With fiat money having its roots in 11th century China, fiat currency has had a long and chequered history. Fiat currency is simply the term used for fiat money that is effectively the main currency of the country.

Yuan Dynasty

Fiat currency first emerged when the Yuan Dynasty of China started to print paper money without restrictions on duration, in order to fund their reign in the absence of sufficient specie. This led to hyperinflation. Eventually, by the mid-15th century, the new Ming Dynasty stopped printing paper money altogether in order to contain both hyperinflation and economic expansion.

Fiat Currency in the West

The first instance of fiat currency in the West came about when the issuing of paper money in Sweden was taken over by the Scandinavian country’s government. This happened in the latter half of the 17th century. Although paper money was inconvertible to specie by 1745, the government mandated its acceptance.

American Colonies

In the Thirteen Colonies, an early form of fiat currency was known as bills of credit. Notes were produced by provincial government, with the promise that holders would be allowed to pay taxes with those notes. The notes were issued for the purpose of paying current obligations and were called by levying taxes at a later point in time. They were circulated between individuals in non-tax transactions because they were denominated in the local unit of account. The colonies where bills of credit were most prevalent were Massachusetts, Pennsylvania and Virginia. The money was sold at a discount of silver, which was then spent by the government. It expired at a pre-agreed later time. Other colonies that had this fiat currency included New England and the Carolinas, where the bills of credit depreciated more dramatically than anywhere else.

As colonial powers continued to introduce fiat currencies backed by taxes such as poll taxes or hut taxes, a cycle of deflationary hard money followed by inflationary paper money continued repeatedly for the majority of the 18th and 19th centuries. The reason why the authorities kept introducing fiat currencies backed by taxes was because they needed to mobilize economic resources in their new possessions, in the context of a transitional arrangement, at least. The Federal Government introduced United States Notes during the course of the American Civil War. These represented a form of paper fiat currency that came to be commonly known as greenbacks.

World War One and Beyond

Although most governments had a legalized monopoly on bank notes and the legal tender status thereof by 1914, most of them still promised to redeem notes in specie on demand. However, as the war wore on, authorities moved to suspend redemption in specie due to the high costs of the military conflict and the accompanying policies of huge expansion. Due to a lack of direct penalty for doing so, governments were not directly responsible for the economic effects of printing more money. This inevitably led to hyperinflation, perhaps most notably in post-war Germany.

In consequent attempts to regain economic stability, pure fiat currency was combined with a form of convertibility via gold bullion exchange. This was done with the purpose of anchoring currency to gold bullion under the Bretton Woods system. This system was established in 1945, after an agreement was made at the Bretton Woods Conference to fix the value of 35 US dollars to one troy ounce of gold and then peg other currencies to the US dollar at fixed rates. This system lasted until 1971, when it collapsed as a result of President Richard Nixon ending the convertibility of the US dollar for gold.

Fiat currency has caused drama throughout history and does so to this day, if only theoretically. Nowadays, critics of fiat currency claim that the United States could use it as a dangerous financial weapon, as much of the rest of the world currently holds US debt and US dollars as central bank reserves. According to the supporters of this argument, fiat money could be printed in the US to cover its debts abroad, yet creditors are unable to sell the devalued US dollar off because doing so would destroy the purchasing power of their own dollar-denominated collections from the United States. It certainly is quite the conundrum.

Sruthi
11/3/2012

Cool .. got the concept .. but what is this specie that you keep referring to?

Does that mean old currency / those metallic coins??

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Adnan S. Jatt
11/14/2012

Quite an informative blog indeed. It emergence in the 11th century china was due to the absence of enough gold to fulfill the certain needs. Also known as bills of credit in America, the production of fiat notes made the transactions, submission of tax an easy matter. Now a day, as the nearly whole world has their foreign exchange reservoirs in the form of US Dollars, the US can dismantle the economy of any country. Thus proves to be a very lethal weapon. Conclusively, the it is an enigma...

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Renee Camille
11/17/2012

It's nice to know that over time, different kinds of currency have emerged together with the realization of the need of efficiency in dealing with transactions. Bank notes and paper money is globally renowned, but as smart investors, we should know that these are not the only investments we can get. We could also invest in tangible materials of high regard and value, like gold and others (art pieces, etc.). Thank you very much for the article. Very informative. :)

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zakaria haddane
12/12/2012

Not surprising, considering that most economists like inflation as a way of redistributing wealth and only a small number of countries have a deflating currency compared to the number of countries with inflation. Amazing how a country's government can survive for years by simply printing more money when everyone taking advantage of the system is too afraid to criticize it. The reason that the majority of the public was opposed to raising the debt ceiling, and the majority is also opposed to government spending to create jobs, is partly from a desire to avoid inflation.

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scott H
12/13/2012

I have often wondered exactly why we as people consider our  different forms of currency to be important, of course I've always know that currency weakens or strengthens an economy but that was the extent of my knowledge. You are very well informed on this subject and your blog has been helpful too me in answering some questions that my son had, thank you!

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Niloy
12/15/2012

It is quite a good article indeed. Very much informative to know a brief about flat currency all over the world. But, I was surprised while I read that this flat currency had started in the china and more surprised to know the role of the USA over the world economy. Yes, it is very bad to feel that the dollar has become the major parameters of calculating a national reserve which can be now controlled by the USA economy. But, if it has become the gold to take over the place of dollars, then the control would be at the hand of individual countries.

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A.Jane
12/17/2012

It’s interesting how fiat money has influenced the history of the world. We don’t often think about the fact that fiat money is only given value because the government says it has value. Without any intrinsic value of its own, it can cause various economic difficulties, including inflation. While some people remain critical of fiat money it doesn't look like it will be going away any time soon. So there might be some more economic drama to come in the future.

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Kristine Joy Escarilla
1/4/2013

Fiat money is actually paper money. Just like anything that has its upside and downside, fiat money has as well. It is amazing how fiat money originated and has been used around the world in transacting business. However, fiat money only becomes a thing of value as long as the government puts it that way. Also, overprinting of fiat money leads to inflation. That is why it is still best to invest in other forms such as gold or silver to protect your wealth.

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ghifary kamal
1/17/2013

Money did not come into being over night. The article contains a short history about monetary evolution. But almost all the regions for almost all the time somewhat needed some sort of metal to use as a currency or money although the money or currency now-a-days we use is a recent invention, not more than 200 years. But human understood the necessity of gold when they realize the valuable thing that we possess or hold.

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