Monitoringclub.org – Fiat money is money that is used by the general public in their daily life. In general, this money can be found in 2 different forms, namely banknotes and coins.
The money that we use for various daily transactions is an example of fiat money itself. Basically, fiat money and commodity money are not the same, because both have differences in value.
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What Is Fiat Money?
Fiat money is money officially issued by the government of a country, where money does not refer to gold price and other physical commodities. The fiat currency in our country is, of course, the rupiah, because this is the official currency issued by the government.
Based on the definition of fiat money above, it is certain that each country will have its own fiat money, in accordance with the policies issued by the government of that country. Other examples of fiat money are US dollars, euros, pesos, and many more.
Fiat currency is very popular and of course used by almost everyone in this world. But in reality, fiat money is a new form of money itself, which is eventually used as the official medium of exchange.
When fiat money had not been made and widely known, each country had to print money with reference to physical commodity savings, where the physical commodities that were used as reference were gold and silver. This shows that fiat money and commodity money have differences.
Fiat money is money that can be printed by the government without having to consider the amount of gold and silver reserves owned by the state. This fiat currency is not based on the amount of gold or silver deposits, but will refer to the number of requests and offers from the community itself.
History of Fiat Money
If you look at its history, fiat money is money that first appeared during the reigns of the Yuan, Song, Ming and Tang Dynasties in the 10th century. This fiat currency was created to meet the high demand for coins at that time.
This high demand for coins was not matched by the availability of raw materials, so that the Chinese people at that time faced a condition where money was scarce and difficult to obtain.
To overcome the above conditions, the Chinese government decided to produce and circulate banknotes among its people. It was this money that eventually became popular and began to spread to the West in the 18th century.
Fiat money became more widely known and gained its popularity in the 20th century, precisely when this fiat currency was legalized by Richard Nixon, who was then president of the United States.
In its development, fiat money is increasingly popular and widely used in various parts of the world. The United States Dollar is the most widely used example of fiat money, because this currency is widely used in global trade.
How Does Fiat Money Work?
Fiat money and commodity money have significant differences.
Commodity money will refer to its intrinsic value, where this money will still be valuable even though it is no longer in the form of currency.
Meanwhile, fiat money from the beginning did not refer to a particular commodity. The value of the money will be fully determined by the government, which acts as the manager and guarantor of the fiat money itself.
Based on the explanation above, it is clear that fiat money and commodity money are not the same. Both do have significant differences, as well as the purpose of manufacture.
The guaranteed value obtained by fiat money from the government is the main reason why people believe in using this money as a tool for transactions. The value of fiat money itself will be corrected when the money is located or used in another country.
In practice, fiat money will be used as a substitute for the barter economy, which was once popular and widely used to meet the needs of the wider community.
When someone needs eggs and chicken, then the person concerned can immediately buy them according to the price determined by the seller, where this purchase is made using the fiat money they have. The person does not need to bring other goods to be bartered.
Fiat money makes transactions much easier and practical. People can buy whatever they want with their money, without the need to adjust the seller’s wishes for certain goods as barter.
Functions of Fiat Money
If you look at the definition of fiat money and also examples of fiat money, it is clear that the main function of this money is as a means of payment. However, to be able to carry out this function properly, fiat money must also fulfill a number of other functions, including:
- Medium of Exchange
Fiat money must fulfill its function as a means of payment if it can be used as a legal means of payment, without using a barter system at all. The owners of money can use the money they have to buy various goods and services whose value is the same as the money paid.
- Unit of Accounts
A currency can be declared as fiat money if it can be used as a unit of measurement. For example, 1 pack of bread is valued at USD2, 1 can of syrup is valued at USD3, and so on.
- Store of Value
Fiat money is also required to have a value that can state the amount of wealth of its owner. In this case, the more money a person has, the higher the value of his wealth.
Advantages and Disadvantages of Fiat Money
Fiat Money Makes Transactions Easy and Simple
Fiat money is money issued by the government of a country, where this money will become the legal medium of exchange in the community. In addition to making every transaction easier, the value of fiat money can also be a measure of a country’s economic stability.