Inorganic money

economic-dictionary

Fiat money or inorganic money is one that is backed by the trust of a company. That is, it is not based on the value of precious metals but on the general belief of the value of the currency.

Origin of fiat money

During most of history, money had intrinsic value, that is, the currency or money was worth the same as its composition. Generally, gold and silver have always been the most widely used and highly valued metals in all societies. However, as the population and transactions have grown, it is not possible to use this method.

Later, and in a mixed way, a system was created, called the Gold Standard through which the coins and bills were backed by a quantity of gold. That is, although the currency was not made of gold and its composition was worth very little, that currency (the indicated value) gave the right to a certain part of this metal.

What is the fiduciary system?

Currently, we use a fiduciary system, that is, a system based on trust or faith in the valuation of coins and bills.For example, no banknote of 20, 100 or 500 euros is really worth that, nor is any currency worth the amount that makes it up, but the entire community takes these values ​​for granted and as valid in order to be able to market them. They trust the value they represent.

All inorganic money is controlled and issued by bodies, generally the central banks of each country and supranational centrals (such as the International Monetary Fund, the European Central Bank, the European Investment Bank and other similar international organizations), to manage and control of it. These bodies are responsible for ensuring authenticity and give confidence to users-consumers, supporting the system.

For this same reason, checks, promissory notes and other monetary legal documents were also created to be able to carry out transactions without the need to transport real currency. They have the value that is assigned (the amount that is written) and are of general recognition.

See the article How Banks Create Money for a deeper understanding of the concept of fiat money.

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