What does Fiat Currency Mean?
What is fiat currency and what does fiat currency mean? One way to understand it is this: fiat currency is currency that is not convertible into something else that is tangible and considered valuable such as silver or gold. Instead, fiat currency is simply “declared” as legal tender by the official proclamation and laws of the government that issues it.
Many of us in the US are old enough to remember silver certificates. These were the dollar bills that had a blue seal on the front and were “redeemable for one dollar in silver” by the bearer of the certificate on demand. This meant that the dollar represented by that paper currency was backed by silver reserves held by the US government and banks around the country. Indeed, you could get a dollar’s worth of silver for that silver certificate.
After 1964, silver certificates were replaced by Federal Reserve Notes. These have a green seal on the front and are not backed by silver, gold or anything else of tangible value. Instead, these notes are backed by “the full faith and credit of the United States”. These green-seal Federal Reserve Notes are an example of fiat currency. You cannot go to your local bank, credit union or the federal government and trade in the money for a dollar’s worth of silver as you were once able to do with silver certificates.
Evolution of Money into Fiat Currency
As we look back into the rise of civilization, different groups of people, whether they were families, clans, tribes or nations, realized that trading things of value was mutually beneficial. One group may have had a surplus of meat but needed wood. Others were able to provide wood to the folks with meat and commerce began. Early on, some tangible things began to take on a regional or global storehouse of value. Precious metals, such as gold and silver, became a standard for value centuries ago in many cultures. As civilization, trading and commerce developed, precious metals became standardized as units of value in trading: Gold and silver coins were invented. As time progressed, paper currency, backed by gold and silver, was introduced by some governments to facilitate the payment for goods and services. After all, who wants to carry around 200 pounds of silver and gold to buy a new chariot!
Enter now into the twentieth century. For a number or reasons, most governments went off a gold standard for currency. Like the US, they began to produce currency that was not backed by or made of gold and silver. Modern American, Canadian, Chinese, Japanese and European coins are made of metal, but not precious metals. Modern paper currencies are backed by the laws and implicit promises of the governmental entities that created them.
Concern regarding Fiat Currency
The main concern regarding fiat currency revolves around the fact that it has no physical basis in value. This can give rise to many economic maladies, such as inflation, hyperinflation and disinflation. As the current conditions of any country’s economy changes, the issuing government can print as much money as they want, essentially cheapening the value of the currency with time. In some dire cases, extreme devaluation may occur, with potentially tragic consequences for the citizens of these countries.
Interestingly, the biggest holders of gold are many of the world’s largest economies – the same countries who currently issue fiat currency. The US, Germany, Italy, France and Russia are the countries with the largest gold reserves in their central banks. What do they know? What does fiat currency mean to them?
Many private investors hold gold and silver, in the form of bullion or coins, as a hedge against possible problems with fiat currency. Even before the advent of fiat currency, gold and silver were considered as a hedge against geopolitical uncertainty.
As you begin to understand the question “What does fiat currency mean?”, perhaps you too should consider gold and silver and a hedge and investment. Fortunately, it is convenient and safe to do so through reputable online dealer such as Golden Eagle Coins.
Gold Hoarding by Governments Who Issue or Use Fiat Currency
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