Question

Please explain the pros and cons of fiat currencies

Answer 1

Fiat currencies ar those currencies that is issued by a government and not backed by any physical commodity. Fiat money obtains its value simply because the government legislates and regulates the use of it.

Pros

Stability : Fiat money as controlled by the government helps in bringing stability in the country . As supply is controlled by the government it helps in creating inflation and can be used to control severe crisis in the economy .

Growth : Government can increase or decrease the supplyof money according to control its growth . Government can increase the supply by printing more currency and supply it in the market and the market in respond will automatically grow as more money is supplied and invested.

Store of value : Fiat money are paper currency which can be easily carried and stored without any kind of problem . Fiat money is active medium of exchange as it is easily carried in pocket or can be stored any where without any harm as paper is neither periciable nor its decreases with time .

Account match : Fiat money is easily measureable as how much to pay ? how much paid ? how much left ? it is countable and helps in knowing the worth of money left with a person/firm/bank .

Cons

Inflation : though fiat currency can control inflation it can also lead to high inflation . As government has complete control over printing of fiat money , it can print endless notes and lead to higher inflation which can be difficult to digest .

Government trust : As government has printing power the value of currency is fully tied with the government . If the government is not stable then the value of currency may drastically fall and bring huge losses . It has only its value for faith and trust in government

Government benefits : The unlimited power of governments to print currency whenever they want can be harmful as well. This gives the government the idea to steal resources from the public even when they refuse to be taxed.If the goernment is greedy it may print notes to enjoy their tenure rather than to develop the nation