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Fiat currencies: The similarity between Rupee or Dollar and Bitcoin

Malvika Baru | Last Modified - Feb 25, 2014, 04:01 PM IST

The difference between fiat currency and money or gold
  • Fiat currencies: The similarity between Rupee or Dollar and Bitcoin
    Fiat currencies: The similarity between Rupee or Dollar and Bitcoin

    New Delhi: Understanding the similarity between the two currencies Rupee and Bitcoin, yes currencies, is by understanding what currency, precisely ‘fiat currency’ is. Let us begin by understanding in fact the difference between ‘fiat currency’ and ‘money’!
    ‘Money (i.e. precious metals) must be a store of value and maintain its purchasing power over long periods of time’, clarifies Mike Maloney. Whereas, ‘National (fiat) currencies are really a tool used by governments in the financial sector to leach away a national’s time and freedom by stealing your purchasing power’, he adds.
    Let us break it down in simple terms for you: Money is something that holds an intrinsic value, which cannot be altered and remains constant forever. For example, 10 grams of gold today possesses purchasing power what it held in your parents’ youth or when your grandparents were young.
    A fiat currency is a piece of paper – a legal tender (e.g. Rupee or Dollar) – backed by collateral (e.g. gold or silver) that holds the real value, purchasing power. Stress your memory before 1971, when the ‘Gold Standard’ was effective across the globe.
    Thus, it can be concluded that money (gold) is something that is actually intrinsically valuable, whereas fiat currency (Dollar or Rupee) is a legal tender only backed by real money/collateral (Gold).
    In Pic: An Indian Rupee issued during British India in 1920. Courtesy: Wikipedia
    Gold Standard and Nixon Shock
    Gold standard was a convention mandated by governments across the globe till 1971. It uniformly authorised that all currencies must be supported by the amount of gold their respective governments possess. Thus, a government could print notes the much could be backed by gold assets it held in its reserve.
    Then in 1971 came the Nixon Shock. US President Nixon outlawed gold standard in USA and other countries followed the trend. Thus, US government no more required a gauge to regulate the quantity of notes printed and liquidity became immeasurable. This liquidity has now developed into inflation.
    We can print fiat currency but we can’t print precious metals
    Gold is ‘the ultimate money because there is nothing else even in the league. It is divisible, it is permanent, it is store of value and it doesn’t go away and it can’t be increased. That is what makes gold most beautiful money of all’, says Richard Daughty, COO Smith Consultancy Group.
    Fiat currency is a legal tender that promises to pay bearer equivalent collateral (gold). ‘Fiat’ implies, as per Oxford dictionary, ‘a formal authorisation or proposition; a decree’. Over the years, the authorisation that promised bearer collateral disappeared, with the sad demise of the gold standard.
    In pic: A US Dollar (Gold Certificate) issued in 1922. Courtesy: The Drakulya Company
    Every US Dollar note (Gold certificate) from 1863 to 1933 was an edict. It claimed that US Treasury promises bearer to pay the sum in gold coins. It read that there was deposited gold with the Treasury, payable to bearer on demand in exchange of every Dollar note (paper/fiat currency).
    Post World Wars, the gold standard altered with US Dollar not promising to pay physical gold anymore. Dollar was still backed by the physical asset. The government was still restrained by gold reserve. However, gold standard was completely done away with by 1971 Nixon Shock.
    Interestingly, Indian government never promised in written in any of the Rupee notes, to day, to pay bearer equivalent gold or silver coins. It has always only promised the bearer to pay the respective sum of Rupees printed on the cheque (currency note).
    Bitocoin is just another fiat currency or worse
    Similar to Indian Rupee or US Dollar, the latest digital sensation Bitcoin is backed by no collateral. It is another medium of transaction sans any intrinsic value. The difference, however, is that while fiat currencies are regulated by uniform central banks, no singular bank authorises Bitcoin’s circulation.
    The crypto currency holds its value on the popular economic mechanisms of saturation or demand and price. When the currency reaches its saturation point or when the demand is no more, owing to known causes, price of Bitcoin begins to plummet, as is seen in the recent past.
    Bitcoin is not even a fiat currency, it is a crypto currency, a digital currency controlled arbitrarily and has neither a physical asset backing it nor a central bank authorising it. As long as buyers have interest in Bitcoin, its value remains.
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