Tuesday, October 23, 2012

What is a Fiat currency?

Fiat money is one that is based on government regulation or law, rather than physical gold or silver.

A fiat currency is one based on the value of the country itself, rather than the gold reserves.

It is essentially paper money backed by a perceived value rather than something tangibly valuable that you can hold in your hand.

Fiat currencies are not a new idea. First seen in 11th century China, the practice of using paper money continued in China late into the 14th century, until it got out of hand and was banned by the Ming dynasty in 1455.

This is what explorer Marco Polo had to say on the subject;

“All these pieces of paper are, issued with as much solemnity and authority as if they were of pure gold or silver... and indeed everybody takes them readily, for where-soever a person may go throughout the Great Kahn's dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold.”

When you consider how much money and debt there is in the world today, it seems that all currencies are Fiat currencies although economists shy away from the term.

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The Weimar republic is a much quoted example in modern history. Bank notes were issued in excess of gold reserves and without anything to back up their value.

This caused inflation to rise to ludicrous levels (hyper inflation) over three years and ended up with people needing wheelbarrows full of money to buy even a loaf of bread.

Could things go the same way today? With the global financial crisis is there enough gold in the world to back up even the debts of even one country?

Quantitative easing , after all, is the practice of printing extra money and if it is not backed up with any true value, how can it be anything other than Fiat money?

Today money does not even get as far as being printed and is just seen as extra noughts on a screen.

 The USA debt alone is calculated at 16 trillion dollars.

A billion equals a thousand million, so 1000, 000,000.

A trillion is a million x million so is 1,000,000,000,000.

Imagine what 16 trillion dollar bills would look like!

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