2018-01-21
452The term 'fiat' in this case has nothing to do with the Italian carmakers. The term derives from the Latin fiat, meaning "let it be done",...
Fiat money is the opposite of honest money. Fiat money is money that is declared to have value even if it does not. Honest money has value regardless of what people say. Gold and silver are often referred to as honest money.
Fiat money is also known as paper money, or electronic money. Since there is nothing behind paper money but the obligation of a state to redeem it in more paper or electronic money, fiat money's ultimate worth is questionable at best. Mainly an outgrowth of central banking, in the modern age, fiat money probably would not be attractive without state support.
In the United States, the world's largest and most dominant economy, the greenback became a fiat currency when President Richard Nixon broke the final link between gold and the dollar in 1971. He did this because the French were apparently threatening to redeem their dollars in gold – and neither the US central bank and/or Treasury did not have enough gold to redeem French greenbacks.
In any event, Nixon severed the dollar's relationship to gold and ever since then the world has embarked on a "bold experiment" in which the global, anchor currency has no specific relationship to an underlying asset. Predictably, this has meant that the United States has continually created more and more fiat dollars, thus inflating the overall stock of dollars and making them worth less and less.
China, one of the world's most ancient civilizations, is said to have had no less than eight separate interregnums of fiat currency – each collapsing and then being replaced by another. In the 1800s, fiat money was even banned by the Chinese. Today, however, the Chinese government is once again a user of fiat money along with the rest of the world. Fiat money has never been so prevalent perhaps as in the modern age. But that doesn't make it any healthier or less prone to failure. Those who ignore history are doomed to repeat it.
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Here is an interesting opinion on fiat money and the inherent strength of US dollar from an American economist on a website.
Bruman Says:
I was doing some research into what really ties fiat currency to any value at all, and the answer seems to be that the only thing that fiat currency is firmly tied to in any way is the settlement of tax obligations. $1 may be worth a lot or a little, but pretty much the only thing it is guaranteed to do is be able to extinguish $1 worth of US tax obligations. As long as a substantial portion of the world’s money is subject to US taxation, the USD will be a currency in demand.
So what makes the stregth of US dollar? People mostly pay their taxes where they live. The American way of life is attractive. Many people around the world want to move to the US, hence become US tax-payers. So they are going to need US dollars, if they are going to have the American way of life. And dollar stregth lies in the minds of those people who want to raise their children in US.
