The Reality of the Fiat Monetary System

Something I have noticed since being at university and being trusted with money that isn't really mine (read overdraft) is how the numbers on my banking app don't seem very real at all. Sure when I buy something the balance goes down and when I put an hour in at work the number increases but there is a loss of tangibility that can make this seem less scary. As it turns out, this perception isn't entirely misguided.
In 1931, Britain abandoned something called the gold standard. The gold standard was a system where the currency used in a country was based upon fixed quantities of gold. So technically your bit of currency was transferable for some decided weight in gold. This meant that the value of currency was evident (because everyone knows gold is precious and expensive). Britain was not alone in its move away from this system, with most other countries abandoning this standard in the 20th century. Certainly the Great Depression was not conducive to banks sustaining their gold reserves under this system. What then replaced this system of monetary organisation? If you have read the title of this article you can probably make the (correct) educated guess that the fiat monetary system is what now defines our money. The difference between the gold standard and fiat money is that fiat money holds no intrinsic value and instead has simply been declared to have value and exist as legal tender by the government. A number of benefits are often cited in regards to this shift in monetary valuation https://www.stlouisfed.org/timely-topics/the-gold-standard/videos/part-4-benefits-of-a-fiat-money-system however the debate continues today.
Regardless, what I think is the most interesting quality of the fiat monetary system is its reliance upon perception. If people begin to doubt that fiat currency has any value, a fiat currency collapse can be instigated and in fact this life cycle of fiat money has occurred throughout the history of its use. Let's consider a potential trajectory of fiat money:

The government replaces commodity backed currency such as the gold standard with instrinsically valueless currency.


With no need for currency to be backed by any commodity or tangible measure of value, government has the capacity to just print more money. However, this can lead to inflation, meaning that you need a greater quantity of the currency for the same product (prices increase because the currency is holding less value). This means that the purchasing power of said fiat currency is reduced; you get less stuff for your £££.
If inflation becomes too extreme and the purchasing power of the fiat currency declines drastically, the population may begin to lose faith in the currency. When people no longer believe fiat money holds any value, the currency becomes worthless.

So in conclusion, perception is a powerful part of economics and economic institutions are by no means perfectly strong. But just because fiat money technically doesn't have any value, don't let that justify your urge for a student loan day splurge, you may still regret that...

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