Fiat Currency: What It Is and Why It's Better Than a Gold Standard | The Motley Fool

Fiat and fiat money

Banking and the expansion of the money supply Video transcript - [Voiceover] Let's take a look at a United States one dollar bill.

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What is it that gives this thing value? You can give it to people and get back, ya know food that you can eat, or things that you can use, and things of hard value.

But what is it about this little piece of paper that makes it valuable? Or I guess it's not paper, as it's cotton, something like that, right?

But the questions stands, right, like what makes this flimsy little thing, that doesn't seem to have any use in it's own right, valuable?

Well, one kind of interesting exercise is to step back in time a little bit and take a look at what the very, very first United States dollars looked liked. So I have here one of the very first that was printed, and let's zoom in on it and kind of read some of the words associated with it.

Understanding Fiat vs. Representative Money

So if we zoom in, let's just say towards the very top here. Notice that it says silver certificate, silver certificate up at the top. So what does that mean? Well, if we zoom out a little bit, it says, it says that this certifies that there has been deposited in the treasury of the United States of America and then the sentence kind of continues in an awkward way below, one silver dollar payable to the bearer on demand. So what that means, what this dollar originally represented was the fact that you were gonna be able to turn in this bill for a silver dollar.

This piece of paper in theory, could be turned in to the United States treasury, which guaranteed that it had in its deposits a silver dollar, an actual piece of silver, and I'll show what one of those looked like in just a moment, It would return to you for this bill.

Commodity money vs. Fiat money

So in a sense what gave it value was this guarantee that you could turn it into silver if you wanted. So this way you could trade this with other people as if it were a piece of silver, 'cause if you gave it to someone that person, now being the bearer on demand, could then in theory, turn this in and get a silver dollar as a result.

And the reason for even having this paper money, and printing these bills is that it was pretty inconvenient to always lug around actual pieces of silver, and actual pieces of metal.

Updated Apr 20, Fiat vs. Representative Money: An Overview Fiat money is physical money—both paper money and coins—while representative money is a form of currency that represents the intent to pay such as a check. Both fiat and representative money are backed by something. Without any backing, they would be completely worthless. Fiat money is backed by the government, while representative money can be backed by different assets or financial instruments.

And this would be especially true in the case of even higher amounts. So for example, here we have a 10, dollar bill. Something you don't really see too often. And if we zoom in and kind of see the guarantees that are written on this guy, it's actually very similar, but its this is instead in gold instead of silver.

Fiat vs. Representative Money: What's the Difference?

So what is it that you actually got when you turned in, ya know for one silver dollar or something like that. What is it that was payable on demand?

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Well you have, what's another form of money, what you can use in commerce and kind of trade with people as a medium of exchange. Officially United States money, but the difference is that the piece of money itself, is the valuable metal. It actually is the silver, so in theory if you ya know, didn't trust the United States Government anymore, you could melt it down for just the pure silver and maybe other countries still value that silver.

And similarly there was gold coins like this that people would use.

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Like this right here is a gold fiat and fiat money worth two and a half dollars. So, this is something where the value is held within it because presumably people value gold, and even if this didn't have a fancy you know, United States symbol all stamped onto it, it would be something valuable, because it's gold. And this kind of money, this ya know gold coins or these silver coins has a special kind of name.

It's called commodity money.

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Let's see, commodity money. And basically what this means is that the thing that you're using for money, the thing that you're trading around, has some value in it's own right.

Even if it wasn't money, it would still be something valuable. This word here, commodity, basically means just anything valuable, it could not only be ya know silver or gold, but things like food or furniture fiat and fiat money livestock.