Fiat money

Main articles:

• Russian ruble
• US dollar

In the general opinion, the origin and functioning of the monetary systems are among the questions of the economic theory, most difficult for understanding. In this situation it is important to give accurate and functional definitions of the basic concepts at the initial stage.

Types of money

Money it is considered to be the assets performing functions of currency, tallies and stores of value. Depending on a method of issue it is possible to select three types of money:

• commodity,
• credit and
• fiat.

Commodity

Commodity money (commodity money) is known since the most ancient times. Their value was defined by the value of material of which they were made. Commodity money played an important role in the metal monetary systems. See Also:

• Prenukleusa - procurement for stone tools - the first money
• Investments into gold
• Investments into silver

Credit

Credit money (credit money, inside money) appeared with emergence of the first banks. They represented debt obligations of banks – banknotes, or deposits. Their value was provided with assets of emitting bank. Credit money was important in the countries where there was no state monopoly for currency issue.

The first money, according to alternative history of money, often consider debts on commodity loans – they were used as tally. After a while temples (as the organizations enjoying unconditional confidence) began to recognize these debts, and they became currency. Afterwards with emergence of large-scale production, for the organization and which start large-scale investments were required, money debts turned into full-fledged means of accumulation.

Thus, according to representatives of the alternative concept, the metal coins which were traditionally considered as "universal equivalent" and "this money" appeared after debts and were derivatives in relation to them. Alternative history of money is capable to furnish other explanation of development of the monetary sphere in the past and also its features in the present. According to this version, banks – not "monetary warehouses", and buyers of debts. Recognizing debts, modern banks, like temples in the ancient time, turn them into the money accepted by all. For this purpose they do not need to accumulate goods (precious metals) or other types of means of payment.

Credit value basis – solvency of his partner, i.e. confidence that the partner will pay off the debt at the scheduled time. This confidence the organizations, thanks to the reputation in large quantities provided the accepting (buying) debts: in the ancient time – temples, further – banks. Value to the accepted debts eventually was given by the state:

• these means appeared in the law national monetary unit, the state support was guaranteed to them;
• they were counted payments of taxes;
• citizens were obliged to pay off them the debts before each other.

Fiat

Fiat money (fiat money, outside money, from armor. fiat is the decree, the instruction) were emitted by the state in the form of treasury notes. The trust to the state was the cornerstone of their value. With emergence of the state monopoly for issue the credit money created by banks was balanced in the rights with fiat money. Therefore all modern money can be considered fiat.

The trust to a monetary system in general is the cornerstone of their value. The state on behalf of the central bank not only emits cash, but also supports trust to non-cash money which creates banks. Further we will use the term "fiat money" in relation to all modern money which is not provided with goods or other material values.

Modern fiat money can be cash and non-cash. Cash and non-cash money can exchange in the ratio 1:1. In process of development of financial technologies the popularity of cash decreases. The basis of money supply in the modern fiat monetary systems is formed by non-cash money.

From time to time the attention of researchers and the general public is attracted by assets which can execute separate functions of money. From the middle of the 2010th years the cryptocurrencies emitted by the private sector apply for it. Cryptocurrencies have separate properties of commodity and credit money.

Digital currencies of the central banks (central bank digital currencies) – one of the projects which are widely discussed at the beginning of the 2020th years in the field of currency circulation. If they will fully perform functions of money, inherently they will treat fiat money.

Issue of fiat money

In the metal monetary systems the amount of issue is limited by bank reserves (quick assets of banks). In the fiat systems such restrictions disappear. But from this does not follow that issue of fiat money nothing it is not limited.

Today affect credit activity of commercial banks:

• percentage policy of the central banks;
• the regulatory standards and measures directed to achievement of financial stability;
• tight restrictions modern bank risk management.

Why the states passed to fiat money

The gold standard played a certain positive role in due time, contributing to the development of world trade and the industry. At the same time it had massive faults:

• the gold overflows between the countries accelerated by increase in rates led to periodic crises;
• the more the countries passed to the gold standard, the stronger there was not enough gold;
• in the conditions of the gold standard the central bank could not perform functions of the last resort lender adequately.

Emergence of the fiat monetary systems solved a shortage problem "monetary metal". But from the very beginning there were risks:

• for price stability – historically the state had a reputation "living beyond means";
• for financial stability – fiat issue can lead to bubbles, and because of the growing interdependence of national economies crises become more "infectious".

Maintenance of financial stability for 2020 still remains not up to the end resolved issue.

Chronicle

2019: An analytical note of the Bank of Russia about fiat money

"Fiat money" Analytical note of the Bank of Russia, August, 2019 Hryshchenko, PDF

See Also

• World economy