Fiat money has real value
The actual material our
money is made of today has, for practical purposes, no intrinsic value in
itself. Our monetary unit is fiat money that is created by government fiat or
decree. The government declares fiat money to be legal tender. In the past
monetary coins were made of, for example, silver or gold which were valuable in
themselves. The actual metal of which the coin was made had a real or intrinsic
value supposedly equivalent to the nominal value inscribed on the coin. Today
fiat money is a government decreed and legally recognized unstable medium of
exchange, unstable unit of account and unstable store of value in the economy.
The actual material today´s fiat money is made of has no intrinsic value
as fiat money is the natural product of the development of the concept of money
through time. In the beginning a monetary unit was a (supposedly) full value
metal coin. Later it was not a full value metal coin but it was the next best
thing as far as economic agents were concerned: it was 100 per cent backed by
gold. Today the material fiat money is made of has no intrinsic value and the
monetary unit is not backed by gold but is backed by the combined macroeconomic
real value of all the underlying value systems in a particular economy or
monetary union. These underlying value systems include, but, are not limited to
sound governance, a sound economic system, a sound manufacturing system, a sound
industrial system, a sound monetary system, a sound political system, a sound
social system, a sound educational system, a sound defence system, a sound
health system, a sound security system, a sound legal system, a sound accounting
system and so on, to name but a few.
Changes in the real value of
unstable money – which is also the unstable accounting monetary unit of account
– are determined by inflation and deflation over time. The real value of money
and thus the monetary unit of account are not stable. The real value of money
and other monetary items are currently not updated or inflation-adjusted over
time in ledger and bank accounts.
Fortunately, (1) the generally
accepted accounting principle of financial capital maintenance in units of
constant purchasing power, (2) double entry accounting, (3) the fact that the
constant real non-monetary value of capital is equal to the real value of net
assets and (4) the fact that companies have unlimited lifetimes, make it
possible to automatically maintain the real value of constant items constant
forever in entities that at least break even – ceteris paribus – when they
implement Constant Item Purchasing Power Accounting during low inflation and
deflation as authorized in IFRS – whether they own any fixed assets or not.
The bank notes and coins that make up about 7% of the fiat money supply
can almost be stated to be created out of nothing – out of thin air – as a
result of the fact that the actual materials used to create physical bank notes
and coins have – in principle – almost no intrinsic value. The unstable real
value of the total fiat money supply is, however, backed by all – the sum total
of – the underlying value systems in an economy, namely sound governance, sound
economic policies, sound monetary policies, sound industrial policies, sound
commercial policies, etc. Positive annual inflation indicates the excess of fiat
money created in the banking system.
Fiat money is used every day by
almost 7 billion people to buy anything and everything in the world economy.
Fiat money has real value. All monetary units in the world are fiat money. Every
person knows exactly what he or she can buy with 1 or 10 or 100 or 1000 units of
fiat money in his or her economy – today. Many people also know that the real
value of fiat money is eroded over time in an inflationary economy and increases
over time in a deflationary economy.
Yes, the special bank paper that
fiat bank notes is made of and the metals that fiat bank coins are made of have
almost no intrinsic value as compared to the real value of the actual gold or
actual silver in gold and silver coins of commodity money in the past. That is
not a logical reason to state that fiat money has no value. Every fiat monetary
unit´s real value is determined by what it can buy today in an average consumer
basket of goods and services. That generally changes every month.
money is money which generally has a monthly changing real value. Only the
actual bank notes and coins have insignificant intrinsic values. Bank notes and
coins constitute only about 7% of the US money supply.
All fiat monetary
units – whether notes and coins or simply electronically represented virtual
values – are legal tender in their respective economies.
functional currencies within economies have international exchange rates with
the fiat functional currencies of other economies.
The fact that fiat
money is not legally convertible into gold on demand as it was done in the days
of the gold standard, is made irrelevant by the indisputable fact that fiat
money is legal tender. Fiat money is used to buy gold. The fact that fiat money
is not legally convertible into gold – an administrative process – is true: it
is a fact. That does not negate the fact that fiat money has real value, the
change of which is indicated monthly in the change in the Consumer Price Index.
The fact that fiat money has real value is so mainstream – almost 7
billion people know it and confirm it daily – 365 days a year – by using fiat
money to buy and sell everything in all economies. The fact that fiat money has
real value is confirmed once a month by about all economies world–wide when
monthly inflation indexes are published indicating the change in the real value
of fiat money. It is thus misleading to imply that because it is a fact that
fiat money cannot administratively be converted at the central bank or any other
bank into gold, that fiat money has no value.
It is an indisputable
mainstream fact that fiat money has real value despite the fact that it is not
legally convertible into gold on demand and that the bank paper bank notes and
metals bank coins are made of have no intrinsic value whereas historically gold
and silver coins had intrinsic values equal to the real value of the gold and
silver they were made of.
The numerous publications of CPI values
world–wide are the creditable references to the fact that fiat money has real
value. Statistics authorities are generally creditable
Copyright (c) 2005-2011 Nicolaas J
Smith. All rights reserved. No reproduction without permission.