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Tuesday, 15 May 2012

Fiat money has real value

Fiat money has real value

The actual materials the physical representation of our money, bank notes and coins, are made of today have, for practical purposes, no intrinsic value in themselves. Our monetary unit 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 unstable medium of exchange, unstable unit of measure and unstable store of real value in the economy.

The actual material fiat money is made of has no intrinsic value as fiat money is the natural product of the development of the concept of money through the ages. In the beginning a monetary unit was a (supposedly) 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 the material fiat money is made of has no intrinsic value and the monetary unit 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.


The daily change in the real value of an unstable local currency – which is also the unstable accounting monetary unit of measure – is indicated by the change in the Daily CPI or monetized daily indexed unit of account in non-hyperinflationary economies. It is generally indicated by the change in the daily US Dollar or other relatively stable foreign currency parallel rate or a Brazilian-style Unidade Real de Valor daily index rate in a hyperinflationary economy.



The actual materials used to create physical bank notes and coins have almost no intrinsic value. The unstable real value of the total fiat money supply 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 within an economy.



Fiat money is used every day by seven billion people to buy everything in the world economy. Fiat money thus has real value. All monetary units in the world are, generally, fiat money. Every person knows, more or less, what he or she can buy with 1 or 10 or 100 or 1000 units of fiat money in his or her economy – today. 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 real 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 day.



Fiat money is money which generally has a daily changing real value. Only the actual bank notes and coins have insignificant intrinsic values.



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 every day to buy gold and silver and almost everything else in the world economy. The fact that fiat money today is not legally convertible into gold – a historic 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 daily by the change in the Daily Consumer Price Index.



The fact that fiat money has real value is totally mainstream:  seven billion people know it and confirm it daily – 365 days a year – by using fiat money to buy and sell everything in the world economy. The fact that fiat money has real value is confirmed daily when daily inflation indices 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 cannot administratively be converted at the central bank or any other bank into gold, that fiat money has no value. All the gold in the world is today bought and sold using fiat money as the medium of exchange.



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 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 Daily CPI and monthly CPI values world–wide are the creditable references to the fact that fiat money has real value. Statistics authorities are generally creditable sources.


Nicolaas Smith

Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.