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Wednesday, 7 July 2010

What backs money?

Our money today has no intrinsic value in itself. It is fiat money that is created by government fiat or decree. The government declares fiat money to be legal tender. In the past monetary coins were made of, for example, silver or gold which were valuable in themselves. The actual metal of which the coin was made had a real or intrinsic value supposedly equivalent to the nominal value inscribed on the coin. Today fiat money is a government decreed and legally recognized medium of exchange, unit of account and store of value in the economy.

Our money today has no intrinsic value as it is the natural product of the development of the concept of money through time. In the beginning a monetary unit was a full value metal coin. Later it was not a full value metal coin but it was the next best thing as far as economic agents were concerned: it was 100 per cent backed by gold. Today it has no intrinsic value and it is not backed by gold but is backed by the combined macroeconomic real value of all the underlying value systems in a particular economy or monetary union.

These underlying value systems include, but, are not limited to sound governance, a sound economic system, a sound manufacturing system, a sound industrial system, a sound monetary system, a sound political system, a sound social system, a sound educational system, a sound defence system, a sound health system, a sound security system, a sound legal system, a sound accounting system and so on, to name but a few.

Kindest regards

Nicolaas Smith
realvalueaccounting@yahoo.com

Copyright © 2010 Nicolaas J Smith