Is the euro a fiat currency?

Fiat money

The euro - a fiat currency

A ten-euro note is a ten-euro note because the governments of the countries in the euro zone have agreed to give a certain type of paper the value “ten”. A fiat currency has no intrinsic value, it is given from outside. This is where it differs from a currency that is linked to the value of gold or other goods, for example. The US dollar was pegged to gold for many years. It was not until 1971 that the gold link was lifted.

Most currencies reflect the value of the economy in which they are considered a means of payment. To stay with the example of the US dollar, however, there are also restrictions here. The US dollar is also the official currency of El Salvador. The national economy is unlikely to represent the value of the US dollar assets in circulation there.

When does fiat money turn into money?

Fiat money only gains value when two trading partners agree that a certain commodity represents a certain value, which is represented by a certain amount of fiat money. Money thus has one of three functions. Money has the following tasks:

  • Payment function
  • Saving function
  • Value measurement

Cash in kind

The counterpart to fiat money, money with no intrinsic value, is money in kind. Money in kind was the forerunner of coins and the later paper money. Anything that had a certain value and was accepted as exchange value by all involved could be used as cash in kind. Paying in kind was nothing more than bartering. Salt was paid for with tobacco, tobacco with animal skins, and animal skins with cowries. The respective equivalent of the natural money resulted from the situation. There was no information that, for example, 1 kilogram of salt was worth 500 grams of tobacco.

Commodity money

The commodity money is closely connected with the natural money. Goods money refers to goods that can be stored for a long time. The prerequisite for the use of commodity money is that certain goods are recognized as "money" in a certain economic area. The most common form of commodity money is undoubtedly gold, followed by other precious metals.

However, commodity money and natural money were exposed to the same effects as fiat money today. If one of the two barter items became scarce, the amount of the other barter item increased in order to be able to “pay”.

Other forms of money

In addition to coins and banknotes, cash in kind and commodity money, there is another type of money. We are talking about deposit money or book money. Deposit money is money that is in an account or that is available to the owner in any other cashless form. This money does not actually exist, but represents a claim against the bank holding the account. Deposit money is used for savings purposes on the one hand, and for participation in cashless payment transactions on the other.

Since deposit money does not actually exist, but can be artificially created through lending, the consequence is that the value of the real economy and the amount of book money continue to diverge. While physical money may only be issued by the central banks, the banks are involved in the creation of bank money by granting loans. In addition to deposits and loans not paid out in cash, book money also includes unused overdraft facilities.

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