Fiat money – everything we need to know about money

Before I tackle the difference between fiat money and cryptocurrency, we should first understand the meaning of money and why it is important in our daily lives. While most of us are already familiar with the use of money, I’m pretty sure that some of us are not familiar and don’t understand why we use paper bills and metallic coins, which are practically cheaper than the goods we usually buy using these bills and coins.

To understand how it is possible, let us first look back at the history of trading in human history. During the early stage of the “market”, our ancestors don’t use the money we use today however they used a system of trading which is rather common in our knowledge, this system is called the “Barter System”.  

Barter system

A barter system is a process of acquiring goods or services in exchange for other products or services which has an equal value to the products the buyer wanted to acquire. Say, for example, I want to have a summer outfit this summer so I went to the shop but since money is not yet introduced, I have to bring something that I can trade in exchange for the summer outfit that I want.

What is Money?

As our technology, knowledge about commerce, and marketing expands the barter system suddenly fades away and a new system was imposed just so to make our trading effective and efficient. Just as when the use of money was introduced, it replaces the barter system, today only intercompany is using the countertrade- a new method of barter system.

Money is anything people will accept in exchange for goods and services. In earlier times the cacao beans are being used as money and soon it was replaced with gold, silver, and bronze coins. Nowadays, we use paper bills and copper coins- at least. You might be wondering why some countries stop the production of coins made of silver or gold, this is because of scarcity. Fact that silver and gold are difficult to mine and is considered rare metals, producing coins out of these materials is highly costly. An object must have five characteristics to consider as a form of money and these are the following;

·         Acceptability – of course, money should be acceptable, people must be willing to accept a certain object as payment for the goods and services.

·         Scarcity- this characteristic is important, for an object to be considered money, this should be scarce otherwise the value of the object will decline and in some cases lose its whole value.

·         Durability- from the word itself durable, money should have a long-term life span that’s why we usually use coins and paper bills.

·         Divisibility – sometimes the value of our money is more valuable than the products we want to acquire that’s why our money should be divisible, for example, in the Philippines we have 1,5,10, and 20 pesos coins we also have 20,50,100,200,500, and 1,000 peso bills. The reason for this division is to give back the change to the buyer if his/her money has a higher value than the goods/services he/she buys.

·         Portability- one of the reasons why the barter system is no longer used today is the difficulty to carry objects just to exchange them for other goods. Our money today can fit in our wallets so it is safe to say that it’s portable.

Three main purposes of money

The three main purposes of money are the following;

·         Medium of exchange- it literally suggests that money should be accepted in exchange for any goods or services.

·         A measure of value- it allows us to measure the value of a certain product or service for an instance, the value of canned tuna is 100 pesos and the value of shoes is 1500 pesos, using money to measure the value of the products is much easier than guessing the value of each product through its uses.

·         Store of value- money must have the capacity to be saved for future use. However, storing it for future spending is not as wise as investing, remember the time value of money plus the problem in inflation so if you’re planning to save it for later use why not invest them to accumulate profit through time.

Why do paper bills have value?

Despite the appearance (paper), paper bills have their value because we believe that they should have a value, for example, I believe a 100 peso bill has value because I can buy anything as long as it falls under the price not exceeding 100 pesos. This is what we called fiat money in which an object doesn’t have a true value but because we believe that it must have one then it should be treated as valuable. According to Investopedia, Fiat money is government-issued money that is not backed by a physical asset like gold or silver, but rather by the government that issued it.