Fiat money

Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value.[1] It was introduced as an alternative to commodity money and representative money. Commodity money is created from a good, often a precious metal such as gold or silver, which has uses other than as a medium of exchange (such a good is called a commodity). Representative money is similar to fiat money, but it represents a claim on a commodity (which can be redeemed to a greater or lesser extent).[2][3][note 1]

Fiat money first began to be used in China in the 11th century. Since then, it has been used by various countries, usually concurrently with commodity currencies. Fiat money started to dominate in the 20th century. Since the decoupling of the US dollar from gold by Richard Nixon in 1971, a system of national fiat currencies has been used globally.

Fiat money has been defined variously as:

  • Any money declared by a government to be legal tender.[4]
  • State-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard.[5]
  • Intrinsically valueless money used as money because of government decree.[2]
  • An intrinsically useless object that serves as a medium of exchange[6] (also known as fiduciary money.)[7]

The term fiat derives from the Latin fiat ("let it be done")[8] used in the sense of an order, decree[2] or resolution.[9]

Yuan dynasty banknote with its printing plate 1287
Yuan dynasty banknotes are the earliest known fiat money.

Treatment in economics

In monetary economics, fiat money is an intrinsically valueless object or record that is widely accepted as a means of payment.[3] In some micro-founded models of money, fiat money is created internally in a community making feasible trades that would not otherwise be possible, either because producers and consumers may not anonymously write IOUs, or because of physical constraints.[10][11]

Precious metals

Circulating silver coins in the 1960s ceased to be produced containing the precious metal when the face value of the coin was below the cost of the elemental metal. The Coinage Act of 1965 eliminated silver from the circulating dimes and quarter dollars of the United States, and most other countries did the same with their coins.[12]

The Canadian penny was mostly copper until 1996 and was removed from circulation in the fall of 2012 due to the cost of production relative to face value.[13]

In 2007 the Royal Canadian Mint produced a million dollar gold bullion coin and sold five of them. In 2015, the gold in the coins was worth more than 3.5 times the face value.[14]



Fiat money originated in 11th century China,[15] and its use became widespread during the Yuan and Ming dynasties.[16]

Jiao zi
Song Dynasty Jiaozi, the world's earliest paper money.

The Song Dynasty in China was the first to issue paper money, jiaozi, around the 10th century AD. Although the notes were valued at a certain exchange rate for gold, silver, or silk, conversion was never allowed in practice. The notes were initially to be redeemed after three years' service, to be replaced by new notes for a 3% service charge, but, as more of them were printed without notes being retired, inflation became evident. The government made several attempts to support the paper by demanding taxes partly in currency and making other laws, but the damage had been done, and the notes fell out of favor.[17]

The successive Yuan Dynasty was the first dynasty in China to use paper currency as the predominant circulating medium. The founder of the Yuan Dynasty, Kublai Khan, issued paper money known as Chao in his reign. The original notes during the Yuan Dynasty were restricted in area and duration as in the Song Dynasty.

During the 13th century, Marco Polo described the fiat money of the Yuan Dynasty in his book The Travels of Marco Polo.[18][19]

All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver... and indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan's dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold.

— Marco Polo, The Travels of Marco Polo


Washington Irving records an emergency use of paper money by the Spanish in a siege during the Conquest of Granada (1482–1492). In 1661, Johan Palmstruch issued the first regular paper money in the West, under royal charter from the Kingdom of Sweden, through a new institution, the Bank of Stockholm. While this private paper currency was largely a failure, the Swedish parliament eventually took over the issue of paper money in the country. By 1745, its paper money was inconvertible to specie, but acceptance was mandated by the government.[20] This fiat currency depreciated so rapidly that by 1776 it returned to a silver standard. Fiat money also has other roots in 17th-century Europe, having been introduced by the Bank of Amsterdam in 1683.[21]

New France 1685–1770

In 17th century New France, now part of Canada, the universally accepted medium of exchange was the beaver pelt. As the colony expanded, coins from France came to be widely used, but there was usually a shortage of French coins. In 1685, the colonial authorities in New France found themselves seriously short of money. A military expedition against the Iroquois had gone badly and tax revenues were down, reducing government money reserves. Typically, when short of funds, the government would simply delay paying merchants for purchases, but it was not safe to delay payment to soldiers due to the risk of mutiny.

Jacques de Meulles, the Intendant of Finance, came up with an ingenious ad-hoc solution – the temporary issuance of paper money to pay the soldiers, in the form of playing cards. He confiscated all the playing cards in the colony, cut them up into pieces, wrote denominations on the pieces, signed them, and issued them to the soldiers as pay in lieu of gold and silver. Because of the chronic shortages of money of all types in the colonies, these cards were readily accepted by merchants and the public and circulated freely at face value. It was intended to be purely a temporary expedient, and it was not until years later that its role as a medium of exchange was recognized. The first issue of playing card money occurred in June 1685 and was redeemed three months later. However, the shortages of coinage reoccurred and more issues of card money were made in subsequent years. Because of their wide acceptance as money and the general shortage of money in the colony, many of the playing cards were not redeemed but continued to circulate, acting as a useful substitute for scarce gold and silver coins from France. Eventually, the Governor of New France acknowledged their useful role as a circulating medium of exchange.[22]

As the finances of the French government deteriorated because of European wars, it reduced its financial support for its colonies, so the colonial authorities in Canada relied more and more on card money. By 1757, the government had discontinued all payments in coin and payments were made in paper instead. In an application of Gresham’s Law – bad money drives out good – people hoarded gold and silver, and used paper money instead. The costs of the war with the British led to rapid inflation in New France. Following the British conquest in 1760, the paper money became almost worthless, but business did not come to a halt because gold and silver that had been hoarded came back into circulation. Under the Treaty of Paris (1763), the French government agreed to convert the outstanding card money into debentures, but with the French government essentially bankrupt, these bonds fell into default and by 1771 they were worthless.

The Royal Canadian Mint still issues Playing Card Money in commemoration of its history, but now in 92.5% silver form with gold plate on the edge. It therefore has an intrinsic value which considerably exceeds its fiat value.[23] The Bank of Canada and Canadian economists often use this early form of paper currency to illustrate the true nature of money for Canadians.[22]

18th and 19th century

Adoption of 'Gold Standard' (Paper currency convertible into gold)[24]
Country Year
United Kingdom 1821
Germany 1871
Sweden 1873
United States (de facto) 1873
France 1874
Belgium 1874
Italy 1874
Switzerland 1874
Netherlands 1875
Austria-Hungary 1892
Japan 1897
Russia 1898
United States (de jure) 1900

An early form of fiat currency in the American Colonies were "bills of credit."[25] Provincial governments produced notes which were fiat currency, with the promise to allow holders to pay taxes in those notes. The notes were issued to pay current obligations and could be called by levying taxes at a later time.[25] Since the notes were denominated in the local unit of account, they were circulated from person to person in non-tax transactions. These types of notes were issued particularly in Pennsylvania, Virginia and Massachusetts. Such money was sold at a discount of silver, which the government would then spend, and would expire at a fixed point in time later.[25]

Bills of credit have generated some controversy from their inception. Those who have wanted to highlight the dangers of inflation have focused on the colonies where the bills of credit depreciated most dramatically – New England and the Carolinas.[25] Those who have wanted to defend the use of bills of credit in the colonies have focused on the middle colonies, where inflation was practically nonexistent.[25]

Colonial powers consciously introduced fiat currencies backed by taxes, e.g. hut taxes or poll taxes, to mobilise economic resources in their new possessions, at least as a transitional arrangement. The purpose of such taxes was later served by property tax. The repeated cycle of deflationary hard money, followed by inflationary paper money continued through much of the 18th and 19th centuries. Often nations would have dual currencies, with paper trading at some discount to specie-backed money.

Examples include the “Continental” issued by the U.S. Congress before the Constitution; paper versus gold ducats in Napoleonic era Vienna, where paper often traded at 100:1 against gold; the South Sea Bubble, which produced bank notes not backed by sufficient reserves; and the Mississippi Company scheme of John Law.

During the American Civil War, the Federal Government issued United States Notes, a form of paper fiat currency popularly known as 'greenbacks'. Their issue was limited by Congress just slightly over $340 million. During the 1870s, withdrawal of the notes from circulation was opposed by the United States Greenback Party. It was termed as 'fiat money' in an 1878 party convention.[26]

20th century

After World War I, governments and banks generally still promised to convert notes and coins into their underlying nominal commodity (redemption in specie, typically gold) on demand. However, the costs of the war and the required repairs and economic growth based on government borrowing afterward made governments suspend redemption in specie. Some governments were careful of avoiding sovereign default but not wary of the consequences of paying debts by consigning newly printed cash which had no metal-backed standard to their creditors, which led to hyperinflation – for example the hyperinflation in the Weimar Republic.

From 1944 to 1971, the Bretton Woods agreement fixed the value of 35 United States dollars to one troy ounce of gold.[27] Other currencies were pegged to the U.S. dollar at fixed rates. The U.S. promised to redeem dollars in gold to other central banks. Trade imbalances were corrected by gold reserve exchanges or by loans from the International Monetary Fund.

The Bretton Woods system collapsed in what became known as the Nixon Shock. This was a series of economic measures taken by United States President Richard Nixon in 1971, including unilaterally canceling the direct convertibility of the United States dollar to gold. Since then, a system of national fiat monies has been used globally, with freely floating exchange rates between the major currencies.[28]

Money creation and regulation

A central bank introduces new money into the economy by purchasing financial assets or lending money to financial institutions. Commercial banks then redeploy or repurpose this base money by credit creation through fractional reserve banking, which expands the total supply of broad money (cash plus demand deposits).

In modern economies, relatively little of the supply of broad money is in physical currency. For example, in December 2010 in the U.S., of the $8,853.4 billion in broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money.[29] The manufacturing of new physical money is usually the responsibility of the central bank, or sometimes, the government's treasury.

The Bank for International Settlements, published a detailed review of payment system developments in the G10 countries in 1985 in the first of a series that has become known as "red books". Currently the red books cover the participating countries on Committee on Payments and Market Infrastructures (CPMI).[30] A red book summary of the value of banknotes and coins in circulation is shown in the table below where the local currency is converted to US dollars using the end of the year rates.[31] The value of this physical currency as a percentage of GDP ranges from a high of 19.4% in Japan to a low of 1.7% in Sweden with the overall average for all countries in the table being 8.9% (7.9% for the US).

Banknotes and coins in circulation (12/31/2015)
Country Billions of dollars Per capita
United States $1,425 $4,433
Eurozone $1,210 $3,571
Japan $857 $6,739
India $251 $195
Russia $117 $799
United Kingdom $103 $1,583
Switzerland $76 $9,213
Korea $74 $1,460
Mexico $72 $599
Canada $59 $1,641
Brazil $58 $282
Australia $55 $2,320
Saudi Arabia $53 $1,708
Hong Kong SAR $48 $6,550
Turkey $36 $458
Singapore $27 $4,911
Sweden $9 $872
South Africa $6 $113
Total/Average $4,536 $1,558

The most notable currency not included in this table is the Chinese yuan, for which the statistics are listed as "not available".


The adoption of fiat currency by many countries, from the 18th century onwards, made much larger variations in the supply of money possible. Since then, huge increases in the supply of paper money have taken place in a number of countries, producing hyperinflations – episodes of extreme inflation rates much higher than those observed in earlier periods of commodity money. The hyperinflation in the Weimar Republic of Germany is a notable example.

Economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.[32] Today, most economists favor a low and steady rate of inflation.[33] Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy.[34] However, money supply growth does not always cause nominal price increases. Money supply growth may instead lead to stable prices at a time in which they would otherwise be falling. Some economists maintain that under the conditions of a liquidity trap, large monetary injections are like "pushing on a string."[35][36]

The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.[37]

Loss of backing

A fiat-money currency greatly loses its value should the issuing government or central bank either lose the ability to, or refuse to, further guarantee its value. The usual consequence is hyperinflation. Some examples where this has occurred are the Zimbabwean dollar, China in 1945 and the mark in the Weimar Republic in 1923.

But this need not necessarily occur; for example, the so-called Swiss dinar continued to retain value in Kurdish Iraq even after its legal tender status was withdrawn by the Iraqi central government which issued the notes.[38][39]

Therefor, all governments will rigidly prop up all fiat currencies because it is necessary for the government to retain it's wealth and secure it's positions, even at the cost of creating a bubble. In the global society all fiat currencies are linked and governmental mishandling will ripple through the entire financial institutions on the planet.

See also


  1. ^ See Monetary economics for further discussion.


  1. ^ Goldberg, Dror (2005). "Famous Myths of "Fiat Money"". Journal of Money, Credit and Banking. 37 (5): 957–967. JSTOR 3839155.
  2. ^ a b c N. Gregory Mankiw (2014). Principles of Economics. p. 220. ISBN 978-1-285-16592-9. fiat money: money without intrinsic value that is used as money because of government decree
  3. ^ a b Walsh, Carl E. (2003). Monetary Theory and Policy. The MIT Press. ISBN 978-0-262-23231-9.
  4. ^ Montgomery Rollins (1917). Money and Investments. George Routledge & Sons. Archived from the original on December 27, 2016. Fiat Money. Money which a government declares shall be accepted as legal tender at its face value;
  5. ^ John Maynard Keynes (1965) [1930]. "1. The Classification of Money". A Treatise on Money. 1. Macmillan & Co Ltd. p. 7. Fiat Money is Representative (or token) Money (i.e something the intrinsic value of the material substance of which is divorced from its monetary face value) – now generally made of paper except in the case of small denominations – which is created and issued by the State, but is not convertible by law into anything other than itself, and has no fixed value in terms of an objective standard.
  6. ^ The new Palgrave dictionary of economics. Palgrave Macmillan (Firm), (Living Reference Work ed.). United Kingdom. ISBN 9781349951215. OCLC 968345651.
  7. ^ "The Four Different Types of Money - Quickonomics". Quickonomics. September 17, 2016. Archived from the original on February 13, 2018. Retrieved February 12, 2018.
  8. ^ Fiat is the third-person singular present active subjunctive of fiō ("I become", "I am made").
  9. ^ Schueffel, Patrick (2017). The Concise Fintech Compendium. Fribourg: School of Management Fribourg/Switzerland. Archived from the original on October 24, 2017.
  10. ^ Kiyotaki, Nobuhiro & Wright, Randall (1989). "On Money as a Medium of Exchange". Journal of Political Economy. 97 (4): 927–54. doi:10.1086/261634..
  11. ^ Lagos, Ricardo & Wright, Randall (2005). "A Unified Framework for Monetary Theory and Policy Analysis". Journal of Political Economy. 113 (3): 463–84. CiteSeerX doi:10.1086/429804..
  12. ^ Dave (2014-08-22). "Silver as Money: A History of US Silver Coins". Silver Coins. Retrieved 2019-03-07.
  13. ^ Agency, Canada Revenue. "ARCHIVED – Eliminating the penny from Canada's coinage system -". Archived from the original on May 17, 2017. Retrieved May 8, 2018.
  14. ^ "Million Dollar Coin". Archived from the original on January 25, 2015. Retrieved May 8, 2018.
  15. ^ Selgin, George (2003), "Adaptive Learning and the Transition to Fiat Money", The Economic Journal, 113 (484): 147–65, doi:10.1111/1468-0297.00094.
  16. ^ Von Glahn, Richard (1996), Fountain of Fortune: Money and Monetary Policy in China, 1000–1700, Berkeley: University of California Press.
  17. ^ Ramsden, Dave (2004). "A Very Short History of Chinese Paper Money". James J. Puplava Financial Sense. Archived from the original on June 9, 2008.
  18. ^ David Miles; Andrew Scott (January 14, 2005). Macroeconomics: Understanding the Wealth of Nations. John Wiley & Sons. p. 273. ISBN 978-0-470-01243-7.
  19. ^ Marco Polo (1818). The Travels of Marco Polo, a Venetian, in the Thirteenth Century: Being a Description, by that Early Traveller, of Remarkable Places and Things, in the Eastern Parts of the World. pp. 353–55. Retrieved September 19, 2012.
  20. ^ Foster, Ralph T. (2010). Fiat Paper Money – The History and Evolution of Our Currency. Berkeley, California: Foster Publishing. pp. 59–60. ISBN 978-0-9643066-1-5.
  21. ^ "How Amsterdam Got Fiat Money". Archived from the original on November 10, 2013. Retrieved May 8, 2018.
  22. ^ a b Bank of Canada (2010). "New France (ca. 1600–1770)" (PDF). A History of the Canadian Dollar. Bank of Canada. Archived (PDF) from the original on October 2, 2013. Retrieved February 12, 2014.
  23. ^ "Playing Card Money Set". Royal Canadian Mint. 2014. Archived from the original on August 15, 2016. Retrieved July 6, 2016.
  24. ^ "Rise and fall of the Gold Standard". Archived from the original on May 4, 2017. Retrieved May 8, 2018.
  25. ^ a b c d e Michener, Ron (2003). "Money in the American Colonies Archived February 21, 2015, at the Wayback Machine." EH.Net Encyclopedia, edited by Robert Whaples.
  26. ^ "Fiat Money". Chicago Daily Tribune. May 24, 1878.
  27. ^ ""Bretton Woods" Federal Research Division Country Studies (Austria)". Library of Congress. Archived from the original on December 2, 2010.
  28. ^ Jeffrey D. Sachs, Felipe Larrain (1992). Macroeconomics for Global Economies. Prentice-Hall. ISBN 0745006086. The Bretton Woods arrangement collapsed in 1971 when U.S. President Richard Nixon suspended the convertibility of the dollar into gold. Since then, the world has lived in a system of national fiat monies, with flexible exchange rates between the major currencies
  29. ^ "FRB: H.6 Release--Money Stock and Debt Measures--January 27, 2011". Archived from the original on July 10, 2017. Retrieved May 8, 2018.
  30. ^ "About the CPMI". February 2, 2016. Archived from the original on October 4, 2017. Retrieved May 8, 2018.
  31. ^ "CPMI - BIS - Red Book: CPMI countries". Archived from the original on October 20, 2017. Retrieved May 8, 2018.
  32. ^ Robert Barro and Vittorio Grilli (1994), European Macroeconomics, Ch. 8, p. 139, Fig. 8.1. Macmillan, ISBN 0-333-57764-7.
  33. ^ Hummel, Jeffrey Rogers. "Death and Taxes, Including Inflation: the Public versus Economists" (January 2007). "Archived copy". Archived from the original on December 25, 2013. Retrieved March 30, 2014.CS1 maint: Archived copy as title (link) p. 56
  34. ^ "Escaping from a Liquidity Trap and Deflation: The Foolproof Way and Others Archived February 26, 2014, at the Wayback Machine" Lars E.O. Svensson, Journal of Economic Perspectives, Volume 17, Issue 4 Fall 2003, pp. 145–66
  35. ^ John Makin (November 2010). "Bernanke Battles U.S. Deflation Threat" (PDF). AEI. Archived from the original (PDF) on December 21, 2013.
  36. ^ Paul Krugman; Gauti Eggertsson. "Debt, Deleveraging, and the liquidity trap: A Fisher‐Minsky‐Koo approach" (PDF). Archived (PDF) from the original on December 17, 2013.
  37. ^ Taylor, Timothy (2008). Principles of Economics. Freeload Press. ISBN 1-930789-05-X.
  38. ^ Foote, Christopher; Block, William; Crane, Keith & Gray, Simon (2004). "Economic Policy and Prospects in Iraq" (PDF). The Journal of Economic Perspectives. 18 (3): 47–70. doi:10.1257/0895330042162395..
  39. ^ Budget and Finance (2003). "Iraq Currency Exchange". The Coalition Provisional Authority. Archived from the original on May 15, 2007.

Bitstamp is a bitcoin exchange based in Luxembourg. It allows trading between USD currency and bitcoin cryptocurrency. It allows USD, EUR, bitcoin, litecoin, ethereum, ripple or bitcoin cash deposits and withdrawals.

The company was founded as a European-focused alternative to then-dominant bitcoin exchange Mt. Gox. While the company trades in US dollars, it accepts fiat money deposits for free only via the European Union's Single Euro Payments Area, a mechanism for transferring money between European bank accounts. Deposits via credit cards or wires incur a fee.Bitstamp offers an API to allow clients to use custom software to access and control their accounts.

CEX.IO is a cryptocurrency exchange and former Bitcoin cloud mining provider. As an online digital currency exchanger, CEX.IO offers trading cryptocurrency for fiat money, such as USD, EUR, GBP and RUB. The exchange charges 0% to 0.25% commission on trade operations, according to the Maker-Taker fee schedule.The list of cryptocurrencies introduced on the platform includes Bitcoin, Ether, Ripple, XLM, Bitcoin Cash, Dash, Zcash, and Bitcoin Gold.

Commodity money

Commodity money is money whose value comes from a commodity of which it is made. Commodity money consists of objects that have value in themselves (intrinsic value) as well as value in their use as money.Examples of commodities that have been used as mediums of exchange include gold, silver, copper, salt, peppercorns, tea, large stones (such as Rai stones), decorated belts, shells, alcohol, cigarettes, cannabis, silk, candy, nails, cocoa beans, cowries and barley. These items were sometimes used in a metric of perceived value in conjunction to one another, in various commodity valuation or price system economies.

Credit theory of money

Credit theories of money (also called debt theories of money) are monetary economic theories concerning the relationship between credit and money. Proponents of these theories, such as Alfred Mitchell-Innes, sometimes emphasize that money and credit/debt are the same thing, seen from different points of view. Proponents assert that the essential nature of money is credit (debt), at least in eras where money is not backed by a commodity such as gold. Two common strands of thought within these theories are the idea that money originated as a unit of account for debt, and the position that money creation involves the simultaneous creation of debt. Some proponents of credit theories of money argue that money is best understood as debt even in systems often understood as using commodity money. Others hold that money equates to credit only in a system based on fiat money, where they argue that all forms of money including cash can be considered as forms of credit money.

The first formal credit theory of money arose in the 19th century. Anthropologist David Graeber has argued that for most of human history, money has been widely understood to represent debt, though he concedes that even prior to the modern era, there have been several periods where rival theories like metallism have held sway.

Cryptocurrency exchange

A cryptocurrency exchange or a digital currency exchange (DCE) is a business that allows customers to trade cryptocurrencies or digital currencies for other assets, such as conventional fiat money or other digital currencies. A cryptocurrency exchange can be a market maker that typically takes the bid-ask spreads as a transaction commission for is service or, as a matching platform, simply charges fees.


A currency (from Middle English: curraunt, "in circulation", from Latin: currens, -entis), in the most specific use of the word, refers to money in any form when in use or circulation as a medium of exchange, especially circulating banknotes and coins. A more general definition is that a currency is a system of money (monetary units) in common use, especially for people in a nation. Under this definition, US dollars (US$), British pounds (£), Australian dollars (A$), European euros (€), Russian rubles (₽) and Indian Rupees (₹) are examples of currency. These various currencies are recognized as stores of value and are traded between nations in foreign exchange markets, which determine the relative values of the different currencies. Currencies in this sense are defined by governments, and each type has limited boundaries of acceptance.

Other definitions of the term "currency" are discussed in their respective synonymous articles banknote, coin, and money. The latter definition, pertaining to the currency systems of nations, is the topic of this article. Currencies can be classified into two monetary systems: fiat money and commodity money, depending on what guarantees the currency's value (the economy at large vs. the government's physical metal reserves). Some currencies are legal tender in certain political jurisdictions. Others are simply traded for their economic value. Digital currency has arisen with the popularity of computers and the Internet.

Deficit spending

Deficit spending is the amount by which spending exceeds revenue over a particular period of time, also called simply deficit, or budget deficit; the opposite of budget surplus. The term may be applied to the budget of a government, private company, or individual. Government deficit spending is a central point of controversy in economics, as discussed below.

Friedman rule

The Friedman rule is a monetary policy rule proposed by Milton Friedman. Essentially, Friedman advocated setting the nominal interest rate at zero. According to the logic of the Friedman rule, the opportunity cost of holding money faced by private agents should equal the social cost of creating additional fiat money. It is assumed that the marginal cost of creating additional money is zero (or approximated by zero). Therefore, nominal rates of interest should be zero. In practice, this means that the central bank should seek a rate of deflation equal to the real interest rate on government bonds and other safe assets, to make the nominal interest rate zero.

The result of this policy is that those who hold money don't suffer any loss in the value of that money due to inflation. The rule is motivated by long-run efficiency considerations.

This is not to be confused with Friedman's k-percent rule which advocates a constant yearly expansion of the monetary base.

Hard money (policy)

Hard money policies (as opposed to fiat currency policies) support a specie standard, usually gold or silver, typically implemented with representative money.

In 1836, when President Andrew Jackson's veto of the recharter of the Second Bank of the United States took effect, he issued the Specie Circular, an executive order that all public lands had to be purchased with hard money.

One can say that a hard money policy is one in which the government recognizes currency which is based on an actual, fixed item which is considered valuable. Hard money is considered the opposite of fiat money, which is currency that takes its value from the government declaration or law which assigns the said value to it. As such, this kind of money is not inherently valuable, but may be used in transactions as long as it is said to be legal tender. The use of fiat money is now more common than the use of hard money, especially on an international level. The US dollar, for instance, is an example of a fiat currency.

James Braid Taylor

Sir James Braid Taylor, KCIE (21 April 1891 – 17 February 1943) was the second Governor of the Reserve Bank of India, holding office from 1 July 1937 until his death on 17 February 1943. He succeeded Sir Osborne Smith who was the Governor from 1 April 1935 to 30 June 1937. He was appointed a CIE in the 1933 New Year Honours List, knighted in the 1935 Silver Jubilee and Birthday Honours List and further appointed a KCIE in the 1939 Birthday Honours List.Taylor, a member of the Indian Civil Service, served as a Deputy Controller in the Currency Department of the Government of India for over a decade. He later became the Controller of Currency, and additionally secretary in the Finance Department. He then became the Deputy Governor of the Reserve Bank and succeeded Smith as the Governor. He was closely associated with the preparation and piloting of the Reserve Bank of India Bill. He governed the bank during the war years and was involved in decision to move from a silver currency to fiat money. Even though he was the second Governor, his signature was the first to appear on the currency notes of the Indian rupee. His second term came to an end when he died in office on 17 February 1943. He was succeeded by Sir C. D. Deshmukh who became the first Indian to lead the Reserve Bank of India.

Kelantanese dinar

The Kelantanese dinar is a currency issued by the Government of the Malaysian state of Kelantan, which purportedly is in conformance with the concept of the Islamic gold dinar. The Kelantanese dinar is available in the form of coins of several denominations. These coins were first struck in 2006 by Mariwasa Kraftangan of Kuala Kangsar, Perak, a local producer of souvenirs and replicas of objects of art and culture, and launched by the state of Kelantan on 20 September 2006. The Government of Kelantan had suggested that the coins had the status of legal tender, and the state-issued dinar sold out quickly, with many buyers seeing the gold dinar as a better choice than fiat money.However, the federal Malaysian government in Kuala Lumpur denied that the Kelantanese dinar had a legal-tender status, stating that the buyers had been misled by the Kelantanese government. The only currency that is legal tender in Kelantan is the Malaysian ringgit. According to the Malaysian constitution, ninth schedule, list I sub 7.a, the states of Malaysia do not have the right to issue coins. In fact, the federal government had already declared publicly in 2006, in response to the plan announced by the Kelantanese government and before any of the coins were minted, that state governments could not issue their own currency.

Medium of exchange

Medium of exchange is one of the three fundamental functions of money in mainstream economics. It is a widely accepted token which can be exchanged for goods and services. Because it can be exchanged for any good or service it acts as an intermediary instrument and avoids the limitations of barter; where what one wants has to be exactly matched with what the other has to offer.Most forms of money can act as mediums of exchange including commodity money, representative money and most commonly fiat money. Representative and fiat money often exist in digital form as well as physical tokens such as coins and notes.

Monetary system

A monetary system is the set of institutions by which a government provides money in a country's economy. Modern monetary systems usually consist of the national treasury, the mint, the central banks and commercial banks.


Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The main functions of money are distinguished as: a medium of exchange, a unit of account, a store of value and sometimes, a standard of deferred payment. Any item or verifiable record that fulfils these functions can be considered as money.

Money is historically an emergent market phenomenon establishing a commodity money, but nearly all contemporary money systems are based on fiat money. Fiat money, like any check or note of debt, is without use value as a physical commodity. It derives its value by being declared by a government to be legal tender; that is, it must be accepted as a form of payment within the boundaries of the country, for "all debts, public and private". Counterfeit money can cause good money to lose its value.

The money supply of a country consists of currency (banknotes and coins) and, depending on the particular definition used, one or more types of bank money (the balances held in checking accounts, savings accounts, and other types of bank accounts). Bank money, which consists only of records (mostly computerized in modern banking), forms by far the largest part of broad money in developed countries.

Purchasing power

Purchasing power is the amount of goods and services that can be purchased with a unit of currency. For example, if one had taken one unit of currency to a store in the 1950s, it would have been possible to buy a greater number of items than would be the case today, indicating that the currency had a greater purchasing power in the 1950s. Currency can be either a commodity money, like gold or silver, or fiat money emitted by government sanctioned agencies.

Representative money

Representative money is any medium of exchange that represents something of value, but has little or no value of its own (intrinsic value). However, unlike some forms of fiat money (which may not have anything of value backing it), to be a genuine representative money, there must always be something valuable supporting the face value represented.More specifically, the term representative money has been used variously to mean:

A claim on a commodity, for example gold certificates or silver certificates. In this sense it may be called "commodity-backed money".

Any type of money that has face value greater than its value as material substance. Used in this sense, most types of fiat money are a type of representative money.Historically, the use of representative money predates the invention of coinage. In the ancient empires of Egypt, Babylon, India and China, the temples and palaces often had commodity warehouses which issued certificates of deposit as evidence of a claim upon a portion of the goods stored in the warehouses, a form of "representative money".According to economist William Stanley Jevons (1875), representative money in the form of bank notes arose because metal coins often were "variously clipped or depreciated" during use, but using representations for the value stored in banks ensured its worth. He noted that paper and other materials have been used as representative money.In 1895 economist Joseph Shield Nicholson wrote that credit expansion and contraction was in fact the expansion and contractions of representative money.In 1934 economist William Howard Steiner wrote that the term was used "at one time to signify that a certain amount of bullion was stored in the Treasury while the equivalent paper in circulation" represented the bullion.

Roman economy

During the Roman Republic, the Roman economy was largely agrarian, centered on the trading of commodities such as grain and wine. Financial markets were established through such trade, and financial institutions which extended credit for personal use and public infrastructure, were established primarily through inter-family wealth. In times of agricultural and cash shortfall, Roman officials and moneyers tended to respond by coining money; this happened during the prolonged crisis of the First Punic War, and created economic distortion and difficulties. Beginning in the early Roman Empire, the economy became monetized to a near-universal extent, in the sense of using money to express prices and debts, and a basic banking system was formed. Emperors issued coinage stamped with their portraits to disseminate propaganda, to create public goodwill, and to symbolise their wealth and power.

The Roman Imperial economy was often unstable, inflated in part by Emperors who issued money to fund high-profile imperial projects such as public building works, or costly wars that offered opportunities for propaganda, but little or no material gain.

There was no central bank to monitor the money supply and control economic conditions, and nearly no regulation of the banking system. The setup of the banking system under the Empire allowed the exchange of extremely large sums without the physical transfer of coins, which led to fiat money. With no central bank, a professional deposit banker (argentarius, coactor argentarius, or later nummularius) received and held deposits for a fixed or indefinite term, and lent money to third parties. Generally, available capital exceeded the amount needed by borrowers, so loans were made and credit was extended on risky terms. The senatorial elite were involved heavily in private lending, both as creditors and borrowers, making loans from their personal fortunes on the basis of social connections. Banks of classical antiquity typically kept less in reserves than the full total of customers' deposits, as they had no incentive to ensure that customers' deposits would be insured in the event of a bank run. It was common consensus among Romans at the time, especially due to Seneca's ideologies, that anyone involved in commerce should have access to credit. This tendency toward fiat money caused the money supply to fluctuate consistently.Emperors of the Antonine and Severan dynasties overall debased the currency, particularly the denarius, under the pressures of meeting military payrolls. Sudden inflation during the reign of Commodus damaged the credit market. In the mid-200s, the supply of specie contracted sharply. Conditions during the Crisis of the Third Century—such as reductions in long-distance trade, disruption of mining operations, and the physical transfer of gold coinage outside the empire by invading enemies—greatly diminished the money supply and the banking sector by the year 300. Although Roman coinage had long been fiat money or fiduciary currency, general economic anxieties came to a head under Aurelian, and bankers lost confidence in coins legitimately issued by the central government. Despite Diocletian's introduction of the gold solidus and monetary reforms, the credit market of the Empire never recovered its former robustness.

Standard of deferred payment

In economics standard of deferred payment is a function of money. It is the function of being widely accepted way to value a debt; thereby allowing goods and services to be acquired now and paid for in the future.The 19th-century economist William Stanley Jevons, influential in the study of money, considered it to be one of four fundamental functions of money. The other three being medium of exchange, store of value, and unit of account. However, most modern textbooks now list only the other three functions; considering standard of deferred payment to be subsumed by the others.Most forms of money can act as standards of deferred payment including commodity money, representative money and most commonly fiat money. Representative and fiat money often exist in digital form as well as physical tokens such as coins and notes.

Token money

In economics, Token money, or Token, is money that has little intrinsic value compared to its face value. Unlike fiat money, which also has little intrinsic value, it is limited legal tender. It does not have free coinage.

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