Lesson 3: The Fiat System Explained

Preview

Now that we understand what money is, some advantages and disadvantages of different types of money, it’s time to understand the current fiat monetary system we live in today. In this video we will explore how we arrived at the fiat monetary system, some of the benefits of that system, and importantly, some of the drawbacks.

Understanding the Current Fiat System

Key Takeaways

• Fiat money is a relatively recent development in the long history of money. The modern fiat era began on August 15, 1971, when President Nixon ended the dollar’s convertibility into gold.
• Fiat money is not backed by anything, except trust in the government.
• Fiat is a Latin word that means “Let it be done”, which reflects the declaratory nature of fiat money. In other words, money has value because the government says it does and we believe them.
• The primary trade off of a fiat monetary system is the added flexibility it provides governments to print money in times of crisis, and remove money to reduce inflation. The downside of this system is that the ability to print money is very temping to use, and this results in inflation.
• Inflation is the decrease in the purchasing power of money — meaning each unit of currency buys fewer goods and services than before.
• 90% of today’s fiat money exists only as digital entries. Physical currency is a very small fraction.
• Key Quote: “The entire history of money is really just the history of trust. We went from trusting a physical object like gold, to trusting an institution like a government. As we move deeper into this new digital world we have to ask, what or who are we going to trust next? Will it be an algorithm? will it still be our governments? Or will it be something entirely new? The answer to that is going to shape everything.“

Additional Resources

• How the Fed prints money (in Jerome Powell’s words)
• Understanding Fiat Currencies – River.com/learn