Money, issued by a government, which is not backed by any commodity (such as gold, silver, wheat, or tobacco). Fiat money has value only because the government says so -- i.e. because you can pay your taxes and fines in it.

The combination of fiat money and the fractional reserve system leads to inflation.

Oppose: gold standard.

Individual Wealth

The question of deciding whether to hold government-enforced currency (fiat money) or gold is a rich man's game. What they are after is individual wealth - since many of the wealthy are "anti-social" in the sense that they are more concerned about their personal well-being and care less about the well-being of the general population.

Collective Wealth

From the non-capitalist viewpoint though, currency and gold aren't as important. Since it is the non-capitalists that have to do the work anyway, their source of wealth is the raw materials, machinery, and information needed to produce things. Thus, if the people of your country actually have to work for a living, it would make more sense for them to spend their currency and gold in order to purchase the raw materials, machinery, and information needed to do their jobs.

The true wealth of a nation is its productive power. It is collective wealth and requires the cooperation of everyone who works for a living.

Undermining Mediums of Exchange

If a country only relies on collecting currency and gold, it's not going to last long. If all the truly productive nations are spending their gold and foreign currencies in order to buy raw materials, machinery, and information, then the amount of gold and currency floating around the market will go up. If the productive nations become willing to only spend gold, but not accept it as payment - instead accepting only raw materials, machinery, etc as payment, then eventually gold will become practically worthless and the nations that concentrated on gathering gold in their vaults will be bankrupt.

Index Backed Currency

At the end of a season, a farmer may find that he has harvested 500 bushels of grain (or maybe a group of oil workers find that they have 500 barrels of oil). Then the farmer issues one paper note for each bushel (or the oil workers issue one paper note for each barrel), and then takes that note to spend in the local economy.

As long as the other members of the community know they can redeem the paper note for a bushel of wheat or barrel of oil at any time, then the paper note has value, and can be used as currency. When someone finally redeems the paper note for the grain / oil, then the note is destroyed.

If you feel paper backed only by barrels of oil or bushels of grain is not stable enough, then it's not hard to back it with a more diversified basket of goods. It would be similar to investing in various index funds - some baskets of goods may try to mimic the consumer price index - other baskets may be more focused on the energy sector or the construction materials sector.

Log in or register to write something here or to contact authors.