Hey readers welcome back. Let us start this topic with a question. What is the difference between money and currency? Most of people think both are same. But Currency is a medium of exchange. Currency can be paper money or gold or bitcoin. It changes between countries whereas money is a form of verified currency.
TYPE OF CURRENCIES
There are two types of currencies 1. Fiat Currency 2. Commodity Currency
Fiat currency has no value. It is regulated and backed by government whereas commodity currency is based on precious earth metals like gold and silver.
COMMODITY TO FIAT
Gold has a history of more than 5000 years as it stands unique out of all other currencies. In ancient Egypt gold was the main form of currency. It continued till 19th century. Even U.S dollar was backed by gold. In 1971, President Nixon takes off United States from Gold Standard. That means U.S no longer exchange dollar to gold for a fixed value.
WHY UNITED STATES ABANDONED GOLD STANDARDS?
Since the value of dollar is linked with gold, the government can’t print more money beyond their gold reserves. This created several constraints for the development. In mid 19th century federal reserve started printing more money which resulted in depletion of gold reserves because people exchanged dollar for gold. So finally U.S government in 1971 abandoned the gold standards and started printing more money. This is where the usage of fiat currency started. Fiat currency is backed by the faith in the government but not with assets like gold any more.
EFFECT OF FIAT CURRENCY ON ECONOMY
Government got complete freedom over currency in 1971 and it started printing more money for developing the country . But this over printing lead to raise in inflation . Between 1971 and 2003 the entire supply of money in the United States has increased by 1,100%.
Because of over supply of fiat currency in the economy the purchasing power of money depreciated. As a result the cost of goods spiked up. Inflation is a monster and still governments are fighting to control it. Increase in price of basic goods like food, clothes and shelter may spark anger in low earning people. It may result for the cause of many revolts. If uncontrolled printing of paper currency continues it may lead to a situation of Hyper Inflation. Best example is Zimbabwe. Between 2008 to 2009 Zimbabwe reached an hyperinflation stage. This resulted in complete downfall of purchasing power of currency. In fact Zimbabwe at the end of 2009 issued 100 trillion note which doesn’t even buy a loaf of bread
Fiat currencies has a great history of failing. The miserable truth is all the countries in the world are using fiat currency even in India. In past whenever fiat currency fails value of gold and silver spiked up and if it fails again history will repeat again.
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