The exchange of goods existed in the Stone Age, when the division of labor arose. As civilization developed, the monetary system changed. People minted coins of gold, silver and other metals. But stocks of these resources are limited. And wars and other large-scale crises greatly depreciated the currency. In place of coins from precious metals , banknotes appeared. As long as their release was provided with state resources, there were no problems. They arose when the nominal value began to differ from the real one. Such money was even given a separate name - fiat currencies. What it is?
History of occurrence
The state has the right to restrict the freedom of citizens. In particular, the use of a certain currency for settlements. The state has the power to deprive a monetary unit of collateral in gold or silver. Such a decision carries a large number of risks. But if it is accepted, then the money ceases to be marketable and becomes fiat.
The first idea to use such a currency was proposed by the ancient Greek thinker Plato. He believed that citizens should not store gold in the form of a payment unit. It is better to create your own currency, the use of which will be limited to a certain territory of the state.
Many countries have tried to embody the idea of fiat money. The first was the Roman emperor Diocletian. The inflation rate in the camp then increased dramatically, and many counterfeiters appeared. The emperor ordered the use of only solid minted in Rome. In addition, uniform prices for goods were established. They operated throughout the empire. Executioners watched the execution of the order. They immediately executed any merchant who dared to break the law. The emperor made such a tough decision, as he understood the danger of neglect of the currency. She was not provided with anything. Hence the concept of "money on trust." But even such tough measures could not change the situation. The law was soon repealed.
Second attempt
This idea really worked only in China. During the Tang Dynasty , fiat money was issued in the 8th century. These measures were taken to prevent inflation. But the experiment failed - merchants preferred to deal with gold. By the 10th century, the state issued coins fully guaranteed by the government.
By the beginning of World War I, almost every state used a secured currency. But the large costs of conducting hostilities led to the widespread emergence of fiat money. To normalize the situation, the Betton Woods Agreement was adopted. According to this document, one dollar was equal to 1/35 troy ounces. All other currencies were tied to the US currency. This system lasted until February 13, 1973. The dollar then amounted to 1 / 42.2. The agreement was broken.
Fiat money - what is it?
In Latin, the word "fiat" means decree, decree. Literal translation: "So be it." Fiat money is the currency that the government positions as the only legal tender. Their intrinsic value is either very small or non-existent. Currently, most of the paper money is fiat, including the US dollar. Its value is guaranteed by the authority of the state. Fiat currency is not tied to gold. She is not provided with anything at all.
The main difference between fiat money and commodity money is the free conversion of the latter. The government cannot print a secured currency more than it has the resources. That is, any expansion of the global economy is limited by the amount of gold reserves in mankind.
Features
Fiat currency is maternity money. The government declares a specific currency as a sole means of payment by special decree. The difference between the nominal and real value of such a currency is the fiat currency. The course is most often set against citizens. There are many stories about the denomination of currencies. But there are no examples where the government would agree to voluntary inflation by adding zero to each bill.
Recently, more and more states refuse to use secured money. They are switching to fiat. This is due to the fact that the state has practically no limit on the issue of currency. Such a decision increases the risk in government. Fiat currencies are unstable to swings in the economy.
Alternative
There is no question of a return to the gold standard. This decision carries two main dangers:
1. Some economists believe that gold can also be called "artificial currency." Its value is converted.
2. Sooner or later, but rising gold prices form a new “bubble”. And then no one will be able to control quotes. Behind fiat money is the government. There will be no one behind gold.
Fiat currency is of great value. It is formed on the basis of government decrees. This also causes the main difficulty - a low level of management. With any errors at the state level, artificial currency becomes very vulnerable. This is one of the reasons for the latest international financial crisis. A natural consequence of this situation is that investors are increasing interest in gold. Prices for this precious metal have been rising for several years. In Russia, banks offer appropriate deposits. By the way, they do not fall under the compulsory insurance system. But there are still many who wish.
The future of air bubbles
In ancient Egypt, the dead pharaohs were buried with gold in the rebuilt burial grounds. People believed that they would use their wealth for all eternity. This idea worked. For a thousand years, neither thieves nor tax authorities touched their gold. But then it was real money. Today, governments in many countries are constantly experimenting with paper bills. Fiat currency is the result of their experiments.
The rapid growth of paper notes created dangerous bubbles. They almost simultaneously set historic highs in every major class of financial assets. The solution to this problem cannot be found. By printing money, the National Bank creates inflation. In case of refusal to issue, the opposite situation will arise. And it’s worth saying an extra word, as financial markets begin to panic. Negative interest rates are already observed in Europe. Central Banks are trying to restore confidence in poorly capitalized banking systems as quickly as possible. And well-developing markets want to create their own financial structure.
Financial systems, currencies and trading methods have changed many times. This process is repeated again. Today, the dollar and the Central Bank of the United States are the main elements of the global financial system. But many are already tired of constantly obeying the rules of the state, which manages to constantly increase its debts on the security of "risk-free" bonds. Soon, the dollar will lose its importance and a new financial system will appear. Already today there are technologies that eliminate the need for banks: cryptocurrencies, trading platforms. It is believed that most of the money supply is stored digitally today. Including your bank account.
Yuan as a substitute for the dollar
If China turns part of its reserves into gold, then the country's currency will suddenly become of great importance in the international financial system. Of course, an attempt to remove the United States from a leading position in the world in terms of reserves of the most expensive metal (328 billion in the spring of 2014) is very risky. But the price of error is a lost profit.
Most countries prefer artificial money and floating exchange rates. But gold has special properties. For more than two millennia, it has been the main means of payment in the world. No third party loan guarantees were needed. No one had any unnecessary questions when people paid with gold receipts for bonds. Artificial money is accepted today due to credit guarantees of the states. In crisis situations, they cannot compete with universal means of payment.
If the dollar, euro or other fiat currency were accepted everywhere, the Central Bank would not store precious metals. But they do it. Money at the fingertips has not become the full equivalent. Of the three dozen member countries of the International Monetary Fund, only four do not have a gold reserve. Small statistics on January 1, 2014:
- the cost of gold on the balance sheet of the Central Bank of developed countries - 762 billion dollars;
- their share in the reserve is 10.3%.
Need to reduce inventory
British economist John Keynes calls gold "a relic of theft," since the return on the asset, given the cost of storage, is negative. Then why the Central Bank around the world collect it?
Politicians have repeatedly suggested selling part of the gold reserve. In 1976, the idea was put forward by US Treasury Secretary William Simon and Fed Chairman Arthur Burn to President Gerald Ford. They offered to sell 275 million ounces of gold and invest the proceeds in profitable assets. They motivated their idea by the fact that this metal has lost great monetary value. But they did not find a common language with Burns.
How are things today
Subsequently, this issue was repeatedly discussed at a meeting of the heads of the Central Bank of the Big Ten. They sought to reduce the gold and foreign exchange reserve, but understood that the mass quotation would greatly reduce the price. Therefore, we agreed on who, when and how much will sell. But Beijing did not have ideological views on gold. Until 2002, their stock was 13 million ounces. Over the year, they increased it by 45%. After another 7 years, they reached 34 million. At the beginning of 2014, China ranks fifth in the world in gold and foreign exchange reserves, behind the USA (261 million), Germany (109 million), Italy (79 million) and France (87 million).
Fiat money: examples from the modern world
Virtually no state carries out emissions secured by national wealth. Therefore, the dollar, euro, Russian ruble and other monetary units can be attributed to artificial. But besides paper, there are also electronic fiat currencies. What it is?
Artificial digital money is expressed in one of the state currencies. Government by law forces citizens to accept them for payment. Issue, redemption and circulation takes place according to the rules of national law. Electronic non-fiat currency expresses the value of private payment systems. The latter control its turnover and repayment.
Both species are divided into two groups. Network currency - electronic money that is transmitted on a hardware basis. Examples: PayPal, M-Pesa (African Payment System). The second group - systems based on SIM cards. Examples: Visa cash, Mondex, Chicknip. But popular in Russia Webmoney, QIWI, RBK Money, EasyPay belong to non-payment systems. Just like Yandex.Money. Both groups exchange electronic currencies with each other.
Summary
The government determines by a special decree which currency the payments will be made in the state. While its release is provided with national wealth, it is called commodity. As soon as the difference between real and face value arises, artificial money appears. Fiat currencies are issued under state guarantees. They are unstable to financial crises and can greatly harm the economy.