Differences Between Real Money and Fiat Money

Differences Between Real Money and Fiat Money

Thomas Allen

    Attributes generally ascribed to monetary material are that it is portable (relatively high value per unit of weight), homogeneous or uniform, durable, divisible, recognizable, highly marketable (highly liquid, universally acceptable), and stable in value. These attributes are true for real money, such as full weighted gold and silver coins. For the most part, they are true for today’s paper fiat money, such as the US dollar, euro, and British pound. However, real money has characteristics that are lacking in fiat paper money.
    Real money has quantity, measurement, and substance. Fiat paper money has only quantity.
    An early illustration of these three attributes in real money is recorded in Genesis 23:16. Abraham bought a burial plot. He paid 400 (quantity) shekels (measurement of weight) of silver (substance). In pre-1933 money, if a person bought something with a $20 gold coin, he paid with money that had quantity (20), measurement (dollar, a unit of weight equal to 23.22 grains), and substance (gold).
    Fiat paper money lacks two of these three characteristics. For example a $20 federal reserve note has quantity: 20. The dollar appears to be its measurement. However, it is not. It is an abstraction. It measures nothing of substance. A unit of measurement has to be something concrete and definable like the meter, ounce, minute, or horsepower so that things can be compared to it. It has to be something that instruments can determine. Also, it lacks substance as its monetary value exceeds the value of the material of which it is made and it does not promise to deliver anything concrete.
    With pre-1933 gold money, a $20 gold coin weighed twice as much as $10 gold coin. Even if the disk had no inscription on it, a disk containing 464.4 grains of gold had twice the purchasing power of a disk containing 232.2 grains of gold. It was twice as large and weighed twice as much.
    Federal reserve notes, which are fiat paper money, cannot be measured. If all the inscriptions are removed from them, a $20 federal reserve note would look like a $10 federal reserve note. They would both have the same value: nothing.
    Another important distinction between real money and fiat paper money is that real money can transport value through space and time, which makes it an excellent store of value, medium of exchange, and standard of value (unit of accounts). Fiat paper money cannot, which makes it a poor store of value, medium of exchange, and standard of value. Real money retains its value when it moves from one place to another and from one time to another. Fiat paper money does not.
    In the United States since 1933, when President Roosevelt stole the people’s gold, the dollar had lost 94 percent of its purchasing power by 2010. Since its complete divorce from gold in 1971, it had lost 81 percent of its purchasing power by 2010.
    On the other hand, gold has retained its value through the millennia. The ancient Babylonian and Hebrew gold shekel contained about 252 grains of gold or about as much gold as an American $10 gold coin.[1] Those 252 grains of gold are still worth 252 grains today.
    If a time traveler carried a $10 gold coin back two thousand years, he would have the buying power equivalent to about 58 days of wages of a common laborer. A common laborer’s wage at that time was about 17¢ per day[2] (this estimate was made in the late 1930s when the federal reserve dollar was worth almost as much as a gold dollar). Moreover, because a $20 gold coin contains twice the gold of $10 gold coin, it would have twice the buying power. If he carried a $100 and a $1 federal reserve note with him, he would get only what he could trade his notes for as a curiosity. He might find the $1 note worth more than the $100 note if the person with whom he was trading liked Washington’s picture more than Franklin’s. Possibly, the person with whom he was trading found that the occult symbols on the back of a $1 note had great value whereas a picture of Independence Hall on the back a $100 note had none. Unlike real money, fiat paper money fails to maintain its value through time.
    Also, unlike real money, most fiat paper money has little value beyond the borders of the issuing country. Fiat paper money that does retain value beyond its borders does so because it is considered a reserve currency or the fiat money of a country is losing value so quickly that it makes other fiat money desirable. This limited ability of fiat paper money to transport value, albeit decreasing value, through space is short-lived.
    Thus, real money can transport value through space and time. Fiat paper money can only transport value for short distances and for a highly limited time. Real money is vastly superior to fiat paper money as a medium of exchange because of its superiority at transporting value through space. It is vastly superior as a standard of value and store of value because of its superiority at transporting value through time.
    As shown above, real money has quantity, measurement, and substance. Fiat paper money has only quantity. Real money can transport value over vast space and time. Fiat money cannot.

Endnotes

1. Madeleine Miller and J. Lane Miller, Harper’s Bible Dictionary, pp. 454-455.


2. John D. Davis, The Westminster Dictionary of the Bible, p. 630.

Copyright © 2014 by Thomas Coley Allen. 

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