The Benefits of Fiat Currency
Fiat currency is a system whereby there is no “intrinsic” value in the medium itself. Supporters of the system generally point to a number of benefits all somewhat related to the ability to manage the money supply, and thus the economy. Technically fiat currency may be directly printed and distributed by the government, but in practice the ability to do so is generally reserved for the Central Bank, a quasi-public institution owned and operated by its member banks. Owners may include both domestic and foreign interests. The purported benefit of this partnership lays in the removal of politics, ie. the people, from the process of formulating, and instituting monetary policy.
Virtually without exception the original currency has had a direct relationship to something of value, whether that be a hard asset, such as gold, or, in some cases, the promise to redeem the currency in a hard asset at a later date. According to those who advocate a fiat currency, “hard money” has a number of faults which fiat currency aims to correct. The primary problem is that the amount of “hard money” which can be circulated is restricted to the amount of gold, or other asset, available to back said currency. In many ways this can be a drag on the economy, primarily due to the fact that the wants or needs of the population cannot always be met by the available resources. A fiat currency aims to address that by simply increasing the money supply to pay for goods and services which could not otherwise be purchased. The underlying philosophy is that a managed economy can better serve the needs of the nation and thus it is antithetical to the free market system.
The management of the money supply, and thus the economy, is placed in the hands of those at the Central Bank determined best suited to make such decisions in a committee setting which meets in secret to avoid political interference. The money supply is increased or decreased as necessary in an attempt to avoid deflation while maintaining a slight rate of inflation reflecting the constant pressures of an increasing money supply backed only by “the full faith and credit” of the nation involved. Inflation is a necessary component in the system as the benefit of such a system lies in the fact that purchases can be made with the newly created money.
In essence, the beauty of the system lies in the fact that money can be created on an as needed basis without the need to produce anything of corresponding value and thus can finance a wide variety of goods and services which may not otherwise have been available. Supporters point to the fact that all developed nations operate on the fiat system, and that the entire social network, the welfare state, and, in fact, much of what we call modern life, has been financed by the fiat system. According to advocates of the system, a well-managed fiat system can go on indefinitely and thus is of great benefit to the entire populace.
Although I am not a supporter of the system, I hope that I have provided a short, but accurate, article presenting the general points in favor of such a system. Obviously those interested should do further research on their own to determine whether the benefits outweigh the costs of such a system. The article itself contains information I consider to be “general knowledge” as well as opinion and welcome any comments which provide further insights into what I have presented here.