What is FIAT?Can I buy a Fiat with gold and what does it have to do with cars?

So let’s be clear, I really like Italian cars and including the Fiat 500, but unfortunately today we will speak about money and what are they.

🙋🏽FAQ

Q.: Are US dollar, Euro, rupee a FIAT currency?
A.: Yes, all the currencies in the world nowadays are FIAT money.

Q.: Why are they called by name of the car company?
A.: From the Latin for “let it be done,” the word fiat is a binding edict issued by a person in command. It can gain an almost Biblical aura of authority, like a movie Pharaoh saying, “So let it be written, so let it be done.” So let it be a fiat.

Q.: Is gold a FIAT currency?
A.: Fiat currency is legal tender whose value is backed by the government that issued it. Gold is the product, that has its own value.

👑➡️💶From gold to fiat

First information about using FIAT money was recorded in 1000AD in China but was unsuccessful.
After World War I and World War II, governments were unable to pay their debts and wasn’t ready to declare a sovereign default. The answer was really simple and in 1944 United States, Canada, Western Europe, Australia and Japan sign the Bretton Woods agreement. Agreement introduces new economic principles:

• Price of the gold was tied to US dollars (35 US dollar per ounce)
• Currency exchange rates were fixed by the all countries agreement parties
• National banks were obliged to maintain their national currencies to one key currency (+/- 1%);
• Countries are able to change currencies using revaluation and devaluation
  IBRD and IMF were founded, to offer loans to cover the deficit of payment balances and support of volatile currencies.

Bretton Woods system collapsed in what became known as the Nixon Shock, after the long crisis in the US. 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 money has been used globally, with freely floating exchange rates between the major currencies.

📚So what exactly is FIAT money?

Fiat money is the currency that a government has declared to be legal tender, but it is not backed by a physical commodity. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material from which the money is made.

📊Advantages and Disadvantages of Fiat Money

Fiat money is the great system, but only if you are capable to control it appropriate way:

• Storing value providing a numerical account;
• Facilitating exchange.

Untied from a gold, fiat currency became much more flexible to control over its supply, which gives government and Central Bank the authority to drive economic variables such as liquidity, credit supply, money velocity and interest rates. As the result, it became easier for them to alleviate their economies from busts and booms of the business cycle.

📉Losing Faith in a Fiat Currency

Many throughout the economy had thought central banks had removed the threat of depressions or serious recessions, but the mortgage crisis of 2007 and subsequent financial meltdown quickly tempered this belief. A currency tied to gold is generally more stable than fiat money due to the limited supply of gold. There are more opportunities for the creation of bubbles with a fiat money due to its unlimited supply.

Certainly world crisis was the main reason for releasing first decentralized cryptocurrency in 2009.
First FIAT alternative which is not controlling by any government in the world, but is controlling by itself. It has become possible by using technologies of blockchain as strong cryptography method to secure financial transactions, control the creation of additional units and verify the transfer of assets.

So, does this mean that all cryptocurrencies are fiat currencies?
Not yet, but we will see how it will be in the future!

FSBT Tech Simple way to improve your finances.

Read our next article about Electronic money on Friday!