizens vowing never to allow inflation again, until the next round of bone-crushing deflation caused business failure and squeezed borrowers who had to pay back in much harder money than they had borrowed. A good example being the abolition of the "Bank of the United States" by Andrew Jackson, where he declared paper money backed by the government "unconstitutional". The two temptations — to create inflationary currencies and to allow reserves to drop from one-to-one to the expected rate of redemption of gold — repeatedly hobbled economic stability. Andrew Jackson (March 15, 1767 – June 8, 1845), one of the founders of the Democratic Party, was the seventh President of the United States, serving from 1829 to 1837. ...


It was World War I which was the collision between specie currency and fiat money. By this point most nations had a legalized government monopoly on legal tender, and in theory governments promised to redeem notes in gold or silver on demand. However, the costs of the war and the massive expansion afterward made every currency effectively fiat money, since there was no reason for a government not to print as much money as it felt it could back with some fraction of its reserves. Since there was no direct penalty for doing so, governments were not responsible for the economic consequences of "running the printing presses", and the 20th century found itself facing a new economic terror: hyperinflation. World War I was primarily a European conflict with many facets: immense human sacrifice, stalemate trench warfare, and the use of new, devastating weapons - tanks, aircraft, machine guns, and poison gas. ... In economics, hyperinflation is inflation which is out of control, a condition in which prices increase rapidly as a currency loses its value. ...


The economic crisis led to attempts to reassert hard money with a new kind of currency: asset-based money. This money combined aspects of fiat currency, in that there was limited convertibility, fractional reserve banking and a unit of account set by the government, with commodity based money, in that there were limits to the amount of money that could be put into circulation. However, many nations failed to create appropriate legal checks and balances, and they continued to suffer inflationary booms and deflationary busts as a result. One recent example was the Argentine bust which followed the unravelling of its "currency board". Instead of being linked to gold, the peso was linked to the US dollar, which served as the hard money basis. When an economic crisis hit, dollar reserves fled the country, causing the monetary basis to collapse. Peso is the name of the currency of various countries: Argentina: Argentine peso (ISO 4217: ARS) Chile: Chilean peso (CLP) Colombia: Colombian peso (COP) Cuba: Cuban peso (CUP) Dominican Republic: Dominican peso (DOP) Mexico: Mexican peso (MXN, previously MXP) Philippines: Philippine peso (PHP) Uruguay: Uruguayan peso (UYU) In Spanish peso... The United States dollar is the official currency of the United States. ...


Credit-based monetary systems

After World War II, the Bretton Woods system was set up, which pegged the value of the United States dollar to 1/35 troy ounces (888.671 milligrams) of gold (the "gold standard") and other currencies to the U.S. dollar. The US promised to redeem dollars in gold to other central banks. Trade imbalances were corrected by gold reserve exchanges or by loans from the International Monetary Fund. World War II was a truly global conflict with many facets: immense human suffering, fierce indoctrination, and the use of new, extremely devastating weapons such as the atomic bomb. ... Wikipedia does not have an article with this exact name. ... Troy weight is a system of units of mass customarily used for precious metals and gemstones. ... The milligram (symbol mg) is an SI unit of mass. ... 1922 U.S. gold certificate The gold standard is a monetary system in which the standard economic unit of account is a fixed weight of gold and currency issuers guarantee, under specified rules, to redeem notes in that amount of gold. ... The logo of the International Monetary Fund (IMF) The International Monetary Fund (IMF) is the international organization entrusted with overseeing the global financial system by monitoring exchange rates and balance of payments, as well as offering technical and financial assistance when asked. ...


Global capitalism, wherein a currency is widely traded as a commodity in itself, is more likely to rely on credit money which can reflect both (commodity) supplies and protections of supplies (by states' military fiats). It is not held stable by any one state but rather by tension between states, as investment migrates from currency to currency in an open "money market". As long as there is an international feedback mechanism, whereby states that attempt to inflate their currency suffer a corresponding drop in international buying power, and an internal feedback mechanism, whereby the government is liable for economic failures that stem from fiscal or monetary irresponsibility, the money system does not take on the characteristics of a fiat money system. However, to proponents of hard money such mechanisms are not to be trusted, and all money not directly based on specie redeemable on demand is "fiat money". Wikiquote has a collection of quotations related to: Capitalism The page is about the economic system. ... The word commodity is a term with distinct meanings in business and in Marxian political economy. ... Credit money is money that is backed by a promise to pay made by someone other than the state. ... Military fiat is a process whereby a decision is made and enforced by military means without the participation of other political elements. ... The money market is the financial market for short-term borrowing and lending, typically up to one year. ...


This regime of asset-based money, or credit-based money, in which banks create currency as intermediaries and governments, in turn, back the banking system, produces a different series of problems. In no small part because it is not immediately easy to differentiate sound currencies from unsound ones, and it is possible to convert credit-based money into fiat money by a legal act or regulation. The question of confidence dominates credit-based money, the confidence that a particular central bank or government will not act in a manner contrary to its national interest by allowing the money supply to rise or fall too much. Part of the system of confidence includes holding of reserves to be able to support a currency if attacked, and the issuing of debt to regulate the supply of currency.


Critiques of credit money expansion

Both Marxist economics and green economists view the evolution from fiat-centric to credit-centric regimes as fundamental to global capitalism, as direct imperialism and colonialism is replaced by more local intermediaries, and relations between rich and poor are defined more by debt. Marxian economics refers to a body of economic thought stemming from the work of Karl Marx. ... Green economics loosely defines a theory of economics by which an economy is considered to be component of the ecosystem in which it resides. ... Wikiquote has a collection of quotations related to: Capitalism The page is about the economic system. ... Imperialism is a policy of extending control or authority over foreign entities as a means of acquisition and/or maintenance of empires, either through direct territorial conquest or through indirect methods of exerting control on the politics and/or economy of other countries. ... Bold textItalic text World map of colonialism at the end of the Second World War in 1945. ...


Some groups (such as the anti-globalization movement or advocates of communism) characterize the shift as shallow and insincere. They argue that imperial or colonial powers (such as the United States or United Kingdom) retain full control of the military power, especially naval power critical to control of commodity trade, and delegate only local enforcement to their former colonies (now their "allies"). They also argue that the credit regime is biased very heavily towards nation-states avowing capitalism, accepting policy from the International Monetary Fund, clearing their currencies via the Bank for International Settlements (BIS), and belonging to the World Trade Organization. These, they argue, simply extend the existing military fiat and its unfair advantages from colonialism, such as setting commodity prices artificially low. Anti-WEF grafiti in Lausanne. ... Communism refers to a theoretical system of social organization and a political movement based on common ownership of the means of production. ... Wikiquote has a collection of quotations related to: Capitalism The page is about the economic system. ... The logo of the International Monetary Fund (IMF) The International Monetary Fund (IMF) is the international organization entrusted with overseeing the global financial system by monitoring exchange rates and balance of payments, as well as offering technical and financial assistance when asked. ... BIS Headquarters in Basel The Bank for International Settlements (BIS), based in Basel, Switzerland, is an international organization of central banks established in 1930 under the Hague agreements. ... WTO Logo The World Trade Organization (WTO) is a multinational rules-based and member driven organization which oversees a large number of agreements defining the rules of trade between its member states (WTO, 2004a). ... Military fiat is a process whereby a decision is made and enforced by military means without the participation of other political elements. ... Bold textItalic text World map of colonialism at the end of the Second World War in 1945. ...


Neo-classical economists respond that no nation is required to belong to any of these organizations, and that states such as Cuba and North Korea retain a strict military fiat and retain their own absolute control of currency, especially hard currency easily traded for goods on the Western markets. They point to the difficult economic position of these nations as evidence of the futility of maintaining fiat money regimes in a world run by mutual credit capitalism. To which critics respond that position has been amplified by isolation, sanctions and boycott, and these nations have suffered collateral damage due to their affiliation with the Soviet Union during the Cold War. This argument, however, is quite unconvincing to classical economists, who reply in turn that isolated economies are practicing not only fiat banking, but also protectionism — practices which protect incompetent local competitors from competent global competitors. Military fiat is a process whereby a decision is made and enforced by military means without the participation of other political elements. ... Hard currency, in economics, refers to a currency in which investors have confidence, such as that of a politically stable country with low inflation and consistent monetary and fiscal policies, and one that if anything is tending to appreciate against other currencies on a trade-weighted basis. ... Wikiquote has a collection of quotations related to: Capitalism The page is about the economic system. ... A boycott is a refusal to buy, sell, or otherwise trade with an individual or business who is generally believed by the participants in the boycott to be doing something morally wrong. ... Collateral damage refers to unintended damage amidst intended damage. ... For the generic term for a high-tension struggle between countries, see cold war (war). ... Protectionism is the economic policy of protecting a nations manufacturing base from the effects of foreign competition by means of very high tariffs on imported goods, restrictive quotas, or other means of reducing importation. ...


The relation of fiat money, usury, debt interest, and commodity money is complex and must usually be established in a political economy as a whole. Competing national economies and their relative advantages and stabilities are reflected on global currency markets. There are moves to make the BIS employ credit ratings for nation-states to render them equivalent to corporations or landowners for the purpose of required reserves. This would "hardwire the credit culture" in the words of Andrew Crocket, former head of the Bank. It would also render it difficult or impossible to truly distinguish fiat money from credit money, as both would then rely on the hegemony of global capitalism and the nation-states that practice it. In effect, all hard currency would rise and fall based on the agreements behind the BIS itself. Usury (from the Latin usuria, demanding in return for a loan a greater amount than was borrowed) was defined originally as charging a fee for the use of money. ... Commodity money refers to money whose value comes from a commodity out of which it is made. ... Political economy was the original term for the study of production, the acts of buying and selling, and their relationships to laws, customs and government. ... The Currency Market or Foreign Exchange Market is one of the largest markets in the world. ... BIS Headquarters in Basel The Bank for International Settlements (BIS), based in Basel, Switzerland, is an international organization of central banks established in 1930 under the Hague agreements. ... A credit rating agency is a company that rates the ability of a person or company to pay back a loan. ... Andrew Crockett is the former head of the Bank for International Settlements. ... Hegemony is the dominance of one group over other groups, with or without the threat of force, to the extent that, for instance, the dominant party can dictate the terms of trade to its advantage; more broadly, cultural perspectives become skewed to favor the dominant group. ... Wikiquote has a collection of quotations related to: Capitalism The page is about the economic system. ...


The importance of fiat money as a concept

In a market economy, individuals should, ideally, make decisions based on the trade off between desires, particularly the trade off between having a good, service or license, and having the liquidity of money. When the role of the government in maintaining or backing the money supply is in question, the issue of credibility enters decisions. Economic actors begin making decisions they would otherwise not make for fear that the currency or money that they hold will change in value radically. This risk produces economic distortions: people convert money to other forms, increasing the demand for goods that are not meant to be used, but hoarded. Economic actors will shelter income in other currencies, or charge higher interest rates. There may be a depression as money which is percieved to be of more durable value leaves circulation, governments may stop striking metallic coins that are retained by individuals. Market liquidity is a business or economics term that refers to the ability to quickly buy or sell a particular item without causing a significant movement in the price. ... Credibility is the believability of a statement, action, or source, and the ability of the observer to believe that statement. ...


Fiat money then calls into question the veil of money, money ceases to be a commodity like others, and begins to have special and peculiar properties. Instead of focusing on production, investment and consumption, economic actors begin to attempt to divine the actions of government. Since actors can have foreknowledge of government actions in a way they cannot have of a market, this leads to economic efforts to bribe, control or curry favor with the entities holding fiat power. Veil of money describes a problem in economics, which centers around the question of whether money is a commodity like other commodities, such as oil or gold or food - or whether it has special properties. ...


Fiat money is also closely tied to government borrowing for expenditures that do not have a clear social return, or which may have negative expectations, such as wars of conquest. Governments choose to pay for war in fiat money, rather than in hard currency or specie, on the belief that the returns of war will be sufficient to pay promised notes, and that during wartime shortage and austerity, goods are not available in any case. This has seldom proven to be the case in the absence of strong inflationary controls. Instead, the usual cycle is for the value of fiat notes to trade at a significant discount to portable and stable forms of exchange, specifically those that will be tender regardless of the winning side in the conflict.


Fiat money is also associated with attempts to control trade, if individuals possess notes which are not redeemable outside of the control of a government, the idea is that they will have to purchase preferentially within the boundaries of the nation, rather than importing. (See Protectionism) It was David Hume who first argued that this merely leads to inflation by the quantity theory of money, even if the money is backed by specie. Protectionism is the economic policy of protecting a nations manufacturing base from the effects of foreign competition by means of very high tariffs on imported goods, restrictive quotas, or other means of reducing importation. ... Wikiquote has a collection of quotations related to: David Hume Online editions of Humes work: Works by David Hume at Project Gutenberg Free eBook of A Treatise of Human Nature at Project Gutenberg Free eBook of The History of England, Volume I at Project Gutenberg Free eBook of An... Velocity of money In economics, the velocity of money refers to a key term in the quantity theory of money, which centers on the equation of exchange: M*V = P*Q where M is the total amount of money in circulation in an economy at any one time (say, on...


Another aspect of fiat money is its relation to property rights. Many economists argue that since a government that has control over its territory can requisition, confiscate or otherwise ban the use of specie within its boundaries, or suspend promise payments - as has often happened in the past - the presence of fiat manipulation of money is seen as being a signal that a government is intent on abrogating property rights for other purposes.


The opposing view is that Governments do not immediately intend to confiscate or ban the use of specie within its boundaries, nor reduce the property rights of its citizens. Instead a Government may be oblivious to the root cause of hyperinflation (excessive increase in the money supply); or worse still, a Government may be aware of the cause, but choose to ignore the problem as it is not one that will come to light in its current political term. In economics, hyperinflation is inflation which is out of control, a condition in which prices increase rapidly as a currency loses its value. ...


Some political economists argue that there is no such thing as fiat money, that governments can create fiat currency, but that the amount of money is determined by the valuation of the market place, and that attempts to create fiat currency beyond the demand for money generate inflation. In the words of Keynes "Money doesn't matter", meaning control of the money supply beyond limited boundaries will be adjusted for in the marketplace. (See IS-LM model). John Maynard Keynes John Maynard Keynes [ˈkeɪns], 1st Baron Keynes of Tilton (June 5, 1883 - April 21, 1946) was an English economist, whose radical ideas had a major impact on modern economic and political thought. ... The IS curve moves to the right, causing higher interest rates and expansion in the real economy (real GDP). ...


The idea that there is no such thing as fiat money is also consistent with the real bills doctrine. On this view, all paper and credit money is backed by the assets of the entity that issued it--usually by the gold and bonds of the central bank or the tax collecting ability of the government that issued it. Since all modern central banks do in fact maintain assets as collateral against the money they issue, one has to ask why these assets are universally held if, as quantity theorists claim, they are irrelevant to the value of the central bank's money.


The real bills view (See Sproul, at www.econ.ucla.edu/workingpapers/wp830.pdf) says that economists have wrongly claimed that because a money is inconvertible, it must be unbacked. Most of the confusion centers around two meanings of convertibility: (1) physical convertibility, where a unit of paper or credit money (a "dollar") can be presented to the issuing bank in exchange for a physical amount of gold, silver, or some other commodity, and (2) financial convertibility, where a dollar can be returned to the issuing bank in exchange for a dollar's worth of the bank's assets. The importance of financial convertibility can be seen by imagining that people in a community one day find themselves with more paper currency than they wish to hold--for example, when the Christmas shopping season has ended. If the dollar is physically convertible (for one ounce of silver, let us suppose), people will return the unwanted dollars to the bank in exchange for silver, but the bank could head off this demand for silver by selling some of its own bonds to the public in exchange for its own paper dollars. For example, if the community has $100 of unwanted paper money, and if people intend to redeem the unwanted $100 for silver at the bank, the bank could simply sell $100 worth of bonds or other assets in exchange for $100 of its own paper dollars. This will soak up the unwanted paper and head off peoples' desire to redeem the $100 for silver. Thus by conducting this type of open market operation--selling bonds when there is excess currency and buying bonds when there is too little, the bank can maintain the value of the dollar at one ounce of silver without ever redeeming any paper dollars for silver. In fact, this is essentially what all modern central banks do, and the fact that their currencies might be physically inconvertible is made irrelevant by the maintenance of financial convertibility. Note that financial convertibility cannot be maintained unless the bank has sufficient assets to back the currency it has issued, so the notion that a currency that is (physically) inconvertible is also unbacked is an illusion.


A further illustration of the irrelevance of physical convertibility can be seen by supposing that a bank issues two kinds of paper dollars: one redeemable for silver throughout the year and another redeemable for one ounce of silver, but only at the end of one year. If the market interest rate is 5%, and if it is costless to issue paper dollars, then the inconvertible dollars must start the year worth about .95 ounces, rise to about .97 ounces at mid-year, and finish the year worth exactly 1 ounce. Any other values would result in arbitrage opportunities. For example, if the dollar started the year worth .96 ounces, then the bank could lend the .96 ounces of silver at 5%, be repaid 1.01 ounces at year-end, pay off the paper dollar with 1.0 ounces, and earn a free lunch of .01 ounces.


What is the value of the convertible dollar? A little reflection will convince the reader that it too must start the year at .95 ounces, reach .97 ounces at mid-year, and finish the year at 1.0 ounces. That is, the issuing bank must actually raise the amount of silver it will pay for a dollar over the course of the year, or arbitrage opportunities will result. For example, suppose that at the start of the year, customers can deposit .95 ounces and get one paper dollar in exchange--a physically convertible dollar that can be returned to the bank for .95 ounces if the customer desires. If that dollar remained at .95 ounces over the whole year, then at the end of the year the bank will have received a free lunch of .05 ounces--a free lunch that will attract rival bankers willing to pay 5% interest to the holders of their dollars.


The result of these processes is that a convertible dollar will always be worth the same as an inconvertible dollar, so that if convertibility is suspended at any time, the value of the now inconvertible dollar will be unaffected--thus creating the illusion that the backing of the money was never relevant to begin with.


See also

e-gold is, according to the e-gold website, 100% backed by gold Digital Gold Currencies (DGCs) are a form of electronic money denominated in gold weight. ... e-gold is a digital gold currency operated by Gold & Silver Reserve Inc. ... This article discusses the use of the precious metal gold as an investment. ...

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Fiat money - Wikipedia, the free encyclopedia (3476 words)
Fiat money or fiat currency, is money that is current or legal tender as satisfaction for money debts by government fiat, that is by law.
The word fiat when considered in the context of "fiat money" is generally considered to stem from the Latin for "let it be", although there is an alternative school of thought that believes the word to be a corruption of the past tense of the latin fidere which means "to trust".
Fiat money is also associated with attempts to control trade, if individuals possess notes which are not redeemable outside of the control of a government, the idea is that they will have to purchase preferentially within the boundaries of the nation, rather than importing.
Encyclopedia: Fiat money (539 words)
Fiat money, by definition, does not have any intrinsic value, nor is it backed by anything other than the confidence holders have in the economy which is covered by the government which decrees it to have value.
Fiat money or Fiat currency (usually paper money) is a type of currency whose only value is that a government made a fiat (i.e.
Fiat money is a promise to pay by the issuer and does not necessarily have any intrinsic value.
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