What is Fiat Currency?
In short, fiat currencies (or Fiat Currency) are those that have their value guaranteed by the issuing government, and not by a physical good or commodity. The strength and respect of each government issuing a currency is what determines the value of this type of money. Most countries around the world use the fiat currency system to purchase goods and services, invest, and save. Fiat currencies have replaced the gold standard and other commodity-based systems in establishing the value of currency.
The Growth of Fiat Currencies
Fiat currencies originated in China hundreds of years ago. Szechuan Province began issuing paper money during the 11th century. At first, it could be exchanged for silk, gold or silver. But eventually, Emperor Kublai Khan came to power and established a fiat monetary system during the 13th century. Historians argue that this money was instrumental in the downfall of the Mongol Empire, with overspending and hyperinflation at the root of its decline.
Fiat money was also used in Europe during the 17th century, being adopted by Spain, Sweden and the Netherlands. The system was a failure in Sweden and the government ended up abandoning it and switching to the silver standard soon after. In the subsequent two centuries, New France in Canada, the American Colonies, and the U.S. federal government also experimented with fiat money with varying results.
In the 20th century, the US returned to using commodity-based currency on a limited basis. In 1933, the government ended the practice of exchanging paper money for gold. In 1972, under the administration of President Nixon, the USA completely abandoned the gold standard, decreeing its end on an international scale, and switching to the fiat currency system. This made the use of this type of currency much more widespread around the world.
Fiat vs. Fiat Currency Golden pattern
The gold standard system allowed the conversion of paper notes into gold. In fact, all paper money was directly related to a finite amount of gold held by the government. Under a commodity-based monetary system, governments and banks could only introduce new banknotes into the economy if they had an equivalent amount in value in their gold reserves. This system placed a limit on the government's ability to create money and increase the value of its currency based solely on economic factors.
On the other hand, under the fiat currency system, money cannot be converted into anything else. With fiat money, authorities can directly impact the value of their currency and link it to economic conditions. Their countries' governments and central banks have much more control over monetary systems and can respond to varying financial events and crises with different tools, such as creating fractional reserve banking and implementing quantitative easing.
Proponents of the gold standard argue that a commodity-based monetary system is more stable because it is backed by something physical and valuable. Proponents of fiat currencies claim that gold prices have been anything but stable. In this context, the price or value of commodity-based currency and fiat currency may fluctuate. But with a fiat currency system, the government has more flexibility to act when there is an economic emergency.
Some Pros and Cons of Using Fiat Currencies
Economists and other financial experts are not unanimous in their support for fiat currencies. Proponents and opponents argue passionately about the pros and cons of this monetary system.
Scarcity: Fiat currencies are not impacted by issues such as scarcity or limitations as is the case with gold.
Cost: It is much cheaper to produce paper money than commodity-based ones.
International Trading: Fiat currencies are used by several nations around the world, making them interesting for international trading.
Convenience: Paper money is not like gold reserves, which require places for storage, protection, monitoring and other things that have additional costs.
Lack of intrinsic value: Fiat currencies have no intrinsic value. This allows governments to create money out of thin air, which could lead to hyperinflation and the collapse of the economic system.
Historically Risky : Historically, the implementation of fiat currency systems has typically caused financial collapses, which suggests that their use has some risks.
Fiat vs. Fiat Currencies Cryptocurrencies
Fiat currencies and cryptocurrencies have some characteristics in common, as neither is backed by a physical commodity - but that's where the similarity ends. While fiat currency is controlled by governments and central banks, cryptocurrencies are essentially decentralized, largely due to a distributed digital ledger called Blockchain.
Another notable difference between these two monetary systems is the way in which each of these forms of money is generated. Bitcoin, like most cryptocurrencies, has a controlled and limited supply - in contrast to fiat currency which banks can basically create out of thin air according to their judgment of a nation's economic needs.
As a form of digital money, cryptocurrencies have no physical characteristics and no borders, making them less restrictive for transactions around the world. Furthermore, transactions are irreversible and the nature of cryptocurrencies makes tracking considerably more difficult compared to the fiat currency system.
It is worth noting that the cryptocurrency market is much smaller and therefore much more volatile than traditional markets. This is probably one of the reasons why cryptocurrencies are not yet universally accepted, but as digital money grows and matures, volatility will likely decrease over time.
Conclusion
The future of these two types of money is by no means guaranteed. While cryptocurrencies still have a long way to go and will certainly face many more challenges, the history of fiat currencies demonstrates the vulnerability of this form of money. This is a big reason why many people are exploring the possibilities of starting to use the cryptocurrency system for their financial transactions - at least on some level.
One of the main ideas behind the creation of Bitcoin and cryptocurrencies is to explore a new form of money built on a fully distributed peer-to-peer (P2P) network. Chances are that Bitcoin was not created to replace the entire fiat monetary system, but to offer an alternative economic network that certainly has the potential to create a better financial system for a better society.
