Fiat Money Explained

Federal Reserve Bank United States image by cliff1066
Federal Reserve Bank United States image by cliff1066

Money is Paper?

That's it, that's all it is... just paper. Money is whatever we agree is money. I could pick up a rock and say that it's worth a burger and fries but unless you agree I won't be able to use the rock to buy lunch.

Our intermediaries (the government) tell us that their money is backed by their reserve system or treasury and that all money has value. We all collectively agree that this paper has value so we use it as a mean of exchange.

But what is money really and why can it be so valuable?

The good old days

The Ancient Egyptians used a form of paper money. People would store their grain in a collective storage bin. Upon arriving a tenant would weigh the grain and provide a ticket accordingly. People quickly realized the value of having these tickets so they used them as a means of trade and purchasing daily goods.

In North America and Europe Gold and Silver were considered valuable. But carrying around the precious metals were dangerous. So they kept the bullion locked up in bank vaults in exchange for tickets that valued their deposits. They too realized that they could use the note rather than the actual gold to buy things. People realized that a note meant hard currency.

Fiat Born

Banks soon realized that people valued notes and not the actual gold so they began printing extra notes to lend out to people buying houses and farms. That way if the loan defaulted they could just reposes the property and resell before anyone would notice that there were more notes than gold deposits.

With money being made in the form of interest banks could no longer hid the fact that they had more in assets than they did in the vault so they helped invent the Fiat Money System.

Governments came on board the Fiat money train because they realized that they could loan way more money than they possibly could before to finance large projects.

With people distracted, the government made their move and established the Federal Reserve Bank to take care of the money supply.

Federal Reserve Bank

The Federal Reserve Bank is not a government institution. What happens is the Government says that they need more money to help the car companies. They go to the Fed and ask for $. The Fed makes the U.S. sign a IOU and then prints the money. The Fed then collects interest on the loan and that just gets piled onto the national debt. The money now is sent to the auto manufacturers and everyone is working and happy. But they soon realise that they have to pay back this loan so at tax time the income tax is all sent to the Fed to pay the minimum interest payments on the national debt they've incurred.

Any questions?

This might help explain things

More by this Author

  • Debit Card Fraud

    Safer than carrying cash, debit card are a step in the right direction for keeping consumers safe and secure. There have however, been a few hiccups. Find out what thieves are doing to steal your money and how you can...

  • How to Live on a Tight Budget

    Living on a tight budget doesn't have to be accompanied with stress and melt down. Giving up and declaring bankruptcy might seem tempting at times but let's face it, do you really believe that the banks will let you off...

  • The Top Ten Places to Visit in Alberta

    Perhaps one of the most overlooked places to visit in Canada is Alberta. While most international travelers come to enjoy the night life of Toronto and Montreal or the beaches of B.C.'s West coast, Alberta has remained...

Comments 3 comments

James A Watkins profile image

James A Watkins 7 years ago from Chicago

Great Hub! This is a fine explication of fiat money. I enjoyed reading it. Thanks!

Jyle Dupuis profile image

Jyle Dupuis 7 years ago from Henrico, Virginia Author

Not an easy thing to explain. Sadly they choose never to teach the fundamentals of money in school. So it becomes a confusing subject for the majority of us.

MTwriter profile image

MTwriter 6 years ago from Montana

Nice post, I found it informative and easy to understand. This is a hard topic to break down but I think you made it easy to comprehend.

    Sign in or sign up and post using a HubPages Network account.

    0 of 8192 characters used
    Post Comment

    No HTML is allowed in comments, but URLs will be hyperlinked. Comments are not for promoting your articles or other sites.

    Click to Rate This Article