Commercial bank money or demand deposits are claims against financial institutions that can be used for the purchase of goods and services. A demand deposit account is an account from which funds can be withdrawn at any time by check or cash withdrawal without giving the bank or financial institution any prior notice. Banks have the legal obligation to return funds held in demand deposits immediately upon demand (or ‘at call’). Demand deposit withdrawals can be performed in person, via checks or bank drafts, using automatic teller machines , or through online banking.

Hard money is a currency backed by a gold standard or other precious metal, or types of lending, political contributions, and government funding. Fiat currencies gained prominence in the 20th century in part because governments and central banks sought to insulate their economies from the worst effects of the natural booms and busts of the business cycle. The gold standard, which backed U.S. currency with federal gold, ended completely in 1971, when the U.S. also stopped issuing gold to foreign governments in exchange for U.S. currency. Fiat money gives central banks greater control over the economy because they can control how much money is printed. Monetarists such as Milton Friedman have argued that variations in money supply have significant influences on price levels over long periods, as well as on economic output in the short run. Monetary policy is essentially a macroeconomic tool used by governments alongside a fiscal policy.

What Are The Three Functions Of Money?

As commodity money, gold has historically served its purpose as a medium of exchange, a store of value, and as a unit of account. Commodity-backed currencies are dollar bills or other currencies with values backed up by gold or another commodity held at fiat money advantages and disadvantages a bank. During much of its history, the money supply in the United States was backed by gold and silver. Interestingly, antique dollars dated as late as 1957 have “Silver Certificate” printed above the portrait of George Washington, as shown below.

This type of currency is not linked to any asset of value and can be printed at will by central governments. However, governments must be careful to avoid over-circulation, as this would cause a drop in value. But, if the government prints too much, for example, to pay debts, it will jeopardize the economy’s stability. A drastic increase in the money supply gives rise to hyperinflation. Money’s purchasing power for goods and services is falling rapidly. Under the gold standard, money in circulation was paper money and had no intrinsic value. However, these banknotes are also valuable because you can exchange them for some gold. The system also promotes the boom-and-bust cycle in the economy. In his 1949 paper “Human Action,” Austrian economist and sociologist Ludwig von Mises asserted that currency not tied to commodity allows a government to expand the money supply. When used to stimulate the economy, expanding the money supply further and further would lead to an inevitable collapse of the monetary and economic system.

What Is Fiat Currency?

The hyperinflation experienced by Zimbabwe demonstrated the propensity of some governments to expand the money supply by overprinting money. The value of fiat money is dependent on how a country’s economy is performing, how the country is governing itself, and the effects of these factors on interest rates. A country experiencing political instability is likely to have a weakened currency and inflated commodity prices, making it hard for people to buy products as they may need. Fiat money is regulated by the government through the Federal Reserve. With the industrialization and involvement of technology, digital currencies are gaining an upper hand over others. Below you will find the major advantages and disadvantages of Cryptocurrencies. Cryptocurrency is the exact opposite of fiat currency in these ways. It is not legal tender, no central government is backing it, and it is decentralized. However, cryptocurrency also has a form of regulation that controls its production – not a central government, but an algorithm. Because fiat money has no physical commodity to back it, hyperinflation can make it worthless.

Counterfeit money is imitation currency produced without the legal sanction of the state or government. Producing or using counterfeit money is a form of fraud or forgery. Plated copies (known as Fourrées) have been found of Lydian coins which are thought to be among the first western coins. Before the introduction of paper money, the most prevalent method of counterfeiting involved mixing base metals with pure gold or silver. A form of counterfeiting is the production of documents by legitimate printers in response to fraudulent instructions. During World War II, the Nazis forged British pounds and American dollars. Today some of the finest counterfeit banknotes are called Superdollars because of their high quality and likeness to the real U.S. dollar.

What Is Fiat Money And Fiduciary?

Some central Stablecoins, such as Tether, require a custodian to regulate the currency and then reserve a certain amount of collateral. Tether holds the US dollar in a bank account and the amount held must be equal to what they issue to maintain the order of the system. Cryptocurrencies are not affiliated with any government or firm. They are also not bound by political, social and other economic indicators. These currencies, which depend entirely on supply and demand in the market, can therefore be quite volatile. This would make it safer to put money in cryptocurrencies than physical cash or bank vaults.

fiat money advantages and disadvantages

It was the world’s second-largest gold mining country after Australia. Most gold mining in the U.S. occurs on federally owned lands in 12 western states. The U.S. no longer has enough gold at current rates to pay off its debt owed to foreign investors. Even when gold hit its peak price of $1,896 an ounce in September 2011, there wasn’t enough gold for the U.S. to pay off its debt. The Gold Standard Act of 1900 established gold as the only metal for redeeming paper currency​. That means most people will default to using the same currency for personal spending and investing. This gives government-issued money an automatic advantage over bitcoin or any other competitor. In the modern world, governments define money because they have the raw power to definehow you must pay your taxes. They can and will use force to make you pay—and deadly force if you resist too hard. Your dollar bill is legal tender for all debts, public and private.

What Is Fiat Cryptocurrency?

Commodity money has an intrinsic value of its own whereas the fiat money has no intrinsic value. Returning to a gold standard could harm national security by restricting the country’s ability to finance national defense. Since leaving the gold standard in 1971 there has only been one year in which any deflation occurred (-0.4%). Under a gold standard these stimulus actions could not have occurred. Further, gold mining is estimated to be “economically unsustainable” by 2050, with new gold supplies running out and large-scale gold mining becoming impossible by 2075. At current rates, gold mines in South Africa, one of the largest global gold producers, could be stripped by 2040. If an international gold standard were to be re-introduced this growth rate could not be maintained.

The best example of money that illustrates its properties is gold. Gold is universally accepted by most cultures as a means of payment because it is relatively scarce, and new supplies are difficult to find and mine. Being the most malleable and ductile of metals, it can also be easily cut into different sizes to correspond to specific values. Hence, it can be kept for a long time and still retain its value. Because money is standardized into specific values, it can be used to price goods and services, and allows the easy comparison of prices. Because the value of money is determined by general agreement, the condition of the money is irrelevant to its value.

Is It Better To Have A Strong Or Weak Currency?

Now, you would probably like to know how it is better than the gold standard. Truth be told, both have their own share of pros and cons, with one being better than the other at certain angles. This means that the government has full control over the former, while the latter have insufficient supervision and control from anyone. The blockchain is there to display all the transactions anyone has made over it.

fiat money advantages and disadvantages

Currently, most nations use paper-based fiat currencies that only serve as a mode of payment. Fiat Money is where the quantity of money that can be printed is unlimited, as it is not attached to a fairly fixed commodity. Despite being legal tender, the country need not hold it’s worth in commodity. While I respect both of these views, I am one of those who think that Stablecoins are an obstacle to rising prices of cryptocurrency. For small traders or investors, switching to Stablecoin does not affect the market price. But the escape of large whales to Stablecoin, or their escape from Stablecoin, has the power to drive the entire market bullish or bearish. While respecting both opinions, it will be interesting to closely monitor the future of Stablecoins. Representative money is not a money itself, maybe a token or piece of paper that has no intrinsic value but represents money or can be exchanged for something with value.


Money made specialization practical; otherwise, it was more efficient for people to perform all the activities that they needed to survive. Money also serves as a store of value, so that money can be saved and invested for later use. Mobile payment, also referred to as mobile money, mobile money transfer, and mobile wallet, generally refers to payment services operated under financial regulation and performed from or via a mobile device. Instead of paying with cash, check, or credit cards, a consumer can use a mobile phone to pay for a wide range of services and digital or hard goods. Although the concept of using non-coin-based currency systems has a long history, only recently has the technology to support such systems become widely available. The term “banknote” refers to the negotiable promissory note that is issued by the central bank. It is used as a legal tender such that one can use it to pay others a specific amount of money. These legal tenders are also popularly known as bills or simply notes. The figure mentioned on the face of the banknote is the amount payable on demand to the bearer without any interest.

  • However, governments must be careful to avoid over-circulation, as this would cause a drop in value.
  • Initially, the banknotes were simply issued by the banks on the basis of precious metals, such as gold or silver.
  • Fiat currency, as explained at the end of my previous post, is a currency, usually always paper based, and isn’t backed by any commodity.
  • At the same time, the true value lies in the trust that people place in it.
  • It facilitates exchange of goods and services and helps in carrying on trade smoothly.

Paper money has many advantages, but it also many dangers that can hinder the very value of the denomination it is intended to represent. Weighing these advantages and disadvantages has become a subject of great political debate. It helps in stabilizing the economy of the country for the reason that governments of the country have control over the supply of the money and fiat currency is not based on the volatile commodity. Gold is still a major financial asset for both countries and central banks, serving as a way to hedge against loans and as an indicator of economic health. Gold is a popular hedge against risk among individuals, as well, making events like the COVID-19 pandemic major drivers of the demand and price of gold. Commodity money was used in the ancient and medieval period because there was no other legitimate or trustworthy monetary system in place which could be used as a medium of exchange. The origin of fiat money resolved the disadvantages associated with commodity money. People have few trust issues with fiat money as it is vouched for by the government and it is much easier to use.


Representative money makes it easier to carry money and make large purchases. However, the supply of representative money should be limited to the supply of the commodity that the issuing government has to convert the paper or tokens to the commodity. One advantage of representative over commodity money is that it is easier to use and transport. Instead of hauling around your physical goods, you can instead have a wallet of banknotes that represent some portion of your store of goods.

fiat money advantages and disadvantages

Historically, fiat currencies took a back seat to money backed by assets of tangible value, like paper currency and bank notes, or as noted above, by a precious metal like gold or silver. The biggest problem with cryptocurrencies is that they do not solve an exigent problem. Most people are satisfied with fiat currencies and while financial transactions can be tracked, most people who are not criminals will not worry so much about that. This is one reason why organizations are required to report any cash transactions in excess of $10,000 in the United States to the IRS.


The Great Depression saw the justifications for using fiat money in addressing macroeconomic problems. Results of the analysis by economists Ben S. Bernanke and Harold James showed that the speed at which countries abandoned the gold standard predicted their economic recovery. Now that you’re aware of the pros and cons of fiat currency, you can make a more informed decision regarding where to hold your funds. Others are looking for something more modern, such as cryptocurrencies or other financial avenues. Regardless, just be sure you know what you’re getting into before converting your money to something other than fiat. With this, a fiat money system can work as the disadvantages of moral hazard and hyperinflation, that the government can simply print away it’s debt, are lessened. After the introduction of Bitcoin 10 years ago, we started to see many altcoins in the market including Ethereum. Thenumber of these coins is 2224, considering those currently registered with Coinmarketcap. Many of us, at some point, would have imagined how much money we would have if we had bought $ 1,000 worth Bitcoin at the right time.

Fiat currency is necessary, as any currency has to be rooted in economic value. Individuals, companies, organizations, governments – anyone who engages in financial transactions and accepts a nation’s currency needs to be assured a country’s currency is viable and stable. Fiat money is generally understood to consist of paper notes, or central bank deposits readily convertible into paper notes, that are useful only as a media of exchange. Being able to create and destroy money is required to stabilize the value of that money, because supply and demand for money continually fluctuates. On the other hand, the creation and destruction must be done by a central authority that is not exposed to the whims of politicians or where such influence is limited. Moreover, if money cannot be created, then a deflationary spiral will occur as the economy grows and requires more money to operate. This will cause people to hoard the money as it increases in value, which will severely damage the economy. One of the reasons why there is more United States currency outside of the United States than within is because many people in certain countries do not trust their governments. They are afraid that their government will print too much money as an easy way to solve fiscal problems, which would reduce the value of the native currency held by the people.