Question

Commodity money (silver or gold) does not create inflation in the economy, why governments or

Reverse Banks still printing fiat money? Explain

Answer 1

What is Fiat Money?

Fiat money is a currency that lacks intrinsic value and is established as a legal tender by government regulation. Traditionally, currencies were based on physical commodities such as silver and gold, but fiat money is based on the credit of the economy.

The value of fiat money depends on supply and demand and was introduced as an alternative to commodity money and representative money. Commodity money is created from precious metals such as gold and silver, while representative money represents a claim on a commodity that can be redeemed.

China was the first country to use fiat currency, around 1000 AD, and the currency then spread to other countries in the world. It became popular in the 20th century when US President Richard Nixon introduced a law that stopped the conversion of the U.S. dollar into gold. Currently, most nations use paper-based fiat currencies that only serve as a mode of payment.

Unlike the traditional commodity-based currencies, fiat currency cannot be converted or redeemed. It is intrinsically valueless and used by government decree. For a fiat currency to be successful, the government must protect it against counterfeiting and manage the money supply responsibly.