Eastern Journal of Economics and Finance

Volume 4, Number 1 (2019) pp 1-13 doi 10.20448/809.4.1.1.13 | Research Articles

 

The Economic Dangers of the Fiat Money System: A Conceptual Analysis

Farah Durani 1
1 Faculty of Finance, College of Business Administration, UBT Jeddah, KSA

Abstract

This study presents the Conceptual Analysis of the understanding, misunderstandings and the likely dangers of fiat money acceptance and usage among general masses. An attempt is made to validate the Austrian theory of instability of fiat money system via logical analysis. The objective of this research is to argue conclusively that the ever-increasing supplies of elastic money are the threat to the very stability of it. This paper elaborates on the origin and purpose of money and the unique characteristic with respect to its demand and supply. The beneficiaries of the paper money system are revealed to demonstrate how the system with its inherent disqualifications continues to run and flourish due to the benefits extended to certain segments of the economic system. Via conceptual thought process advanced by Humes, several models of money injection from simple to more complex and realistic approaches are adopted to argue conclusively that no economy can remain stable with ever-increasing supplies of flexible money. Money is not neutral, and any new injection of money distorts the market prices, creates misallocations of resources and disorients market participants. Investigating the feasibility of the fiat money system, this research endorses the fact that such monies can never act as a stimulant in every kind of economic activity without altering the very base of it.

Keywords

Fiat money Austrian theory Elastic money Money injection. Monetary stability.

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