3. Fiat Money

Representative money has now been replaced by fiat money. Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done". In other words, this is money given value by a government decree. In a fiat money system, money is not backed by a physical commodity (i.e. gold). Instead, the only thing that gives the money value is the faith placed in it by the people that use it. As a result of this change in the money system there is no restraint on the amount of money that can be created. This allows unlimited credit creation. A rapid growth in the availability of credit is often mistaken for economic growth, This currency is declared to be legal tender, despite the fact that it has no intrinsic value and is not backed by reserves.

In most cases, a fiat monetary system comes into existence as a result of excessive public debt. When the government is unable to repay all its debt in gold or silver, the temptation to remove physical backing rather than to default becomes irresistible. This was the case in the 18th century France during the Law scheme, as well as in the 70s in the US, when Nixon removed the last link between the dollar and gold which is still in effect today.

4. Fiat Money – Toilet Paper Money

The history of fiat money, to put it kindly, has been one of failure. In fact, every fiat currency since the Romans first began to practise it in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy as a whole.

The French have been particularly unsuccessful in their attempts with fiat money. John Law was the first man to introduce paper money to France. In 1716 John Law convinced France to use paper money and declared all taxes must be paid with it to gain acceptance. The idea snowballed and paper money became more desired than coin. It led to excessive printing, additional moneymaking schemes and fraud. The new paper currency rapidly became oversupplied until nobody wished to own the worthless junk anymore and demanded coinage for their currency. Exaggerated values coinciding with money printing eventually blew up the system. John Law became the most hated man in France and was forced to flee to Italy.

In 1971 the US finally switched to fiat money. At this point in time many of the economically developed countries' currencies were fixed to the US dollar, and so this single step meant that much of the western world's currencies became fiat money based.

Nowadays the United States is one of the most prominent nations which relies on fiat money, although many other countries do as well. There are a number of advantages and disadvantages to this type of currency, and the issues with fiat money have been debated vigorously for centuries by economists and politicians.

The biggest disadvantages of the fiat money system are:

1. The system represents nothing more than a sinister and evil form of hidden taxation. When the government can print money at will, it is morally identical to the counterfeiter who illegally prints currency. Fiat money is the opposite of honest money.

2. Fiat money polices especially hurt savers and those on fixed incomes, who find the value of their money (euros, dollars, pounds) steadily eroded (gradually reduced) by the printing presses.

Sources: 1) http//www.en.wikipedia.org/

2) adapted from “The History of Money” by

Mary Bellis

HISTORICAL NOTES

1. Elizabeth I (1533–1603) – the queen of England from 1558 until her

death. She never married, and is sometimes called the Virgin

Queen. She is thought of as a very strong woman and an effective

ruler.

2. Sir Isaac Newton (1642–1727) – a British scientist who is best

known for discovering gravity. He made many other important

scientific discoveries and is considered to be one of the most

important scientists who ever lived.

3. Nixon, Richard (1913–1994) – a US politician who was President of

the US from 1969 to 1974. He is most famous for being

involved in “Watergate scandal”. He was thought by some

people to be dishonest and because of this he was sometimes

called “Tricky Dicky”.

4. John Law (1671–1729) – a Scottish economist who believed that

money was only a means of exchange and that it did not

constitute wealth in itself. According to John Law, national wealth

depended mostly on trade. Law suggested the establishment of

a national bank to create and increase instruments of credit.

Law proposed to stimulate industry by replacing gold with paper

credit and to reduce the national debt by introducing shares

in economic ventures. Though most of these economic ventures

ultimately failed, his theories were 300 years ahead of their time.

VOCABULARY NOTES

commodity money	товарные деньги
intrinsic value	зд. собственная ценность
to coin gold and silver	чеканить деньги из золота и серебра
to mint coins	чеканить деньги
image	зд. изображение на монете
slivers of precious metal	кусочки драгоценного металла
serrated edge	зубчатый край/насечка по краю (монеты)
milled coins	монеты машинной чеканки
representative money	бумажные деньги, полностью обеспеченные золотом или серебром
fiat money	бумажные деньги, не обеспеченные золотом
legal tender	законное платежное средство
to gain acceptance	получить признание
coinage	= metal currency, coins
to switch to smth.	перейти на… / «переключиться» на…

TEXT 2

Read the text for the specific information that will enable you to

answer in English or in Russian the following questions:

1. What was the first reason for creating а bank in Amsterdam at the beginning of the 17th century? What successful banking practice was introduced in Amsterdam at that time? What did it result in?

2. What was the second important discovery made by the bankers of Amsterdam? What did this new monetary innovation and practice of taking deposits and lending them further result in? What was actually the main disadvantage of that monetary innovation?

3. What was the essence of the idea developed by John Law? How can you explain the words that “people were getting rich on paper”? What raised suspicion and doubts about John Law’s practices of issuing notes and trading of stock? Was it in any way similar to the situation in Amsterdam?

4. What methods and practices were developed by the Bank of England to prevent unrestrained, unlimited and uncontrolled money supply and money creation by banks? What do you think is the difference between "making money" and "creating  money”?         

For better understanding consult HISTORICAL and VOCABULARY

NOTES below the text. Make use of an ABBYY Lingvo or any other

electronic dictionary, as well as the LANGUAGE TRANSLATION

SOFTWARE on your computer. Remember: the use of any machine

translation (MT) system requires post editing.