Why is fiat money better

Because it can no longer be converted into gold and is not directly tied to the amount of gold a government stores, fiat money is at risk from inflation. This means it can lose its value in the face of economic uncertainty. If the government prints too much money, the value of its currency drops.

That was the case in Zimbabwe. Hyperinflation—extremely fast and out-of-control inflation—caused the currency to lose its value. The government began printing banknotes with higher values in order to keep up with inflation. The country's central bank had to stop printing money, causing the Zimbabwe dollar to officially lose value in the foreign currency market. The country eventually turned to the U. Representative money is government-produced money backed by a physical commodity such as precious metals.

Other forms of representative money are still in place, including financial instruments like checks and credit cards. These forms of payment are used today in place of traditional money, with the intent to pay at a later date. Representative money has a long history. In the 17th and early 18th centuries, furs and commodities like corn were used in transactions.

This was followed by precious metals like gold and silver. Up until , the world followed the gold standard, where a person was able to exchange the money they held directly for gold. A country that followed the gold standard set a fixed price for gold, buying and selling gold at that price. That fixed price was used to determine the value of the currency. The major appeal for representative money was that it was not influenced by inflation—governments were only able to print enough money for the amount of gold they held in their vaults.

While fiat money doesn't have intrinsic value —that being through an objective calculation—its value is set by the government that issues the currency. Most modern currencies around the world are forms of fiat money. Fiat money can be used to buy goods and services since both parties involved in a transaction agree on the currency's value. Representative money, on the other hand, is valued based on the instrument backing it, whether that's a commodity, asset , or another financial instrument such as a check.

A single dollar may, for instance, be worth a specific amount of gold. Most currencies are no longer backed by commodities.

But there are still other forms of representative money, such as checks, money orders , and bank drafts. They can be exchanged for the value listed on the instrument. As mentioned above, the United States severed its ties with the gold standard in , turning its currency into fiat money. That led all national currencies to be valued against the U. Discounted offers are only available to new members. Stock Advisor will renew at the then current list price. Investing Best Accounts.

Stock Market Basics. Stock Market. Industries to Invest In. Getting Started. Planning for Retirement. Retired: What Now? Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. Most modern paper currencies, such as the U. One danger of fiat money is that governments will print too much of it, resulting in hyperinflation.

Provides flexibility Gives central banks greater control over economy Seigniorage. Risk of inflation Not fool-proof way to protect economy Opportunity for bubble.

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What Is Chartalism? Chartalism is a non-mainstream theory that emphasizes the impact of government policies and activities on the value of money.

Nixon Shock Nixon Shock refers to the economic actions taken by President Richard Nixon in that eventually led to the collapse of the Bretton Woods system. The USD is the abbreviation for the U. Gold Standard The gold standard is a system in which a country's government allows its currency to be freely converted into fixed amounts of gold.

Legal Tender Definition Legal tender describes any official medium of payment recognized by law that can be used to extinguish a public or private debt or meet a financial obligation.

Partner Links. Related Articles. Monetary Policy Fiat Money vs. Economics Fiat vs. Representative Money: What's the Difference? Monetary Policy Is fiat money more prone to inflation than commodity money?

Macroeconomics How the U. Dollar Became the World's Reserve Currency. Investopedia is part of the Dotdash publishing family. Cryptocurrencies are playing an increasingly important role in the economy. Companies like Tesla accept Bitcoin as money; even asset managers recommend investing in Bitcoin. But how do they work? Visit the new DW website Take a look at the beta version of dw.

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