Fiat money is money that a government\ndeclares is legal tender. Fiat refers to the government order. It\u2019s from the\nLatin, like so many of our legal words, and it means \u201clet it be done.\u201d<\/p>\n\n\n\n
The government looks at the notion that\npaper bills can be legal tender, and says, \u201clet it be done.\u201d<\/p>\n\n\n\n
Gold-backed money, also known as hard\ncurrency, is money that can be converted to actual gold. It used to be this\nway. Your dollar was as good as gold. On August 15, 1971, the United States\ndecreed that the US dollar would not be gold backed. President Richard Nixon\nsaid, \u201clet it be done\u201d and American dollars became a fiat currency. <\/p>\n\n\n\n
Most, if not all countries, now use fiat\ncurrency. Money is not backed by any commodity. When a monetary system is based\non commodity money, the money in circulation can be backed up by the commodity.\n<\/p>\n\n\n\n
Three thousand years ago, in Mesopotamia (more or less where Iraq, Kuwait, Syria, and Turkey are today), a solid system of commodity money was set up. It was based on the shekel. The shekel weight measurement was the equivalent of 0.497 ounces or 14.1 grams. <\/p>\n\n\n\n
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The way it worked was 0.497 ounces of\nbarley wheat was a shekel of wheat so a coin would be minted of the equivalent\namount of silver, gold, lead, copper, tin, or bronze or some other precious\nmetal. That coin was called a shekel. It\u2019s a lot easier to carry around a few\ncoins rather a hundred pounds of wheat.<\/p>\n\n\n\n
That was then. Now we use fiat money or\nnon-commodity money which is just another way of saying, money not backed by\ngold or any other commodity. So the big question is, how is our money valued?<\/p>\n\n\n\n
It\u2019s based on supply and demand. Because of\nthis, there is the chance of hyperinflation making fiat money worthless. There\nis a story about the little boy who came home with a puppy and told his mother\nthat it cost him $40,000. It was a very valuable puppy.<\/p>\n\n\n\n
\u201cWhere did you get that kind of money?\u201d his\nmother asked.<\/p>\n\n\n\n
The little boy shrugged. \u201cI traded two\n$20,000 kittens for him.\u201d<\/p>\n\n\n\n
Fiat money is worth what we are willing to\ntrade it for.<\/p>\n\n\n\n
Hyperinflation results from rapid\ninflation. Experts say that when the price of goods and services increase by\nmore than 50% a month, it is hyperinflation. In a fiat money system, the\ngovernment can simply print more currency. <\/p>\n\n\n\n
Here is an example of a real case of\nhyperinflation. The First World War was very costly to Germany. The German\nEmperor Wilhelm II and his government believed they would win the war. The plan\nwas to borrow the money to fund the war. They ended the gold standard and switched\nto fiat money.<\/p>\n\n\n\n
When Germany won the war, they would impose\nreparations on the defeated countries. Also, they would have all resources of\nthose countries. Germany would be rolling in dough.<\/p>\n\n\n\n
Germany lost the war and had to face the\nmassive debt incurred by all that borrowing. Reparations had to be paid in hard\ncurrency. No fiat marks would do. The fiat mark was next to useless. Massive\ndebt coupled with stacks of paper money backed by nothing caused a great deal\nof financial misery. By November 1923, the US dollar was worth 4.2 trillion\nmarks. To put this in perspective, a dozen eggs cost four billion marks in\nOctober 1923.<\/p>\n\n\n\n
There are stories such as the man who\nordered a coffee and discovered that the price had doubled between placing the\norder and the coffee arriving at his table. Printing paper money that had no\nbacking had gone entirely out of control.<\/p>\n\n\n\n
Fiat money can be volatile. Commodity money is backed up by something of value.<\/p>\n\n\n\n
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