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Fiat System
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Fiat System
Fiat system can be defined as the system wherein the money is used for the purpose of storage in order to purchase power. The Fiat system is also known as a system which is completely opposite to the barter system which was universally used in the old age.
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One of the most important aspects of Fiat system is that money is backed by commodities other than physical commodity in this system. This means that the physical value of the commodity would not eventually help in the rise or fall of the commodity. In Fiat system the value is decided more or less on the kind of faith that has been shown by the people in a certain commodity. The value also depends heavily on the scarcity of the commodity.
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You would notice that there is no real limit on the creation of money in the Fiat system. This means that any amount of money can be created in such a system as there is no restrain of any sorts. Fiat system is probably the only system in the world which would allow unlimited creation of money. Many people have a belief that creating more money would lead to the economic growth of the country. However, this is far from being the truth. The reason many people have this belief is because of the fact that once more money is created a lot of new businesses get kick started. However, due to unlimited creation of money the economy soon suffers a very big setback which might take ages to get repaired. The economy would realize that the inflation – deflation ratio is devastated due to the creation of unlimited money. Creating unlimited money would also mean that there would be no balance when it comes to Debt and GDP of the economy.
One of the prime reasons why Fiat system exists is due to very high public debt. Usually a government would opt for the option of creating more money using Fiat system when it is unable to pay off the debt in the form of silver and gold. However, the Fiat system can have poor consequences and hence most of the governments prefer to invest more in gold so that they can pay their debts using gold as a form of currency.
Very rarely would you come across a government using Fiat system.
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