We put our value in many everyday items even though there is no real tangible value to it. Money on the other hand is tangible value that is worldwide. However, when it comes to fiat currency, is it truly valuable? Or is it simply valuable because we just believe that?
First off, what is fiat currency? “Fiat money is currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material from which the money is made” (Radcliffe). It was first introduced as a substitute to a commodity-backed currency, but this currency is not backed up to any physical reserves, so it is worthless when hyperinflation comes into play. Just like if people in America stop using the U.S. dollar, it won’t have any value.
Money, in all it’s different forms, have played an essential role in human society. However, the use of fiat money is so widespread that people don’t question its value. Economists question the value it is and if it’s really fundamental.
Usually currencies are based on gold or silver, physical commodities. But this fiat money is “based solely on the faith and credit of the economy” (Radcliffe). Most paper money is fiat currency due to it not having intrinsic value, value that is “calculated value of a company using fundamental analysis” (Intrinsic Value). It’s only used as a payment.
Today, fiat money is stored as a digital form instead of a physical asset. “The purchasing power of fiat money is glued to the state’s authority and any damage to that authority leads to a decrease of fiat money’s value and results in inflation” (Fiat Money News). Basically, fiat money is only valuable as long as the government says it is or maintains it.
To think more on this, why does assets have value? Assets like land or lands. Both different because of the physicality of each one, but they still hold value because they are “financial instrument[s]” (The Evolution).
So why does fiat money have the value that it does? “Fiat money is a financial instrument and must derive its value from its contractual properties, even if that contract is implied rather than explicit” (The Evolution). And the value on that works only if the market is confident in the long-term economy. It’s all risky.
To conclude, fiat currency is money that the government declares as a legal tender and can be in digital form. It has value because we believe it does. The U.S. dollar will only be of value because we use it as payment. Other than that, it’s just a piece of paper in our wallet really worth nothing but what we think it has. We think $1 is worth $1 or a candy bar because that’s the value the government and market have placed it under.
Radcliffe, Brent. “Fiat Money.” Investopedia, Investopedia, 4 Aug. 2018, www.investopedia.com/terms/f/fiatmoney.asp.
“Latest News on Fiat Money.” Cointelegraph, Cointelegraph, 23 May 2018, cointelegraph.com/tags/fiat-money.
“Latest News on Fiat Money.” Cointelegraph, Cointelegraph, 23 May 2018, cointelegraph.com/tags/fiat-money.
