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Fiat money is a currency without intrinsic value that has been established as money , often by government regulation. Fiat money does not have use value , and has value only because a government maintains its value, or because parties engaging in exchange agree on its value. Commodity money is created from a good, often a precious metal such as gold or silver , which has uses other than as a medium of exchange such a good is called a commodity. Representative money is similar to fiat money, but it represents a claim on a commodity which can be redeemed to a greater or lesser extent.
The first use of fiat money was recorded in China around AD. Since then, it has been used by various countries, usually concurrently with commodity currencies. Fiat money started to dominate in the 20th century. Since the decoupling of the US dollar from gold by Richard Nixon in , a system of national fiat currencies has been used globally, with freely floating exchange rates between the national currencies.
While gold- or silver-backed representative money entails the legal requirement that the bank of issue redeem it in fixed weights of gold or silver, fiat money's value is unrelated to the value of any physical quantity.
A coin is fiat currency to the extent that its face value , or value defined in law, is greater than its market value as metal. The term fiat derives from the Latin fiat "let it be done"  used in the sense of an order, decree  or resolution.
In monetary economics , fiat money is an intrinsically valueless object or record that is widely accepted as a means of payment. Circulating silver coins in the s ceased to be produced containing the precious metal when the face value of the coin was below the cost of the elemental metal.
The Coinage Act of eliminated silver from the circulating dimes and quarter dollars of the United States, and most other countries did the same with their coins. The Canadian penny was mostly copper until and was removed from circulation in the fall of due to the cost of production relative to face value. In the Royal Canadian Mint produced a million dollar gold bullion coin and sold five of them. In , the gold in the coins was worth more than 3.
Fiat money originated in 11th century China,  and its use became widespread during the Yuan and Ming dynasties. Although the notes were valued at a certain exchange rate for gold, silver, or silk, conversion was never allowed in practice. The government made several attempts to support the paper by demanding taxes partly in currency and making other laws, but the damage had been done, and the notes fell out of favor.
The successive Yuan Dynasty was the first dynasty in China to use paper currency as the predominant circulating medium. The original notes during the Yuan Dynasty were restricted in area and duration as in the Song Dynasty. All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver Tally sticks were employed as fiat currency in medieval England when, due to gold shortage, [ citation needed ] Henry I initiated their use by the Exchequer in or around ; royal taxes had to be paid in tally sticks.
In , Johan Palmstruch issued the first regular paper money in the West, under royal charter from the Kingdom of Sweden, through a new institution, the Bank of Stockholm. While this private paper currency was largely a failure, the Swedish parliament eventually took over the issue of paper money in the country.
By , its paper money was inconvertible to specie, but acceptance was mandated by the government. Fiat money also has other roots in 17th-century Europe, having been introduced by the Bank of Amsterdam in In 17th century New France , now part of Canada, the universally accepted medium of exchange was the beaver pelt.
As the colony expanded, coins from France came to be widely used, but there was usually a shortage of French coins. In , the colonial authorities in New France found themselves seriously short of money.
A military expedition against the Iroquois had gone badly and tax revenues were down, reducing government money reserves. Typically, when short of funds, the government would simply delay paying merchants for purchases, but it was not safe to delay payment to soldiers due to the risk of mutiny. Jacques de Meulles , the Intendant of Finance, came up with an ingenious ad-hoc solution — the temporary issuance of paper money to pay the soldiers, in the form of playing cards.
He confiscated all the playing cards in the colony, cut them up into pieces, wrote denominations on the pieces, signed them, and issued them to the soldiers as pay in lieu of gold and silver. Because of the chronic shortages of money of all types in the colonies, these cards were readily accepted by merchants and the public and circulated freely at face value. It was intended to be purely a temporary expedient, and it was not until years later that its role as a medium of exchange was recognized.
The first issue of playing card money occurred in June and was redeemed three months later. However, the shortages of coinage reoccurred and more issues of card money were made in subsequent years. Because of their wide acceptance as money and the general shortage of money in the colony, many of the playing cards were not redeemed but continued to circulate, acting as a useful substitute for scarce gold and silver coins from France. Eventually, the Governor of New France acknowledged their useful role as a circulating medium of exchange.
As the finances of the French government deteriorated because of European wars, it reduced its financial support for its colonies, so the colonial authorities in Canada relied more and more on card money. By , the government had discontinued all payments in coin and payments were made in paper instead.
The costs of the war with the British led to rapid inflation in New France. Following the British conquest in , the paper money became almost worthless, but business did not come to a halt because gold and silver that had been hoarded came back into circulation. Under the Treaty of Paris , the French government agreed to convert the outstanding card money into debentures , but with the French government essentially bankrupt , these bonds fell into default and by they were worthless.
It therefore has an intrinsic value which considerably exceeds its fiat value. An early form of fiat currency in the American Colonies were " bills of credit. The notes were issued to pay current obligations and could be called by levying taxes at a later time.
These types of notes were issued particularly in Pennsylvania , Virginia and Massachusetts. Such money was sold at a discount of silver, which the government would then spend, and would expire at a fixed point in time later.
Bills of credit have generated some controversy from their inception. Colonial powers consciously introduced fiat currencies backed by taxes, e. The purpose of such taxes was later served by property tax.
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. Congress before the Constitution ; paper versus gold ducats in Napoleonic era Vienna , where paper often traded at During the s, withdrawal of the notes from circulation was opposed by the United States Greenback Party.
It was termed as 'fiat money' in an party convention. After World War I , governments and banks generally still promised to convert notes and coins into their underlying nominal commodity redemption in specie, typically gold on demand. However, the costs of the war and the required repairs and economic growth based on government borrowing afterward made governments suspend redemption in specie. From to , the Bretton Woods agreement fixed the value of 35 United States dollars to one troy ounce of gold.
Trade imbalances were corrected by gold reserve exchanges or by loans from the International Monetary Fund. The Bretton Woods system collapsed in what became known as the Nixon Shock. This was a series of economic measures taken by United States President Richard Nixon in , including unilaterally canceling the direct convertibility of the United States dollar to gold. Since then, a system of national fiat monies has been used globally, with freely floating exchange rates between the major currencies.
A central bank introduces new money into the economy by purchasing financial assets or lending money to financial institutions. Commercial banks then redeploy or repurpose this base money by credit creation through fractional reserve banking , which expands the total supply of broad money cash plus demand deposits.
In modern economies, relatively little of the supply of broad money is in physical currency. For example, in December in the U. The Bank for International Settlements , published a detailed review of payment system developments in the G10 countries in in the first of a series that has become known as "red books".
The most notable currency not included in this table is the Chinese yuan , where its statistics are listed as "not available". The adoption of fiat currency by many countries, from the 18th century onwards, made much larger variations in the supply of money possible. Since then, huge increases in the supply of paper money have taken place in a number of countries, producing hyperinflations — episodes of extreme inflation rates much higher than those observed in earlier periods of commodity money.
The hyperinflation in the Weimar Republic of Germany is a notable example. Economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.
Money supply growth may instead lead to stable prices at a time in which they would otherwise be falling. Some economists maintain that under the conditions of a liquidity trap , large monetary injections are like "pushing on a string. The task of keeping the rate of inflation low and stable is usually given to monetary authorities.
Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates , through open market operations , and through the setting of banking reserve requirements. A fiat-money currency greatly loses its value should the issuing government or central bank either lose the ability to, or refuse to, further guarantee its value. The usual consequence is hyperinflation. Some examples where this has occurred are the Zimbabwean dollar , China in and the mark in the Weimar Republic in But this need not necessarily occur; for example, the so-called Swiss dinar continued to retain value in Kurdish Iraq even after its legal tender status was withdrawn by the Iraqi central government which issued the notes.
From Wikipedia, the free encyclopedia. Card money in New France. History of the Canada dollar. Money creation and Monetary policy. Economics portal Numismatics portal. Journal of Money, Credit and Banking. Monetary Theory and Policy. The Classification of Money". A Treatise on Money. Fiat Money is Representative or token Money i. The Concise Fintech Compendium. Journal of Political Economy. Money and Monetary Policy in China, — , Berkeley: University of California Press.
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