isn t a foolproof way to protect the economy
creates an opportunity for a bubbleprovides risk of inflationfiat currencies gained prominence in the 20th century in part because governments and central banks sought to insulate their economies from the worst effects of the natural booms and busts of the business cycle fiat money isn t a scarce or fixed resource like gold so central banks have much greater control over its supply this gives them the power to manage economic variables such as credit supply liquidity interest rates and money velocity the u s federal reserve has the dual mandate to keep unemployment and inflation low and using fiat money can help it meet those goals 5fiat money serves as a good currency if it can handle the roles that a nation s economy requires of its monetary unit storing value providing a numerical account and facilitating exchange it also has excellent seigniorage it s more cost efficient to produce than a currency that s directly tied to a commodity the mortgage crisis of 2007 and subsequent financial meltdown tempered the belief that central banks could necessarily prevent depressions or serious recessions by regulating the money supply a currency tied to gold is generally more stable than fiat money because of the limited supply of gold there are also more opportunities for the creation of bubbles with fiat money because of its unlimited supply examples of fiat moneythe u s dollar the euro the british pound the japanese yen the albanian lek and the indian rupee are all examples of fiat money it s a currency that s backed by an issuing government so fiat money usually provides some economic stability but not always the african nation of zimbabwe provided an example of the worst case scenario in the early 2000s the country s central bank began to print money at a staggering pace in response to serious economic problems resulting in hyperinflation experts suggest that the currency lost 99 9 of its value during this time prices rose rapidly and consumers carried bags full of money just to purchase basic staples the government of zimbabwe was forced to issue a 100 trillion zimbabwean dollar note at the height of the crisis foreign currencies were eventually used more widely than the zimbabwean dollar 6