Fiat Money 

Fiat Money 

The word “fiat” is a Latin word that’s best interpreted as “by decree.” This means that any fiat currency, i.e., paper money, only has value because their respective governments say so. As a result of such legal decrees of value, paper or fiat currencies are also called “legal tender” which means they have to be accepted for payment of goods and services in their respective countries. That being said, you can now see that money as we know it today has value only because of its legal status, which is declared by governments. As I mentioned earlier, the trust in the value of money has shifted from something (gold) to someone (the government).

Now fiat money as we know it now has some pretty serious issues. These are being centralized and are practically unlimited in quantity. Being centralized means that there’s a central or lone authority that has the power to issue and control its supply, which in the case of the United States dollar is the Federal Reserve. It’s also practically unlimited in quantity because the Federal Reserve has the power and capability to print or mint more units of the US dollar if it chooses to do so.  Now, why is this a serious concern?

The reason is one of the most basic principles of economics; supply and demand. To be more specific, this means that when the supply of an object is increased, the value of that object will tend to decrease assuming demand for that thing remains constant. Conversely, when the supply of an item is decreased, assuming constant demand, the value will increase. So if the Federal Reserve or any monetary authority prints more money, it’ll flood markets with more of that currency, which can make it worth less, i.e., buy less of goods and services. So when you see the prices of goods and services rising substantially over the long term, it’s not necessarily because they became more expensive but because the value of the currency, e.g., the United States dollar, has dropped due to increased supply.


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