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Fiat money (from la, fiat, "let it be done") is a type of
currency A currency, "in circulation", from la, currens, -entis, literally meaning "running" or "traversing" is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general ...
that is not backed by any commodity such as
gold Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile ...
or
silver Silver is a chemical element with the symbol Ag (from the Latin ', derived from the Proto-Indo-European ''h₂erǵ'': "shiny" or "white") and atomic number 47. A soft, white, lustrous transition metal, it exhibits the highest electrical ...
. It is typically designated by the issuing government to be legal tender. Throughout history, fiat money was sometimes issued by local banks and other institutions. In modern times, fiat money is generally authorized by government regulation. Fiat money generally does not have intrinsic value and does not have use value. It has value only because the individuals who use it as a unit of account or, in the case of currency, a medium of exchange agree on its value. They trust that it will be accepted by merchants and other people. Fiat money is an alternative to
commodity money Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods. This is in contrast to representa ...
, which is a currency that has intrinsic value because it contains, for example, a precious metal such as gold or silver which is embedded in the coin. Fiat also differs from representative money, which is money that has intrinsic value because it is backed by and can be converted into a precious metal or another commodity. Fiat money can look similar to representative money (such as paper bills), but the former has no backing, while the latter represents a claim on a commodity (which can be redeemed to a greater or lesser extent). Government-issued fiat money
banknote A banknote—also called a bill (North American English), paper money, or simply a note—is a type of negotiable instrument, negotiable promissory note, made by a bank or other licensed authority, payable to the bearer on demand. Banknotes w ...
s were used first during the 11th century in
China China, officially the People's Republic of China (PRC), is a country in East Asia. It is the world's List of countries and dependencies by population, most populous country, with a Population of China, population exceeding 1.4 billion, slig ...
. Fiat money started to predominate during the 20th century. Since
President Richard Nixon Richard Milhous Nixon (January 9, 1913April 22, 1994) was the 37th president of the United States, serving from 1969 to 1974. A member of the Republican Party, he previously served as a representative and senator from California and was t ...
's decision to suspend US dollar convertibility to gold in 1971, a system of national fiat currencies has been used globally. Fiat money can be: * Any money that is not backed by a commodity. * Money declared by a person, institution or government to be legal tender, meaning that it must be accepted in payment of a debt in specific circumstances. * State-issued money which is neither convertible through a
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
to anything else nor fixed in value in terms of any objective standard. * Money used because of government decree. * An otherwise non-valuable object that serves as a medium of exchange (also known as
fiduciary A fiduciary is a person who holds a legal or ethical relationship of trust with one or more other parties (person or group of persons). Typically, a fiduciary prudently takes care of money or other assets for another person. One party, for exa ...
money.) The term ''fiat'' derives from the
Latin Latin (, or , ) is a classical language belonging to the Italic languages, Italic branch of the Indo-European languages. Latin was originally a dialect spoken in the lower Tiber area (then known as Latium) around present-day Rome, but through ...
word , meaning "let it be done" used in the sense of an order, decree or resolution.


Treatment in economics

In
monetary economics Monetary economics is the branch of economics that studies the different competing theories of money: it provides a framework for analyzing money and considers its functions (such as medium of exchange, store of value and unit of account), and ...
, fiat money is an intrinsically valueless object or record that is accepted widely as a means of payment. Accordingly, the value of fiat money is greater than the value of its metal content. One justification for fiat money comes from a micro-founded model. In most economic models, agents are intrinsically happier when they have more money. In a model by Lagos and Wright, fiat money doesn't have an intrinsic worth but agents get more of the goods they want when they trade assuming fiat money is valuable. Fiat money's value is created internally by the community and, at equilibrium, makes otherwise infeasible trades possible. Another mathematical model that explains the value of fiat money comes from
game theory Game theory is the study of mathematical models of strategic interactions among rational agents. Myerson, Roger B. (1991). ''Game Theory: Analysis of Conflict,'' Harvard University Press, p.&nbs1 Chapter-preview links, ppvii–xi It has appli ...
. In a game where agents produce and trade objects, there can be multiple Nash equilibria where agents settle on stable behavior. In a model by Kiyotaki and Wright, an object with no intrinsic worth can have value during trade in one (or more) of the Nash Equilibria.


History


China

China has a long history with paper money, beginning in the 7th century CE. During the 11th century, the government established a monopoly on its issuance, and about the end of the 12th century, convertibility was suspended. The use of such money became widespread during the subsequent Yuan and
Ming The Ming dynasty (), officially the Great Ming, was an imperial dynasty of China, ruling from 1368 to 1644 following the collapse of the Mongol-led Yuan dynasty. The Ming dynasty was the last orthodox dynasty of China ruled by the Han pe ...
dynasties. The
Song Dynasty The Song dynasty (; ; 960–1279) was an imperial dynasty of China that began in 960 and lasted until 1279. The dynasty was founded by Emperor Taizu of Song following his usurpation of the throne of the Later Zhou. The Song conquered the res ...
in China was the first to issue paper money, '' jiaozi'', about the 10th century CE. Although the notes were valued at a certain exchange rate for gold, silver, or silk, conversion was never allowed in practice. The notes were initially to be redeemed after three years' service, to be replaced by new notes for a 3% service charge, but, as more of them were printed without notes being retired, inflation became evident. The government made several attempts to maintain the value of the paper money by demanding taxes partly in currency and making other laws, but the damage had been done, and the notes became disfavored. The succeeding
Yuan Dynasty The Yuan dynasty (), officially the Great Yuan (; xng, , , literally "Great Yuan State"), was a Mongol-led imperial dynasty of China and a successor state to the Mongol Empire after its division. It was established by Kublai, the fif ...
was the first dynasty of China to use paper currency as the predominant circulating medium. The founder of the Yuan Dynasty,
Kublai Khan Kublai ; Mongolian script: ; (23 September 1215 – 18 February 1294), also known by his temple name as the Emperor Shizu of Yuan and his regnal name Setsen Khan, was the founder of the Yuan dynasty of China and the fifth khagan-emperor of ...
, issued paper money known as
Jiaochao Jiaochao () is a Chinese word for banknote first used for the currency of the Jurchen-led Jin dynasty and later by the Mongol-led Yuan dynasty of China. Jin dynasty The Jurchens swept control over northern China, conquering the Liao dynasty ...
during his reign. The original notes during the Yuan Dynasty were restricted in area and duration as in the Song Dynasty. During the 13th century,
Marco Polo Marco Polo (, , ; 8 January 1324) was a Venetian merchant, explorer and writer who travelled through Asia along the Silk Road between 1271 and 1295. His travels are recorded in '' The Travels of Marco Polo'' (also known as ''Book of the Marv ...
described the fiat money of the
Yuan Dynasty The Yuan dynasty (), officially the Great Yuan (; xng, , , literally "Great Yuan State"), was a Mongol-led imperial dynasty of China and a successor state to the Mongol Empire after its division. It was established by Kublai, the fif ...
in his book '' The Travels of Marco Polo''.


Europe

Washington Irving Washington Irving (April 3, 1783 – November 28, 1859) was an American short-story writer, essayist, biographer, historian, and diplomat of the early 19th century. He is best known for his short stories "Rip Van Winkle" (1819) and " The Legen ...
records an emergency use of paper money by the Spanish for a siege during the Conquest of Granada (1482–1492). In 1661, Johan Palmstruch issued the first regular paper money in the West, by 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 assumed control of the issue of paper money in the country. By 1745, its paper money was inconvertible to specie, but acceptance was mandated by the government. This fiat currency depreciated so rapidly that by 1776 it was returned to a silver standard. Fiat money also has other beginnings in 17th-century Europe, having been introduced by the Bank of Amsterdam in 1683.


New France 1685–1770

In 17th century
New France New France (french: Nouvelle-France) was the area colonized by France in North America, beginning with the exploration of the Gulf of Saint Lawrence by Jacques Cartier in 1534 and ending with the cession of New France to Great Britain and Spa ...
, now part of Canada, the universally accepted medium of exchange was the
beaver Beavers are large, semiaquatic rodents in the genus ''Castor'' native to the temperate Northern Hemisphere. There are two extant species: the North American beaver (''Castor canadensis'') and the Eurasian beaver (''C. fiber''). Beavers a ...
pelt. As the colony expanded, coins from France came to be used widely, but there was usually a shortage of French coins. In 1685, the colonial authorities in New France found themselves seriously short of money. A military expedition against the
Iroquois The Iroquois ( or ), officially the Haudenosaunee ( meaning "people of the longhouse"), are an Iroquoian Peoples, Iroquoian-speaking Confederation#Indigenous confederations in North America, confederacy of First Nations in Canada, First Natio ...
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 Jacques de Meulles, seigneur of La Source (died 1703), was intendant (1682–86) and interim governor general of New France. He was the son of Pierre de Meulles, king's councillor, treasurer-general of war supplies; d. 1703. As chief administra ...
, the Intendant of Finance, conceived an ingenious
ad hoc Ad hoc is a Latin phrase meaning literally 'to this'. In English, it typically signifies a solution for a specific purpose, problem, or task rather than a generalized solution adaptable to collateral instances. (Compare with ''a priori''.) Com ...
solution – the temporary issuance of paper money to pay the soldiers, in the form of
playing card A playing card is a piece of specially prepared card stock, heavy paper, thin cardboard, plastic-coated paper, cotton-paper blend, or thin plastic that is marked with distinguishing motifs. Often the front (face) and back of each card has a f ...
s. He confiscated all the playing cards in the colony, had them cut 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 accepted readily 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 during June 1685 and was redeemed three months later. However, the shortages of coinage reoccurred and more issues of card money were made during 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 The governor of New France was the viceroy of the King of France in North America. A French nobleman, he was appointed to govern the colonies of New France, which included Canada, Acadia and Louisiana. The residence of the Governor was at the C ...
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 assistance to its colonies, so the colonial authorities in Canada relied more and more on card money. By 1757, the government had discontinued all payments in coin and payments were made in paper instead. In an application of Gresham’s Law – bad money drives out good – people hoarded gold and silver, and used paper money instead. The costs of the
Seven Years' War The Seven Years' War (1756–1763) was a global conflict that involved most of the European Great Powers, and was fought primarily in Europe, the Americas, and Asia-Pacific. Other concurrent conflicts include the French and Indian War (1754 ...
resulted in rapid inflation in New France. After the British conquest in 1760, the paper money became almost worthless, but business did not end because gold and silver that had been hoarded came back into circulation. By the Treaty of Paris (1763), the French government agreed to convert the outstanding card money into debentures, but with the French government essentially bankrupt, these bonds were defaulted and by 1771 they were worthless. The
Royal Canadian Mint }) is the mint of Canada and a Crown corporation, operating under the ''Royal Canadian Mint Act''. The shares of the Mint are held in trust for the Crown in right of Canada. The Mint produces all of Canada's circulation coins, and manufacture ...
still issues Playing Card Money in commemoration of its history, but now in 92.5% silver form with gold plate on the edge. It therefore has an intrinsic value which considerably exceeds its fiat value. The Bank of Canada and Canadian economists often use this early form of paper currency to illustrate the true nature of money for Canadians.


18th and 19th century

An early form of fiat currency in the
American Colonies The Thirteen Colonies, also known as the Thirteen British Colonies, the Thirteen American Colonies, or later as the United Colonies, were a group of British colonies on the Atlantic coast of North America. Founded in the 17th and 18th centur ...
was " bills of credit."Michener, Ron (2003).
Money in the American Colonies
." EH.Net Encyclopedia, edited by Robert Whaples.
Provincial governments produced notes which were fiat currency, with the promise to allow holders to pay taxes with those notes. The notes were issued to pay current obligations and could be used for taxes levied at a later time. Since the notes were denominated in the local unit of account, they were circulated from person to person in non-tax transactions. These types of notes were issued particularly in
Pennsylvania Pennsylvania (; ( Pennsylvania Dutch: )), officially the Commonwealth of Pennsylvania, is a state spanning the Mid-Atlantic, Northeastern, Appalachian, and Great Lakes regions of the United States. It borders Delaware to its southeast, ...
,
Virginia Virginia, officially the Commonwealth of Virginia, is a state in the Mid-Atlantic and Southeastern regions of the United States, between the Atlantic Coast and the Appalachian Mountains. The geography and climate of the Commonwealth are ...
and
Massachusetts Massachusetts (Massachusett: ''Muhsachuweesut Massachusett_writing_systems.html" ;"title="nowiki/> məhswatʃəwiːsət.html" ;"title="Massachusett writing systems">məhswatʃəwiːsət">Massachusett writing systems">məhswatʃəwiːsət'' En ...
. Such money was sold at a discount of silver, which the government would then spend, and would expire at a fixed date later. Bills of credit have generated some controversy from their inception. Those who have wanted to emphasize the dangers of inflation have emphasized the colonies where the bills of credit depreciated most dramatically: New England and the Carolinas. Those who have wanted to defend the use of bills of credit in the colonies have emphasized the middle colonies, where inflation was practically nonexistent. Colonial powers consciously introduced fiat currencies backed by taxes (e.g.,
hut tax The hut tax was a form of taxation introduced by British in their African possessions on a "per hut" (or other forms of household) basis. It was variously payable in money, labour, grain or stock and benefited the colonial authorities in four inter ...
es or poll taxes) to mobilise economic resources in their new possessions, at least as a transitional arrangement. The purpose of such taxes was later served by
property tax A property tax or millage rate is an ad valorem tax on the value of a property.In the OECD classification scheme, tax on property includes "taxes on immovable property or net wealth, taxes on the change of ownership of property through inher ...
es. 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 money which represented specie. Examples include the “ Continental” bills issued by the U.S. Congress before the
United States Constitution The Constitution of the United States is the supreme law of the United States of America. It superseded the Articles of Confederation, the nation's first constitution, in 1789. Originally comprising seven articles, it delineates the natio ...
; paper versus gold
ducat The ducat () coin was used as a trade coin in Europe from the later Middle Ages from the 13th to 19th centuries. Its most familiar version, the gold ducat or sequin containing around of 98.6% fine gold, originated in Venice in 1284 and gained ...
s in
Napoleon Napoleon Bonaparte ; it, Napoleone Bonaparte, ; co, Napulione Buonaparte. (born Napoleone Buonaparte; 15 August 1769 – 5 May 1821), later known by his regnal name Napoleon I, was a French military commander and political leader wh ...
ic era
Vienna en, Viennese , iso_code = AT-9 , registration_plate = W , postal_code_type = Postal code , postal_code = , timezone = CET , utc_offset = +1 , timezone_DST ...
, where paper often traded at 100:1 against gold; the South Sea Bubble, which produced bank notes not representing sufficient reserves; and the
Mississippi Company The Mississippi Company (french: Compagnie du Mississippi; founded 1684, named the Company of the West from 1717, and the Company of the Indies from 1719) was a corporation holding a business monopoly in French colonies in North America and t ...
scheme of
John Law John Law may refer to: Arts and entertainment * John Law (artist) (born 1958), American artist * John Law (comics), comic-book character created by Will Eisner * John Law (film director), Hong Kong film director * John Law (musician) (born 1961) ...
. During the
American Civil War The American Civil War (April 12, 1861 – May 26, 1865; also known by Names of the American Civil War, other names) was a civil war in the United States. It was fought between the Union (American Civil War), Union ("the North") and t ...
, the Federal Government issued United States Notes, a form of paper fiat currency known popularly as 'greenbacks'. Their issue was limited by Congress at slightly more than $340 million. During the 1870s, withdrawal of the notes from circulation was opposed by the United States Greenback Party. It was termed 'fiat money' in an 1878 party convention.


20th century

After
World War I World War I (28 July 1914 11 November 1918), often abbreviated as WWI, was List of wars and anthropogenic disasters by death toll, one of the deadliest global conflicts in history. Belligerents included much of Europe, the Russian Empire, ...
, governments and banks generally still promised to convert notes and coins into their nominal commodity (redemption by 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 by specie. Some governments were careful of avoiding sovereign default but not wary of the consequences of paying debts by consigning newly printed cash not associated with a metal standard to their creditors, which resulted in hyperinflation – for example the hyperinflation in the Weimar Republic. From 1944 to 1971, the Bretton Woods agreement fixed the value of 35 United States dollars to one troy ounce of gold. Other currencies were calibrated with the U.S. dollar at fixed rates. The U.S. promised to redeem dollars with gold transferred to other national banks. Trade imbalances were corrected by gold reserve exchanges or by loans from the
International Monetary Fund The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster glo ...
(IMF). The Bretton Woods system was ended by what became known as the Nixon shock. This was a series of economic changes by United States President
Richard Nixon Richard Milhous Nixon (January 9, 1913April 22, 1994) was the 37th president of the United States, serving from 1969 to 1974. A member of the Republican Party, he previously served as a representative and senator from California and was ...
in 1971, including unilaterally canceling the direct convertibility of the
United States dollar The United States dollar ( symbol: $; code: USD; also abbreviated US$ or U.S. Dollar, to distinguish it from other dollar-denominated currencies; referred to as the dollar, U.S. dollar, American dollar, or colloquially buck) is the officia ...
to
gold Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile ...
. Since then, a system of national fiat monies has been used globally, with variable exchange rates between the major currencies.


Precious metal coinage

During the 1960s, production of silver coins for circulation ceased when the face value of the coin was less than the cost of the
precious metal Precious metals are rare, naturally occurring metallic chemical elements of high economic value. Chemically, the precious metals tend to be less reactive than most elements (see noble metal). They are usually ductile and have a high lu ...
it contained (whereas it had been greater historically ). In the United States, the
Coinage Act of 1965 The Coinage Act of 1965, , eliminated silver from the circulating United States dime (ten-cent piece) and quarter dollar coins. It also reduced the silver content of the half dollar from 90 percent to 40 percent; silver in the half dollar was s ...
eliminated
silver Silver is a chemical element with the symbol Ag (from the Latin ', derived from the Proto-Indo-European ''h₂erǵ'': "shiny" or "white") and atomic number 47. A soft, white, lustrous transition metal, it exhibits the highest electrical ...
from circulating dimes and quarter dollars, and most other countries did the same with their coins. The Canadian penny, which was mostly
copper Copper is a chemical element with the symbol Cu (from la, cuprum) and atomic number 29. It is a soft, malleable, and ductile metal with very high thermal and electrical conductivity. A freshly exposed surface of pure copper has a pink ...
until 1996, was removed from circulation altogether during the autumn of 2012 due to the cost of production relative to face value. In 2007, the Royal Canadian Mint produced a million dollar
gold Gold is a chemical element with the symbol Au (from la, aurum) and atomic number 79. This makes it one of the higher atomic number elements that occur naturally. It is a bright, slightly orange-yellow, dense, soft, malleable, and ductile ...
bullion coin and sold five of them. In 2015, the gold in the coins was worth more than 3.5 times the face value.


Money creation and regulation

A
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
introduces new money into an economy by purchasing
financial asset A financial asset is a non-physical asset whose value is derived from a contractual claim, such as bank deposits, bonds, and participations in companies' share capital. Financial assets are usually more liquid than other tangible assets, such ...
s or lending money to financial institutions.
Commercial bank A commercial bank is a financial institution which accepts deposits from the public and gives loans for the purposes of consumption and investment to make profit. It can also refer to a bank, or a division of a large bank, which deals with ...
s then redeploy or repurpose this base money by credit creation through
fractional reserve banking Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserv ...
, which expands the total supply of "
broad money In economics, broad money is a measure of the amount of money, or money supply, in a national economy including both highly liquid "narrow money" and less liquid forms. The European Central Bank, the OECD and the Bank of England all have their own ...
" (cash plus
demand deposit Demand deposits or checkbook money are funds held in demand accounts in commercial banks. These account balances are usually considered money and form the greater part of the narrowly defined money supply of a country. Simply put, these are depo ...
s). In modern economies, relatively little of the supply of broad money is physical currency. For example, in December 2010 in the U.S., of the $8,853.4 billion of broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money. The manufacturing of new physical money is usually the responsibility of the national bank, or sometimes, the government's
treasury A treasury is either *A government department related to finance and taxation, a finance ministry. *A place or location where treasure, such as currency or precious items are kept. These can be state or royal property, church treasure or i ...
. The
Bank for International Settlements The Bank for International Settlements (BIS) is an international financial institution owned by central banks that "fosters international monetary and financial cooperation and serves as a bank for central banks". The BIS carries out its work th ...
published a detailed review of payment system developments in the Group of Ten ( G10) countries in 1985, in the first of a series that has become known as "red books". Currently the red books cover the participating countries on Committee on Payments and Market Infrastructures (CPMI). A red book summary of the value of banknotes and coins in circulation is shown in the table below where the local currency is converted to US dollars using the end of the year rates. The value of this physical currency as a percentage of GDP ranges from a maximum of 19.4% in Japan to a minimum of 1.7% in Sweden with the overall average for all countries in the table being 8.9% (7.9% for the US). The most notable currency not included in this table is the Chinese yuan, for which the statistics are listed as "not available".


Inflation

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 occurred in a number of countries, producing hyperinflations – episodes of extreme inflation rates much greater than those observed during earlier periods of
commodity money Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects having value or use in themselves (intrinsic value) as well as their value in buying goods. This is in contrast to representa ...
. The hyperinflation in the Weimar Republic of Germany is a notable example.
Economists An economist is a professional and practitioner in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are ...
generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the
money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...
. Presently, most economists favor a small and steady rate of inflation.Hummel, Jeffrey Rogers. "Death and Taxes, Including Inflation: the Public versus Economists" (January 2007). p. 56 Small (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly to a recession, and reduces the risk that a
liquidity trap A liquidity trap is a situation, described in Keynesian economics, in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rat ...
(a reluctance to lend money due to low rates of interest) prevents
monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for federal funds, very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money s ...
from stabilizing the economy. However, money supply growth does not always cause nominal increases of price. Money supply growth may instead result in stable prices at a time in which they would otherwise be decreasing. Some economists maintain that with the conditions of a
liquidity trap A liquidity trap is a situation, described in Keynesian economics, in which, "after the rate of interest has fallen to a certain level, liquidity preference may become virtually absolute in the sense that almost everyone prefers holding cash rat ...
, large monetary injections are like "pushing on a string". The task of keeping the rate of inflation small and stable is usually given to monetary authorities. Generally, these monetary authorities are the national banks that control monetary policy by the setting of
interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, t ...
s, by
open market operation In macroeconomics, an open market operation (OMO) is an activity by a central bank to give (or take) liquidity in its currency to (or from) a bank or a group of banks. The central bank can either buy or sell government bonds (or other financial ...
s, and by the setting of banking
reserve requirements Reserve requirements are central bank regulations that set the minimum amount that a commercial bank must hold in liquid assets. This minimum amount, commonly referred to as the commercial bank's reserve, is generally determined by the centra ...
.


Loss of backing

A fiat-money currency greatly loses its value should the issuing government or
central bank A central bank, reserve bank, or monetary authority is an institution that manages the currency and monetary policy of a country or monetary union, and oversees their commercial banking system. In contrast to a commercial bank, a centra ...
either lose the ability to, or refuse to, continue to guarantee its value. The usual consequence is hyperinflation. Some examples of this are the Zimbabwean dollar, China's money during 1945 and the Weimar Republic's mark during 1923. A more recent example is the currency instability in Venezuela that began in 2016 during the country's ongoing socioeconomic and political crisis. But this need not necessarily occur, especially if a currency continues to be the most easily available; for example, the pre-1990 Iraqi dinar continued to retain value in the Kurdistan Regional Government even after its legal tender status was ended by the Iraqi government which issued the notes..


See also

*
Criticism of the Federal Reserve The Federal Reserve System (also known as "the Fed") has faced various criticisms since it was authorized in 1913. Nobel laureate economist Milton Friedman and his fellow monetarist Anna Schwartz criticized the Fed's response to the Wall Stree ...
* Debasement *
Fractional-reserve banking Fractional-reserve banking is the system of banking operating in almost all countries worldwide, under which banks that take deposits from the public are required to hold a proportion of their deposit liabilities in liquid assets as a reserv ...
* Hard currency *
Hyperinflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real value of the local currency, as the prices of all goods increase. This causes people to minimize their holdings in that currency as t ...
* Inflation hedge *
Modern monetary theory Modern Monetary Theory or Modern Money Theory (MMT) is a heterodox * * * * * * macroeconomic theory that describes currency as a public monopoly and unemployment as evidence that a currency monopolist is overly restricting the supply ...
*
Money creation Money creation, or money issuance, is the process by which the money supply of a country, or of an economic or monetary region,Such as the Eurozone or ECCAS is increased. In most modern economies, money creation is controlled by the central bank ...
*
Money supply In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circu ...
* Network effect * Seigniorage *
Cryptocurrency A cryptocurrency, crypto-currency, or crypto is a digital currency designed to work as a medium of exchange through a computer network that is not reliant on any central authority, such as a government or bank, to uphold or maintain it. It i ...
* Silver coin * Silver standard


Notes


References

{{DEFAULTSORT:Fiat Money Currency Monetary reform Numismatics