WHAT IS FIAT MONEY?? SO IN THIS IMPORTANT LESSON I’M GOING TO TRY TO GET YOU TO UNDERSTAND BY USING HISTORY, I AM TRYING TO GET YOU TO UNDERSTAND THE HISTORY OF MONEY.
WE DID THIS STUDY LAST YEAR BUT I AM BRINGING IT BACK AGAIN FOR THE NEW FOLKS THAT ARE WITH US.
THE TERM “FIAT MONEY” IS TOSSED AROUND AND SNARLED THROUGH TEETH ALMOST IN DISGUST WITH LITTLE UNDERSTANDING AS TO WHAT IT ACTUALLY IS.
FOR THIS EXERCISE I WOULD LIKE EVERYONE TO TURN YOUR HEAD OVER AND SHAKE IT UNTIL ALL THE IDEAS YOU HAVE ABOUT THE WORD FIAT FALL OUT BECAUSE WE ARE READY TO START AGAIN.
I WANT TO ADDRESS FOR STARTERS 3 TYPES OF MONEY AND EACH IS VERY IMPORTANT TO UNDERSTAND AND I’M GOING TO EXPAND YOUR BRAINS. 4 QUESTIONS FOR YOU.
1) WHAT IS FIAT MONEY?
2) WHAT IS COMMODITY MONEY?
3) WHAT IS REPRESENTATIVE MONEY
4) ARE COINS FIAT MONEY?
ALRIGHT LET’S GO, I THINK I MAY DO A LIVE STREAM THURSDAY NIGHT AND GO OVER ALL OF THIS, BUT FOR NOW LET’S SEE HOW IT GOES.
WHAT IS MONEY?
HERE IS A GOOD JUMPING OFF POINT FOR MOST FOLKS IN HERE.
WHAT IS MONEY?
Everyone uses money. We all want it, work for it and think about it. If you don’t know what money is, you are not like most humans. However, the task of defining what money is, where it comes from and what it’s worth belongs to those who dedicate themselves to the discipline of economics. While the creation and growth of money seems somewhat intangible, money is the way we get the things we need and want. Here we look at the multifaceted characteristics of money.
LET’S DEFINE THE 3 TYPES OF MONEY.
FIAT MONEY, COMMODITY MONEY, AND REPRESENTATIVE MONEY, OK YOU CAN READ THEIR DEFINITIONS IN YOUR TIME.
LET’S BREAK IT DOWN A BIT OK?
FIAT MONEY BY DEFINITION = Fiat money is a currency established as money by government regulation or law. The term derives from the Latin fiat (“let it be done”, “it shall be” used in the sense of an order or decree
What is ‘Fiat Money
Fiat money is currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Historically, most currencies were based on physical commodities such as gold or silver, but fiat money is based solely on faith. Fiat is the Latin word for “it shall be”.
WHERE DID FIAT MONEY ORIGINATE?
The first use of fiat money was recorded in China around 1000 AD. Since then, it has been used by various countries, concurrently with commodity currencies.
Fiat money originated in 11th century China, and its use became widespread during the Yuan and Ming dynasties
REAL QUICK LET’S TALK ABOUT THE GOLD STANDARD, WHAT IS IT? WHY WAS IT DISCONTINUED? WHAT WERE THE DOWNFALLS OF IT? ALL OF THIS WE WILL COVER TOO IN THIS LITTLE MINI SERIES SO YOU CAN HAVE ALL THE FACTS YOU NEED TO UNDERSTAND HOW THE FINANCIAL SYSTEM REALLY WORKS.
Fiat Currency: What It Is and Why It’s Better Than a Gold Standard
The value of money has to be has to be based on something of value. A fiat currency (or fiat money) is one example.
The gold standard-vs.-fiat currency debate will be waged for years to come.
“In God we trust. All others pay cash.”
The most important thing about money is this: People need to be able to count on its value, and that value needs to be stable over time. For that reason, many countries have, over the past century, shifted to a fiat currency.
But what exactly is fiat currency, and what makes it the best alternative? Let’s take a closer look.
Underpinning the value of money
Fiat currency is legal tender whose value is backed by the government that issued it. The U.S. dollar is fiat money, as are the euro and many other major world currencies.
This approach differs from money whose value is underpinned by some physical good such as gold or silver, called commodity money. The United States, for example, used a gold standard for most of the late 19th and early 20th century. A person could exchange U.S. currency — as well as many public and even some private debts — for gold as late as the 1930s.
A fiat currency’s value is underpinned by the strength of the government that issues it, not its worth in gold or silver.
Why a fiat currency is better economic policy
Here’s a look at U.S. inflation since the beginning of the 20th century:
The most important aspect of a currency is the relative stability of its value. And while there are certainly more aspects to inflation than just the currency standard, it’s a major factor in monetary policy and a government’s ability to control the money supply.
The U.S. dollar — as well as many public and private debts — could be converted into gold until the mid-1930s, and the U.S. dollar was tied to the value of gold until the early 1970s, when President Nixon completely severed the relationship between the U.S. dollar and gold. With the exception of the late 1970s’ and early 1980s’ oil crisis and recession, inflation has become much less volatile, and deflation hasn’t been an issue.
A key reason is U.S. monetary policy. Since the Federal Reserve has more flexibility to control supply and demand of currency, it is more able to limit the impact of major economic shocks, such as the financial crisis of 2008-2009. Many economists acknowledge that the government’s ability to control the supply of currency played a major role in keeping the crisis — easily the worst in 80 years — from causing even greater harm to the American and global economy.
What gold advocates ignore
Those who advocate for a gold or similar standard often use the argument that fiat currencies aren’t really “worth” anything, since there isn’t anything tangible that underpins its value. That’s really not a very accurate description of a fiat currency, versus a gold standard. Simply put, the value of any currency, whether a commodity or a fiat currency, is only relative to what people think it’s worth.
And gold hasn’t exactly been stable or reliable in recent years:
What does that chart tell us? In times of uncertainty, people hoard gold. You can see it in the early ’80s’ oil crisis and recession and the recent financial crisis, when gold prices soared, only to fall sharply once the overall economic environment improved.
This situation is largely what led Franklin D. Roosevelt to sever the convertibility of U.S. currency and debt into gold during the Great Depression. Under the gold standard (especially when currency could be converted to gold), hoarding gold had a direct impact on monetary flow, hurting commerce and exacerbating recessions. By severing the link between gold reserves and currency, the Federal Reserve is better able to combat major economic shocks to the economy.
Think gold is a great investment? Historically, it really hasn’t been:
The U.S. stock market has been a far superior long-term investment since Nixon severed the relationship between gold and the dollar in the 1970s. And since September 2012, gold has fallen by 40%, while the S&P 500 has seen total returns of more than 50%.
Stability is key
It’s fair to argue that the Federal Reserve’s efforts to limit the impact of economic crisis could have unforeseen long-term effects, based on the additional money that has been put in circulation, versus a gold or silver standard that limits how much money circulates. The problem gets back to times of major economic crisis: When governments need tools to stop or reduce the harm, a commodity standard has historically had the opposite effect as people hoard it.
By severing the tie between a commodity that people tend to hoard in times of crisis and the value and supply of money, a fiat currency is a better alternative, but only so long as those pulling the levers of monetary supply keep the balance between supply and demand stable.
Here’s the bottom line: Currency is a tool of trade. People tend to hoard gold and silver when things are uncertain, and that’s harmful when it limits currency flows on a large scale. Removing the relationship between a currency and commodity doesn’t create “worthless money.” It simply keeps panic from causing greater economic harm in times of crisis when people hoard the underpinning of a commodity currency and stop the wheels of commerce.
That may not make fiat currency better, but it certainly makes it “less bad.”
ALRIGHT NOW YOU SHOULD BE ABLE TO UNDERSTAND WHAT FIAT REALLY IS. I WILL BE BACK AND WE WILL LOOK AT WHAT DEBT IS NEXT. BECAUSE YOU GUESSED IT, DEBT IS ALSO MONEY.
I’LL BE BACK IN A FEW AND PLEASE FOLLOW US ON TWITTER AND CHECK INTO FACEBOOK AND PLEASE SUBSCRIBE TO OUT YOU TUBE CHANNEL SO YOU DO NOT MISS THE LIVE STREAM THURSDAY.
I’LL BE RIGHT BACK…..ML