#Representative moneymoney series

Paper money acts as a storage medium for purchasing power and an alternative to the barter system. How Does Fiat Money Work?įiat currency is not supported by any physical commodity, but by the faith of its holders and virtue of a government declaration. Since then, most countries have adopted fiat monies that are exchangeable between major currencies.

#Representative moneymoney series

However, in 1971, United States President, Richard Nixon, introduced a series of economic measures including canceling the direct convertibility of dollars into gold due to declining gold reserves. The Bretton Woods Agreement fixed the value of one troy ounce of gold to 35 United States Dollars. However, the high cost of the American Civil War and the need to rebuild the economy forced the government to cancel the redemption. In the early 20 th century, the government and banks had promised to allow the conversion of notes and coins into their nominal commodity on demand. The government halted the convertibility of its paper money to gold or silver during this war. For example, the Federal Government of the United States turned to a form of fiat currency referred to as “Greenbacks” during the American Civil War.

During wars, countries turn to fiat currencies to preserve the value of precious metals such as gold and silver. In some regions, such as New England and the Carolinas, the bills depreciated significantly and there was a hike in commodity prices as the bills lost value. The issuing of too many bills of credit generated some controversy due to the dangers of inflation. The provincial governments issued notes that the holders would use to pay taxes to the authorities. American colonies, France, and the Continental Congress started issuing bills of credit that were used to make payments. The West started using paper money in the 18 th century. Paper money became the only legal tender in the Yuan Dynasty (1276-1367), and issuing of notes was conferred to the Ministry of Finance during the Ming Dynasty (1368-1644). Traders started issuing private notes covered by a monetary reserve, and it was considered to be the first legal tender. During the Song Dynasty (960-1276), there was a booming business in the Sichuan region that led to a shortage of copper money. The people were familiar with the use of credit notes, and they readily accepted pieces of paper or paper drafts.Ī shortage of coins forced people to change from coins to notes. In the Tang Dynasty (618-907), there was a high demand for metallic currency that exceeded the supply of precious metals. History of Fiat Moneyįiat money originated from China in the 10 th century, mainly in the Yuan, Tang, Song, and Ming dynasties. For a fiat currency to be successful, the government must protect it against counterfeiting and manage the money supply responsibly. It is intrinsically valueless and used by government decree.

Unlike the traditional commodity-backed currencies, fiat currency cannot be converted or redeemed.

Currently, most nations use paper-based fiat currencies that only serve as a mode of payment. President Richard Nixon introduced a law that canceled, the direct convertibility of the U.S. It became popular in the 20 th century when U.S. Commodity money is created from precious metals such as gold and silver, while representative money represents a claim on a commodity that can be redeemed.Ĭhina was the first country to use fiat currency, around 1000 AD, and the currency then spread to other countries in the world. The value of fiat money depends on supply and demand and was introduced as an alternative to commodity money and representative money. Traditionally, currencies were backed by physical commodities such as silver and gold, but fiat money is based on the creditworthiness of the issuing government. Fiat money is a currency that lacks intrinsic value and is established as a legal tender by government regulation.