Can someone explain how fiat money works? I’m very bad at economics and reading about it is making my brain hurt. Is money even real?
In: Economics
Nothing in society is “real” besides that people as a group agree that it is real.
The time on the clock isn’t “real”, those are just numbers we put on a machine we invented to help organize our day.
The borders between countries aren’t “real” because chances are at some point that was just a line drawn on a map by some dude claiming to be in charge, even if there’s a nice line on the ground or wall there now. It probably wasn’t there 500 years ago. We put it there.
But these things are still real, we use the time on the clock, and there are people in prison who will tell you that yeah the borders between countries are very much real and crossing them the wrong way can negatively impact you.
Fiat money works the same way. Everyone agrees that the money has value and is worth something.
Way back in the day, pretty much all money was based on previous metals. Gold, Silver, even copper. The United States dollar worked the same way, you used to be able to take your dollars and go and exchange them with the government for real, physical gold.
In 1971, the US abandoned the gold standard (for many reasons, one main one being that having a physical commodity restricting how much money you can print into circulation can put a damper on the economy).
Instead now the US dollar is just backed by trust. It isn’t back by any physical commodity you can do exchange it for. Instead it is backed by the fact that we all, me, you, banks, the government, agree that it has value, and use it.
Which really, isn’t that different that using gold backed money, tell me, is gold to a normal person really worth anything? Sure you can make some shiny looking stuff, but if you were starving or freezing you couldn’t eat it or warm yourself with it unless you could get someone else to also agree that the gold has value and trade with you for it.
But if that person didn’t like shiny metals, then you just might be out of luck.
The US dollar is a “fiat” currency. Nobody thinks that the piece of paper with Andrew Jackson’s picture on it is worth 20 times more than the piece of paper with George Washington’s picture on it. Opinions might vary on the value of the piece of paper with George Washington’s picture on it, but the Bureau of Engraving and Printing can make them for much less than one dollar each.
The only thing that makes the piece of paper with George on it worth a dollar is the US government’s requirement that people accept that piece of paper having that value.
It’s like baseball cards. The paper has no value (except as paper) until people imbue it with value by willing to exchange other stuff for it.
Or like monopoly money, which is colorful paper for all intents and purposes EXCEPT for the purposes of playing monopoly.
Money isn’t real.
Fiat money is the natural endpoint of an economic system. /first we had bartering, which was incredibly inconvenient because carrying your goods to market just to trade them for other goods was unnecessarily difficult. So then we moved to representative money, the bills represented something with an agreed upon value. So a bill would say be worth 1 bar of silver, and one could go to the bank and exchange the bill for a bar of silver or vice versa. Fiat money has value because it is believed that is has value, and people believe in that value. The value is also determined by how much money is in circulation, If there’s very few bills in circulation, the value is generally high, if there’s way too many bills in circulation, the value will plummet, So a central bank (In the case of the US the federal reserve) watches the amount in circulation and prints money accordingly, most economists consider a slow steady inflation rate is ideal. This is the reason why governments can’t just “print more money” to pay debts, if they do their currency will enter a state called “hyperinflation” that is the currency becomes essentially worthless. An example is Zimbabwe, wherein the Zimbabwean dollar was reduced to so little value that a 100,000,000,000 note was worth about a third of a cent in USD.
Latest Answers