The value of fiat money is largely based on public faith in the issuer. The value of money as a commodity, on the other hand, is based on the material from which it was manufactured, such as gold or silver. Fiat money, therefore, has no intrinsic value, while commodity money often has it. Changes in public confidence that a government will issue fiat money may be sufficient for fiat currency to lose its value.
Money was invented because of the shortcomings of bartering, the act of exchanging one good or service directly for another. Formerly used in parts of Asia, Africa and Oceania, cowry shells were a popular form of money as a commodity. As the best example of basic money, the value of gold coins was linked to their weight and precious metal content. While there are other theories and causes of inflation, the idea that changes in the money supply influence price levels has an impact on commodities.
From that moment on, the world's major currencies were no longer linked to a physical product, but to the will (and solvency) of the governments that issued them. However, the gold coin has a much higher value, since a jeweler or goldsmith could use it to produce an expensive object. Fiat money is a currency issued by the government that is not backed by a physical product, such as gold or silver, but by the government that issued it. Mercantile money is a form of money that has intrinsic value, meaning that it is worth something in its own right, rather than simply being a display of financial value, such as a banknote.
Since fiat money is not tied to physical reserves, such as domestic gold or silver reserves, it risks losing value due to inflation or even losing its value in the event of hyperinflation. However, the growing demand for paper money put the gold standard under enormous pressure during the 20th century. At the end of the 19th century, many of the world's paper currencies were linked to gold at a fixed price per ounce according to an international monetary system known as the gold standard. This differs from gold-backed currency, for example; it has intrinsic value due to the demand for gold in jewelry and decoration, as well as in the manufacture of electronic devices, computers and aerospace vehicles.
Among the studies that have analyzed this statement in depth is Roy Jastram's fundamental work, The Golden Constant. Central banks around the world—the same institutions that replaced gold with paper—understand this well, as evidenced by the continuation of their buying wave, which is now reaching its 30-year high. People can also degrade gold or silver coins by trimming the edges or removing chips from the coins, melting those small quantities and selling them.
