Fiat currency or Fiat money is the currency which is declared as the legal tender by the government and has no backing of any physical commodity such as gold and rather the value of the fiat money is derived from the demand and supply forces of the market. The US dollar and Indian rupee are the fiat currencies of America and India respectively. The face value of fiat currencies is much higher than their commodity values. Most of the modern paper money around the globe are fiat currencies.
- Indian Rupee : India
- Euro - Belgium
- Yuan - China
- Peso - Mexico
- Shilling - Uganda
- Rial - Oman
- USD - USA
MERITS OF FIAT CURRENCY
There are various merits of Fiat currencies. Some of them are as follows:
1. Stable value:
They have a stable value, unlike money which is backed by commodities like silver, gold or copper etc, as the currencies which are backed by commodities are volatile in nature due to the regular business cycle and the periodic recessions. On the other hand, the central bank of the country can print or put hold the paper currency when they require, which gives them great control over the supply of currency, liquidity and interest rates.
2. Neutralising the economy:
It helps to neutralise and stabilise the economy of the country for the reason that governments have control over the supply of the fiat currency and money is not based on any volatile commodity
3. Most accepted:
It is the most accepted currency form and not supported by the multiple currency exchanges and payment networks around the globe. This makes it more valuable.
DOWNSIDES OF FIAT MONEY
Apart from the upsides or merits we discussed, there are some limitations and downsides as well for fiat money which are:
- It has the potential that its value can go nil because the paper in which it is printed has no value due to which all value can be lost. Once the value of money starts going down towards zero, then the economy and everyone using it will completely be destroyed.
- Although it is witnessed that fiat money is a more stable currency which can assist in the situation of recessions but during worldwide recession, it was argued that a limited supply of gold makes it a more stable currency when compared with the fiat currency as it has unlimited supply.
- Every year a new stock of money is printed for the purpose of replacing the bills which are taken out of circulation because they have been destroyed or lost. But using this reason usually more money is printed than the requirements and hence causing the fiat currencies to lose their value over the period of time.
- As the govt is given the power and authority to print the fiat money whenever they want, it gives the alternative to the government to steal the resources of the people of the nation even in case they refuse to get taxed. In these cases, the government slightly inflates the currency and then purchases whatever is required by them before the rise of the prices.
Fiat money is the most accepted form of currency and it is supported by the multiple currency payment networks and exchanges around the globe. In other ways, fiat currency does not have any intrinsic value and the market forces determine its value. This helps in stabilizing the economy of the country for the reason that governments have control over the supply of the money and fiat currency is not blacked on any volatile commodity. Nevertheless, the government must be very diligent while printing it as in case the over circulation value of the currency drops, it may lead to a situation of hyperinflation.