![]() The workaround is to increase the money supply by printing more currency at the expense of high inflation rates.Īnother specific advantage of fiat money is that it is more practical than commodity money. During an economic recession, a government can stimulate the economy by creating jobs. ![]() Remember that fiat money can directly influence inflation and employment. Countries such as China that did not follow the standard almost avoided the global economic crisis entirely. Bernanke and Harold James showed that the speed at which countries abandoned the gold standard predicted their economic recovery.įor example, in 1931, Great Britain and countries in Scandinavia recovered earlier than countries that remained on the standard much longer, such as France and Belgium. Results of the analysis by economists Ben S. The Great Depression saw the justifications for using fiat money in addressing macroeconomic problems. Monetary policy is essentially a macroeconomic tool used by governments alongside a fiscal policy. Monetarists such as Milton Friedman have argued that variations in money supply have significant influences on price levels over long periods, as well as on economic output in the short run. Take note that one of the ways the government manages the economy is through a monetary policy that includes controlling the money supply to address inflation and influence aggregate demand and economic activity. Hence, the central bank controls its production and circulation, thus controlling the money supply and the banking system. Remember that this type of currency is a government-backed legal tender. Advantages: The Arguments And Justifications For Fiat MoneyĪ primary advantage of fiat money is that it gives the government control over the economy through its central bank. It is also important to highlight the fact that this type of currency is a legal tender through a government decree. Most modern currencies such as the United States dollar, renminbi of China, the euro of the European Union, the Japanese yen, and the sterling pound of the United Kingdom are fiat money. The prevalence of this type of currency also forms part of the contemporary history of money.
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