What is Fiat currency?

Fiat money comes from a Latin word, meaning crappy car. And that fiat money is the currency that we are all using as an exchange to trade items. It is that piece of paper you gain by trading it with your time and freedom.

Max Keiser, a former Wall Street broker said that Fiat currency is a currency that exist at the dictate or by fiat from a government in a country. They have their printing presses, and the paper money rolls off the printing presses.

And then they give it the fiat designation which makes the currency official. It’s just worthless paper, but when Zeti Aziz (now Muhammad Ibrahim) gives it the special sign, it suddenly becomes currency.  

Money must be a store of value however, there is on intrinsic value in currency, and that the money was printed backed up by absolutely nothing. It is confidence game. Currency have values because people are believing the values printed on the piece of paper. Basically, it is created out of thin air where it is absolutely worthless. It is about as valuable as Monopoly money.

Before World War 1, each note that a treasury issued would say that there has been deposited with the United States of Treasury – 20 dollars in gold coins payable to the bearer upon demand.

The money was in the vault. The paper money, or the currency was merely a note given to you act only as a receipt. A claim check on the money that you stored in the bank. The same as going to a car workshop. You send them your car and they will give you a claim check for your car.

The value is that car in the workshop. Not that piece of paper that says you own the car. Therefore, all the currencies that were circulating in the market, the U.S. dollars, the Ringgit Malaysia, the Japanese Yen, they were all supposed to act as a claim check on true money (gold and silver).

However, that is not the case.

According to an article by Datuk Steven Wong from News Straits Time, he admitted that ringgit does not have any intrinsic value. It only had value because the people put values to it. The continuous production of currency kept rising for more than 200% in the United States alone for a period of only 10 years.

The figure below shows the Amount of Existing Money Supply Created by Commercial Banks through Fractional Reserve Banking System in the form of loans from 1973 to 2011. The graph grows exponentially.

The graph above provided by Bank Negara Malaysia shows that in 2011, the amount od Broad Money, M3 was RM1.24 trillion. Broad money means the money supply produced and circulated in the country. 

If the graph continues to rise higher, the value of Ringgit will sooner or later depreciated and will then lose its purchasing power. 

Example of countries that their currency had no value due to hyperinflation is Venezuela. Their currency can no longer be used anywhere in the world due to it being oversupplied and finally lose its value. The people had lost faith and confidence in their currency which depleted the value of their money.

The economic and financial crisis happening around the world are caused by humans. Sometimes, the crisis was caused by the psychology-driven market shares instability.

Since the creation of fiat bank notes but the early banks in Malaysia which contain an interest-based system, the Malays and Muslim traders rejects it due to the characteristics being the same as riba' which is forbidden in the teachings of Islam.

However, back in the days, there are no Muslims who worked in a bank - they were only filled with the Chinese people who owns large business community. This causes for the economical gap between the Chinese and the Malays to widen, thus affecting the education and facilities of the Malays.

Fiat money was produced widely in Malaysia and interest-based loans were practiced which caused a systematic shrinkage in the relative financial inclusion of the Malays, the indigenous people and the Muslim traders. Resulting in a huge wealth transfers from the Malays to the Chinese through inflation and economic deprivation which continues until today.

References 

1)  Prof Dato' Dr. Ahamed Kameel. (2013). Fiat Money and the Economic Degradation of the Malays. https://www.ahamedkameel.com/fiat-money-and-economic-degradation-of-the-malays/ 

2) Andrew Beattie. (2019). When did the U.S. started using paper money?.  https://www.investopedia.com/ask/answers/09/paper-money-usa.asp

3) Clem Chambers. (2020). The Crash Of 2020, QE And The Federal Reserve's Market Corner. https://www.forbes.com/sites/investor/2020/04/20/the-crash-of-2020-qe-and-the-federal-reserves-market-corner/#620ac368fb8a

4) Datuk Steven Wong. (2018). Is the Ringgit real? New Straits Time. Source: https://www.nst.com.my/opinion/columnists/2018/08/405564/ringgit-real#.XySkbEqGY7U