Fiat currency?

Fiat money?

While watching a debate the other day between congressman Ron Paul, ex-senator Rick Santorum and former governor of Massachusetts, Mitt Romney. It struck me that in my circle of friends, family and colleagues we never talk about what Ron Paul calls "honest money". Money that is actually backed by a commodity that makes it worth what it says it is. Today our money, the Krona, is just like the Dollar another piece of paper or low grade metal. There is no hidden government cellar filled with gold and silver that backs this currency and ensures its worth to us and to investors. There are actually quite a few dangers associated with "paper money".

Without the support of a commodity like gold and silver to back it up the currency can easily be created when there is a need for it. Government needs to bail out an auto mobile company? Here, have some money! The banks need a financial loan from the tax payers? Start the printers! When you print money the worth of it goes down since there is more of it in circulation. When there is more money in circulation the average Joe eventually gets more money each month to spend on products. This means more people will be able to purchase products and items they never could before and there will eventually be shortages of certain products. Eventually the prices will go up to stabilize the market. It is actually quite simple, more money in circulation = less value of that money. Does that trouble you? It should... But wait, there is more!

So there is more money in circulation, the currency is devalued and is now weaker than the other world leading currencies. Suddenly everything outside your own country became really expensive since you now have to pay twice as much of your currency to exchange it to another one one. This becomes a real pain and a problem because your salary did not necessarily go up with the inflation. Ultimately weak currency will fail. It is called "fiat currency" - currency that is not backed up with a commodity.

So who should really decide the worth of the currency? The free market, the government or maybe greedy banks that only look out for themselves? Some interesting things to consider. I am by no means an expert in this area but I take an interest in it and try to learn more about our monetary system and you should too. It concerns all of us.