IFRS and US GAAP authorised CMUCPP automatically maintains the constant purchasing power of constant real value non-monetary items (e.g. capital, all items in shareholders´ equity, provisions, salaries, wages, pensions, taxes, trade debtors/creditors, etc) only when updated in terms of the Daily CPI during low and high inflation, hyperinflation and deflation - ceteris paribus. European Accounting Association: "Capital maintenance is a competing objective of financial reporting."
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
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
All fiat functional currencies within economies have
international exchange rates with the fiat functional currencies of other
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
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
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.
Copyright (c) 2005-2012 Nicolaas J Smith. All rights reserved. No reproduction without permission.