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Great-Depression/: Pros and Cons of Fiat Money

Fiat money has advantages in allowing governments to control money supply and influence economic activity, but it also carries risks of inflation, bubbles, and loss of value if not properly managed as governments are prone to overprinting money without commodity backing, as evidenced by events like the 2007 financial crisis triggered by loose monetary policy and the subprime mortgage meltdown. While practical, fiat currency is less stable than commodity-backed money and its value is directly tied to government policies and decisions around money creation.

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Ho Trong Tan (K15 HCM)
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41 views

Great-Depression/: Pros and Cons of Fiat Money

Fiat money has advantages in allowing governments to control money supply and influence economic activity, but it also carries risks of inflation, bubbles, and loss of value if not properly managed as governments are prone to overprinting money without commodity backing, as evidenced by events like the 2007 financial crisis triggered by loose monetary policy and the subprime mortgage meltdown. While practical, fiat currency is less stable than commodity-backed money and its value is directly tied to government policies and decisions around money creation.

Uploaded by

Ho Trong Tan (K15 HCM)
Copyright
© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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https://courses.lumenlearning.

com/boundless-worldhistory/chapter/the-
great-depression/
https://mises.org/library/human-action-0

https://www.investopedia.com/terms/s/subprime-meltdown.asp

PROS AND CONS OF FIAT MONEY


PROS:
- It is the money that doesn’t have any intrinsic value, i.e., it is used as money by the government
decree. can be controlled by central banks, effect the society. (government control over the
economy through its central bank)
- Take note that one of the ways the government manages the economy is through a monetary
policy that includes controlling the money supply to address inflation and influence aggregate
demand and economic activity.
- It is exposure to devaluation. Today, fiat money under today reserved banking system, induce
banks to create money, lead to inflation. Lead to price burble for economy which results in
financial and economic crisis.

Remember that fiat money can directly influence inflation and employment.

Another specific advantage of fiat money is that it is more practical than commodity money. the
growth of the population and increase in economic activity would require the expansion of money
supply that in turn, would outpace the capacity of societies to mine precious metals.

The Great Depression demonstrated how abandoning commodity money to print money out of thin
air could effectively stimulate the economy

money tied to gold or silver

It is also important to stress the fact that precious metals such as gold and silver are finite resources
that are expensive to mine. While a currency based on a gold or silver standard has the advantage of
preventing inflation, it essentially has no mechanism for counteracting deflation due to an increasing
need for money in circulation.

Dis:

- It is exposure to devaluation. Today, fiat money under today reserved banking system, induce
banks to create money, lead to inflation. Lead to price burble for economy which results in
financial and economic crisis.

Remember though, that the fiat dollar bills that you carry around are just pieces of printed paper.
They become valuable only after the government declares that they have worth.

it risks losing its value due to inflation or become entirely worthless during hyperinflation for the
simplest reason that it is not backed up by physical reserves, especially commodities such as gold
and silver.
History shows that some governments can have the propensity to over pint money, thus artificially
increasing the money supply

money can be created without gold or more specifically, out of thin air at the expense of inflation.
Increasing the circulation of this money naturally results in inflation.

It artificially lowers interest rates and provides incentives for taking excessive risks, thus leading to
an escalating solvency crisis

PROS:
The fiat money doesn’t have any intrinsic value and is used as type of currency by the government
decree. Besides that, the central bank is responsible for serving the money supply and banking
system of country. Briefly, the original advantage of fiat money is that it helps the government have
much greater control over its money supply through its central bank. As a result, it can manage
economic variables such as liquidity, interest rates, and money velocity in order to more instantly
address inflation and influence aggregate demand and economic activity like employment.

For example, in The Financial Crisis of the 1930s, Great Britain and countries in Scandinavia restored
much earlier than countries, such as France and Belgium, which remained on the gold standard. At
that time, China did not follow the standard almost evaded the Great Depression entirely.

In fact, in the standard, precious metals such as gold and silver are limited resources which are
expensive to mine. Moreover, some argues that capacity of societies to mine precious metals can’t
bear the expansion of money supply in turn, which is obligated by the growth of the population and
escalation in economic activity. Hence, fiat money is clearly is more practical and convenient than
money tied to gold or silver.

CONS:
The first disadvantage is that the fiat dollar bills that you carry around are obviously just pieces of
printed paper. Therefore, they have power only after being accepted by the government’s
confirmation.

Besides that, the government’s control of money supply is not completely secured and always
accurate. The reason is it can’t certainly prevent depressions or serious recessions by regulating the
money supply. According to the paper “Human Action” in 1949, Ludwig von Mises, Austrian
economist and sociologist, fiat money gives a government the authority to enrich the money supply.
In other words, the money supply is unlimited. That’s the simple reason for more chances for the
creation of bubbles with fiat money.

A realistic evidence for the disadvantage above is the mortgage crisis of 2007 and subsequent
financial meltdown. This event not only exposed that the fiat money is that despite giving
government the ability to supervise the economy through monetary policy, it’s the loose policy. It
also showed that commodity money is not stable, neither does the currency based on mere legal
pronouncement.

Another specific disadvantage that due to its unlimited supply, fiat money, obviously, is less stable
than commodity money. This means its value is very easy to lose because of the inflation. Moreover,
that it is not backed up by physical reserves can cause it eventually to become completely worthless
during hyperinflation.

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