8th of Sep. 2016
What is money and what are fiat currencies? are they the same? Common people find it hard to understand the difference between money and currency. Most of us deal with fiat currencies and have accepted them as “money” but the truth is, there is a big difference between fiat currencies and real money. We, at Leaf.ae, will highlight the main differences of money and currency in this post.
“Fiat” means “it shall be” in Latin. So just from the name, we can conclude that the word refers to something not real, but a promise or faith. Fiat currency is declared as a legal tender by governments, and such currencies are not backed by or linked to physical gold reserves. If people lose faith in a country’s fiat or “paper” currency, it risks becoming worthless due to inflation or hyperinflation. The value of fiat currencies is derived from the supply/demand relationship and not the actual value, and therefore, they are solely based on faith and the performance of an economy.
Historically, governments minted coins from physical commodities such as Silver or Gold, so they had intrinsic value. Before the 1970s period, paper money could be redeemed for a set amount of physical gold/silver, but after the collapse of Bretton Woods, the United states ended the convertibility of paper money into physical gold, and the world followed.
The history of fiat currencies is filled with failures. In fact, every single fiat currency that ever existed since the first century ended through devaluation and collapse. Entire economies have failed due to the collapse of fiat currencies. The Roman Denarius is a good example. Rome’s famous coinage contained pure silver during the beginning of the 1st century and 50 years later, the Denarius contained only 94% silver and at around A.D. 100, the silver content was reduced to 85%. Emperors in the Roman Empire liked this monetary policy and kept it going. By the year 244, the silver content in the Denarius was reduced to 0.05% only! And the empire collapsed shortly after as no one trusted the Denarius as a store of value.
The same has been repeated by other empires and civilizations and it seems the world did not learn from such lessons. Since 1913, the US dollar lost over 90% of its value. Are we on the path of a global fiat currency collapse? It appears the process has already started. Logic and history tell us that only Gold and Silver are real money.
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