Fiat Money:
In earlier
times, currencies were based on physical commodities such as gold or silver,
but fiat money is based solely on faith. As per modern definition, most of the
world's paper money is fiat money. Because fiat money is not linked to physical
reserves, it risks becoming worthless due to hyperinflation. If people lose
faith in a nation's paper currency, the money will no longer hold any value.
Fiat money
originated in 11th century China
and its use became widespread during the Yuan and Ming dynasties.
Advantages:
- Convenience- Paper money comes in many denominations, which allows you to carry large amounts of legal tender without having to move large, bulky forms of money. It takes up little space and is widely recognized as a note of value that can be traded for any goods or services.
- Economical- Not only is paper money small and transportable, but it also is much cheaper to produce than the value it may represent.
- Can Be Created At Will- Unlike any other store of wealth, paper money can be printed at will of the Government Body. If there is a need, such as in times of a national emergency or monetary deflation, the bureau can print and release as many bills as needed to resupply the population with paper money.
Disadvantages:
- Inflation- Conversely, printing too much paper money as required to sustain moderate growth can lead to high rates of inflation. As the number of legal notes increases, the value of those notes decreases because more dollars are chasing relatively fewer goods and services, which causes prices to rise.
- Confidence- If public confidence fades because of high national debt or political turmoil it can ensue chaos where goods and services will be traded only in kind, meaning paper money can become practically useless.
- Fragility- Paper money is susceptible to accidental tearing, shredding, burning and being run through the laundry.
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