FIAT Money

FIAT Money

Let it be done!

What is Fiat Money?

• Fiat money is currency which derives itsvalue from government regulation or law. Itdiffers from commodity money, which isbased on a good, often a precious metalsuch as gold or silver, which has uses otherthan as a medium of exchange.

Fiat Money

History of Fiat Money

Fiat money originated in 11th centuryChina, and its use became widespread duringthe Yuan and Ming dynasties.

The Song Dynasty in China was the first toissue paper money, jiaozi, around the 10thcentury AD.

• All these pieces of paper are,issued with as much solemnityand authority as if they were ofpure gold or silver... and indeedeverybody takes them readily,for wheresoever a person maygo throughout the Great Kaan'sdominions he shall find thesepieces of paper current, andshall be able to transact all salesand purchases of goods bymeans of them just as well as ifthey were coins of pure gold.

• —Marco Polo, The Travels of Marco Polo

Yuan dynasty banknotes are the earliest known fiat money.

• An early form of fiat currency in theAmerican Colonies were "bills of credit".

• Provincial governments produced noteswhich were fiat currency, with the promise toallow holders to pay taxes in those notes. Thenotes were issued to pay current obligationsand could be called by levying taxes at a latertime.

Since the notes were denominatedin the local unit of account, they werecirculated from person to person innon-tax transactions.

These types of notes were issuedparticularly in Pennsylvania, Virginiaand Massachusetts.

Such money was sold at a discountof silver, which the government wouldthen spend, and would expire at afixed point in time later.

20th century

After World War I, in theory, governments stillpromised to redeem notes in specie on demand.However, the costs of the war and the massiveexpansion afterward made governments suspendredemption in specie. Since there was no directpenalty for doing so, governments were notimmediately responsible for the economicconsequences of printing more money, which ledto hyperinflation – for example the hyperinflationin the Weimar Republic.

• Kuan note is the oldest known banknote in the world. It was made in China circa 1380.

• The first paper money in England was issued in the early 1600s as fiat money.

Fiat money has two characteristics.

a) It does not represent anything of intrinsic value.

b) It is decreed to be legal tender

Yuan dynasty banknotes are the earliest known fiat money.