What is Fiat Currency? Pros of Fiat currency and difference between Fiat and crypto
There are many currencies called the cryptocurrency which is actually a form of decentralized digital currency and nowadays we can also see digital currencies that are being centralized by a government bank of a particular country but today we are not going to talk about any of those in this article. In this article, we are going to talk about a different kind of currency.
The currency we are going to talk about today is the one that is not backed or supported by any kind of commodity like silver or gold or any other commodity. There is also a different system in which the value of this kind of currency is being derived. The derivation of the value of the currency that we are going to talk about in this article is dependent upon the trust of normal people around the world.
This type of currency is called fiat currency or fiat money. Further in the article, we are going to talk about all the things that concern fiat currency, the criteria list that a currency should fulfill to be called a fiat currency, the history of fiat currencies and all the advantages of using fiat currencies over the newly popular decentralized digital currency called the cryptocurrency.
Criteria under which a Currency can be called a Fiat Currency or Fiat Money
Before getting into the list of criteria under which a currency can be called a fiat currency or fiat money let us just talk about where the term fiat came from and what was the reason behind calling these types of currency fiat currency. The currency got the name of Fiat Currency originally from the Latin term or word which was fiat. The meaning of this Latin term was actually Let it be done.
Now the reason behind using this particular term is that the currency gets a sense of decree, order, and resolution. These three things were the sense in which the Latin term fiat was added to the name of the currency. Now let us discuss what currencies can be called a fiat currency or what are the criteria of a currency being called a fiat currency. The different criteria are as follows:
- We have already mentioned this condition in the definition of the currency itself which states that a currency that has no backing from any kind of commodities like silver or gold can be called a fiat currency.
- The currencies that are declared or controlled by certain people or a government of a particular country or union of a continent or any kind of government institution can be called or referred to as fiat currency or fiat money.
- The currencies that are issued by a state that is a state government and there is no way to convert the currency into any other currency even with the assistance of a central bank and other than that the value of the currency is not constant that is the value of the currency changes based on some standard objectives can be called fiat currency or fiat money.
- The currency that is used by the people for maintaining the decree of the government of a country they live in can be called a fiat currency or fiat money.
- Any kind of object that does not have any real value but can be used as a medium of exchange can be called or referred to as fiat currency or fiat money.
These are all the criteria if the currency fulfills any one of these criteria that are mentioned in the criteria list those currencies can be called fiat currency or fiat money.
Impact of the fiat currencies on the economy
Now we have come across what a fiat currency is in a detailed manner. So it is now time to discuss the impacts that are caused by fiat currency or fiat money on the economy in general. As we are talking about currencies it will be only fair if we talk about the monetary economics and the impacts of fiat currency on monetary economics as a whole. If we discuss monetary economics then we have to say that the fiat currency or fiat money whatever you want to call it is a valueless object in an intrinsic sense. Apart from being an object which is in an intrinsic sense has no value it can also be referred to as a record that is on a wide range accepted or used as a medium of making payments.
If we take reference from the theories of money or currency that are created in modern time then we will see that the theories say that fiat currency or fiat money has a greater value than the metal content in it. On the other hand, if we go by the concept of the theories of money which were made earlier than the modern ones then we can notice that there is high contrast. We are talking about the money theories that were made during or in the middle ages which had much more similarity to the “Arrow Debreu Model” of currencies. This model focused on the concept of coins as commodities.
The Advantages of using fiat currency
Now as we have already talked about fiat currency and about the impact of this kind of currency that is the fiat currency or the fiat money on the economy or we can specifically say the monetary economy. Now we are going to discuss the advantages that are pros of using fiat currency as a medium of payment. The different advantages of using fiat currency or fiat money as a medium of payment are as follows:
Supply is unlimited
There can be an unlimited supply of fiat currencies. The centralized bank of a country can produce the amount of money they want without any kind of limitations, even with the help of technology the centralized banks of the countries won’t even require to print the money anymore.
We state it as an example because unlike other commodities like gold, silver, coal, or any other commodity which depends on the number of laborers that are assigned to carry out the mining of the commodities, fiat currency is not like that. And also unlike the other commodities that we just mentioned fiat currency is not a natural resource.
Hence the supply of it is not limited and can be increased or decreased by the centralized banks of the country as per their need.
The low cost required to produce the fiat currencies
Let us first mention that with what comparison we are accepting fiat currencies to be having a cheap production cost and what kind of currency we are considering to have a high cost of production. Let us take the example of a currency that is backed by commodities like silver or gold which we call representative currency or commodity currency.
The production of such currencies that are backed by any kind of currency derives the value of itself by the rate of extraction of the commodity on which it is dependent. Due to this reason the extraction of such commodities is an important factor and for extracting this kind of commodities a lot of labor and investment is needed.
This increases the production cost of such currencies. On the other hand, fiat currencies do not require any commodity to derive its value so the cost production of fiat currency is cheaper.
The stability it offers
Well for this advantage that we are going to mention you need to know the previously mentioned advantages. Let’s first explain the role of the second advantage in the case of stability. We already mentioned that the cost production of fiat money or fiat currencies is much lower than the other representative or commodity currencies hence the production can be controlled very easily for maintaining the stability of the fiat currency or fiat money.
No limit in supply is also another advantage that we mentioned and this advantage also serves the training stability. The centralized banks can increase or decrease the supply of the currency as per the requirement so that the fiat currency can stay stable which helps the people.
The difference between Fiat currency and cryptocurrency
There are many differences between these two currencies which we are going to mention in this set of the article. So keep on reading the article as this section is really important. The differences are as follows:
Kind of the currency
The fiat currency is actually available and can be transferred both digitally and physically but crypto is by themselves digital assets hence there is no question about physical transfers.
Issued by
The fiat currencies are issued by the centralized bank of the different countries whereas the cryptocurrencies are operated by independent individuals or organizations
Legal
Fiat currencies are legal in every country in this world whereas cryptocurrencies are illegal in some countries.
Supply
We already mentioned that the supply of fiat currencies is unlimited whereas the supply of crypto is limited.
Conclusion
Hopefully, this article has helped you learn about what fiat currencies are, the advantages of using that kind of currency, and the difference between them and cryptocurrencies.
