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Monday, 15 November 2010

Fiat money has real value and is legally convertible

All fiat money is created out of nothing: out of thin air. It is, however, backed by all - the sum total of - the underlying value systems in an economy, namely sound governance, sound economic policies, sound monetary policies, sound industrial policies, sound commercial policies, etc. Positive annual inflation indicates the excess of fiat money created in the banking system.

Fiat money is used every day by 6 billion people to buy anything and everything in the economy. Fiat money has real value. All monetary units in the world are fiat money. Every person knows exactly what he or she can buy with 1 or 10 or 100 or 1000 units of fiat money in his or her economy – today. Everyone also knows that the real value of fiat money is eroded over time in an inflationary economy and increases over time in a deflationary economy.

Yes, the special bank paper that fiat bank notes is made of and the metals that fiat bank coins are made of have almost no intrinsic value as compared to the real value of the actual gold or actual silver in gold and silver coins of commodity money in the past. That is not a logical reason to state that fiat money has no value. Every fiat monetary unit´s real value is determined by what it can buy today in an average consumer basket of goods and services. That generally changes every month.
Fiat money is money which generally has a monthly changing real value. Only the actual fiat bank notes and coins have insignificant intrinsic values. Fiat bank notes and coins constitute only about 7% of the US money supply.

All fiat monetary units – whether notes and coins or simply electronically represented virtual values - are legal tender in their respective economies.

All fiat functional currencies within economies have international exchange rates with the fiat functional currencies of other economies.

The fact that fiat money is not legally convertible into gold on demand as it was done in the days of the gold standard, is made irrelevant by the indisputable fact that fiat money is legal tender. Fiat money is used to buy gold. The fact that fiat money is not legally convertible into gold - an administrative process - is true: it is a fact. That does not negate the fact that fiat money has real value, the change of which is indicated monthly in the change in the Consumer Price Index.

The fact that fiat money has real value is so mainstream - 6 billion people know it and confirm it daily - 365 days a year - by using fiat money to buy and sell everything in all economies. The fact that fiat money has real value is confirmed once a month by about 155 to 200 economies world wide when monthly inflation indexes are published indicating the change in the real value of fiat money. It is thus misleading to imply that because it is a fact that fiat money can not administratively be converted at the central bank or any other bank into gold, that fiat money has no value.

It is an indisputable mainstream fact that fiat money has real value despite the fact that it is not legally convertible into gold on demand and that the bank paper bank notes are made of and metals bank coins are made of have no intrinsic value whereas historically gold and silver coins had intrinsic values equal to the real value of the gold and silver they were made of.

The numerous publications of CPI values world wide are the absolutely creditable references to the fact that fiat money has real value. Statistics authorities are generally creditable sources.
© 2005-2010 by Nicolaas J Smith. All rights reserved. No reproduction without permission.