What is fiat money?
Fiat money is national legal tender that derives its value from the state that enacts it, rather than a physical product or commodity. The power of the state, which creates the value of fiat money, is the key to this type of money. Most countries around the world use fiat money to purchase products and services, invest, and save. Fiat money has replaced the gold standard and other commodity-based systems in establishing the value of national currency.
The rise of fiat money
The roots of fiat money go back centuries to China. The Sicuan region began printing paper money in the 11th century. At first, silk could be exchanged for gold and silver, but later Kublai Khan came to power and established the fiat currency system in the 13th century. Historians claim that this money was instrumental in the collapse of the Mongol Empire, and that overspending and hyperinflation were the roots of the collapse.
Fiat money was also used in 17th century Europe by Spain, Sweden and the Netherlands. The system failed in Sweden and the state abandoned its use and moved to the silver standard. Over the next two centuries, New France in Canada, the American Colonies, and then the U.S. The Federal Government has tried fiat money and achieved both success and failure.
In the 20th century, B.D. It has returned to using commodity-based currency in a partially limited area. In 1933, the government ended the practice of exchanging paper money for gold. In 1972, under President Nixon, the United States completely abandoned the gold standard and switched to the fiat currency system. This brought the end of the gold standard internationally and led to the use of the fiat money system in the world.
Fiat money Gold standard comparison
The gold standard system allowed paper money to be converted into gold. In fact, all paper money was backed by a limited number of gold coins held by the state. In the commodity-based monetary system, the government and banks could only introduce new money into the economy if there were resources equivalent to its value in gold stocks. This system limited the state's ability to create money and increase the value of money solely based on economic factors.
On the other hand, in the fiat money system, money cannot be converted into anything else. With fiat money, authorities can directly influence the value of the currency and tie it to economic conditions. States and central banks of countries have much more control over their monetary systems and can respond to various financial events and crises through the use of different tools, such as creating fractional reserve banking or initiating quantitative easing.
Proponents of the gold standard argue that commodity-based monetary systems are more stable because they are backed by something physical and valuable. Fiat supporters, on the other hand, argue that the gold standard has not been stable at all in the past. In this context, the value of both the commodity-based monetary system and fiat money may vary. However, in a fiat money system, the government can act more flexibly in the event of an economic emergency.
Some pros and cons of using fiat money
Economists and other economic experts are open about how much they support fiat systems. The pros and cons of this monetary system are the subject of heated debates between opponents and proponents.
Scarcity: Fiat money is not affected by the scarcity of a physical commodity such as gold.
Cost: Fiat money is less expensive to produce than commodity-based money.
Responsiveness: Fiat money provides governments and central banks with flexibility in response to economic crises.
International Trade: Fiat money is used by many nations around the world, making it a convenient currency for international trade.
Convenience: Unlike gold, fiat money does not rely on physical resources that require storage, protection, tracking and other costly needs.
Lack of intrinsic value: Fiat money has no inherent value. This allows governments to create money from scratch, which can lead to hyperinflation and the collapse of the economic system.
Historically risky: Historically, the establishment of fiat systems has typically led to financial crashes, which suggests that their use carries some risks.
Fiat and Cryptocurrency comparison
Fiat and cryptocurrency are similar in that neither is backed by a physical commodity, but their similarities end there. While fiat money is controlled by governments and centralized banks, cryptocurrencies are essentially decentralized, largely driven by Blockchain, a distributed digital ledger.
One of the obvious differences between these two monetary systems is the way currencies are created. Like most cryptocurrencies, Bitcoin has a controlled and limited supply. In contrast, with fiat currencies, banks can create money out of thin air based on their assessment of the country's economic needs.
Cryptocurrencies, as a digital form of money, are borderless and have no physical counterpart, making them less restrictive on transactions made around the world. Moreover, transactions made are irreversible and the nature of cryptocurrencies makes them more difficult to track than fiat systems.
It is also worth noting that the cryptocurrency market is much smaller and therefore much more volatile than traditional markets. This is one of the reasons why cryptocurrencies are not yet accepted worldwide, but as the crypto economy develops and matures, volatility will likely decrease.
Conclusion
The future of both currencies is uncertain. Cryptocurrencies have a long road ahead of them and it is certain that they will face many more challenges along the way. The history of fiat money systems also reveals the sensitivity of this type of money. This is an important reason why many people are considering the possibility of switching at least some of their financial transactions to the cryptocurrency system.
One of the main reasons behind the creation of Bitcoin and cryptocurrencies is to explore a new type of money built on a distributed peer-to-peer network. Bitcoin was most likely not created to replace the entire fiat system, but to offer an alternative economic network that has the potential to create a better financial system for a better society.