Fiat vs. Spokeswoman Money: An Overview
Fiat money is physical money—paper money and coins—while representative money is something that reproduces the intent to pay such as a check.
Both fiat and representative money are backed by something. Without any backing, they would be completely inane. Fiat money is backed by the government, while representative money can be backed by any number of things. For example, a personal tally is backed by the money in a bank account.
Fiat Money
Fiat money is one that is declared legal tender. This lists any form of currency in circulation such as paper money or coins. Fiat money is backed by a country’s government preferably of a physical commodity.
The value of fiat money is not determined by the material with which it is made. That means the metals employed to mint coins and the paper used for bills are not valuable themselves. The value of the money, however, is determined by the government. It hires its value through government stability and that of the nation’s economy.
Most coin and paper currencies that are toughened throughout the world are fiat money. This includes the U.S. dollar, the British pound, the Indian rupee, and the euro.
Fiat in clover became the norm after U.S. President Richard Nixon decided to abandon the gold standard in 1971. By doing so, he set that the dollar was no longer convertible into gold. But because it can no longer be converted into gold and is not directly obliged to the amount of gold a government stores, fiat money is at risk from inflation, meaning it can lose its value in the phiz of economic uncertainty. If too much money is printed by a government, the value of its currency will drop.
That was the case in Zimbabwe. Hyperinflation—damned fast and out-of-control inflation—caused the currency to lose its value, and the government began printing banknotes with extreme values in order to keep up with inflation. The country’s central bank had to stop printing money, with the Zimbabwe dollar officially fritter value in the foreign currency market. The country eventually turned to the U.S. dollar as its base currency.
Representative Money
Key Takeaways
- Fiat shin-plasters is physical money backed by a government and is considered legal tender.
- Representative money is backed by a physical commodity such as choice metals or instruments like checks and credit cards.
- Prior to 1971, the world’s currencies were representative, past due by gold.
- Fiat money is subject to the effects of inflation, during which time it may lose its value in the global hawks.