“Fiat” money is a currency issued by governments that is not tied to physical products such as gold and silver. The currency value is usually set by the ratio of supply and demand and regulated by governments’ financial departments. USA dollar, euro, pound, and many other stable currencies are called “fiat” (Chen 1). Nowadays, the currency is becoming more unstable due to such risks as inflation and citizens’ distrust, affecting purchasing power in the US and other countries.
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Even though governments are controlling money supply, the risk of inflation is high as “fiat” money is not dependent on gold. When more money is printed, its value is less, and it is not beneficial to both governments and citizens. Consequently, the lost value of “fiat” money may cause distrust and suspicions from residents upon the government. Moreover, when trust from citizens is lost, “fiat” money will no longer be in demand. For instance, in the early 2000s, Zimbabwe experienced a serious economic problem, and the central bank started printing a great amount of money, causing hyperinflation (Islam et al. 70). Prices on ordinary products increased, and the 100-trillion Zimbabwean dollar was 40 cents in the US dollar (Chen 1). This fact forced people to carry huge bags with money while shopping.
However, despite all these risks, the purchasing power in the US and other countries, where “fiat” currency is used, has increased. The convenience of the use and easy transactions play a considerable role, and high purchasing power helps keep inflation low (Islam et al. 71). Governments convince people that “fiat” money has purchasing power and they can buy physical products. Consequently, citizens have a reason to trust “fiat” money and use it in their lives.
According to Dapp et al., a debt-based “fiat” system is borrowed by government money paid in a specific time period (8). For instance, borrowing from other governments is an example of debt-based “fiat” system. Non-debt-based “fiat” system is money earned without debt, such as tax revenue, debt recovery, and non-tax revenue.
Chen, James. “Fiat Money”. Investopedia, 2020, pp. 1-5.
Dapp, Marcus M., et al. “The Fiat Money System”. A Participatory Framework to Promote Sustainability, 2021, pp. 7-9.
Islam, Mohammad Rabiul, et al. “Cryptocurrency vs. Fiat Currency: Architecture, Algorithm, Cashflow & Ledger Technology on Emerging Economy: The Influential Facts of Cryptocurrency and Fiat Currency”. International Conference on Information and Communication Technology for the Muslim World, 2018, pp. 69-73.
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