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.
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