Saudi Press

Saudi Arabia and the world
Sunday, Jun 01, 2025

Let’s all please stop calling dollars ‘fiat money’. They are not fiat and they are not money.

The US Dollar is not a money, as it is not backed up by government or assets. It is a virtual credit note, created out of nothing (just a number added onto a balance sheet), and backed up by nothing but a “promise” to pay it back. The Federal Reserve can create endless US Dollars out of nothing, without having anything on their own to back it up aside from the ability to create just more of the same nothing. The Fed “gives” this nothing as a “credit” in exchange for whatever they accept as collateral, whether the collateral is really worth anything or not. And if the debtor fails to pay it back, the Fed just creates more nothing to bail them out, as often as necessary. The AIG vicious circle, for instance, is a prime example.
Sometimes it’s possible to simplify something too much. More than a decade ago Ben Bernanke, then chair of the Federal Reserve’s Board of Governors, sat down for an interview with 60 Minutes, the television show that important Americans call when they have important things to say.

Bernanke was explaining how the Fed had responded to the financial crisis. When he got to the asset purchase programmes, the host asked whether the Fed was spending taxpayers’ money. 

“It’s not tax money,” Bernanke said. “The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So to lend to a bank, we simply use the computer to mark up the size of the account that they have at the Fed.” The host asked him whether the Fed had been printing money. “Well,” said Bernanke, “effectively.”

He wasn’t wrong, of course. He’s Ben Bernanke. You might disagree with his policy choices, but he certainly knows how money is created.

That quote from 60 Minutes, though, still comes up, often, more than a decade later. When Bernanke simplified what the Fed does, he confirmed for a lot of people the deeply mistaken idea that the Fed simply magics up dollars out of nothing and then, by fiat, says “There. That’s money.” 

There’s a problem with the word “fiat.” We use it to describe our current monetary system. Then we teach undergraduates that the word comes from the Italian for decree, or edict. We tell them that fiat money is a social convention. It has value because the government says it does, and everyone agrees. Cameron Winklevoss, co-founder of the crypto exchange Gemini, says that “all money is a meme.” That’s what he was taught at Harvard while he was doing the other thing he’s famous for.

This is unfortunately not at all how money works. The first description I could find of money as “fiat” comes from John Stuart Mill, the English philosopher, in Principles of Political Economy. Mill proposed a hypothetical: suppose a government began paying salaries in a paper money that couldn’t be converted on demand into silver or gold. The value of that money, he wrote, “would depend on the fiat of the authority”. 

Well, yeah. If the US Department of the Treasury were to print up carnival tickets, spend them into the economy and call them dollars, the value of those dollars would depend on the fiat of Congress. But that’s not what the Treasury does, and that’s not what a dollar is. 

If you live in the US, the dollars you use most often in your daily life are bank dollars. Your bank creates them when it loans you money, then deposits them in your account.

Bank dollars don’t have value just because your bank says they do. Your bank has regulators poking into its books, to make sure those loans are sound assets with decent returns. And your bank pays premiums to the Federal Deposit Insurance Corporation, to guarantee your deposits in case it fails anyway. If bank dollars are just a social convention — a meme — then your mortgage is just a meme, too.

Now, take the Fed. It’s just a special bank. Like Bernanke said, commercial banks have deposit accounts at the Fed. When the Fed lends them money, it marks up their accounts with dollars we call reserves. And, just like when the commercial banks lend you money, those reserves are a liability for the Fed. But there’s a crucial part of the process that didn’t make it into 60 Minutes: when the Fed marks up those accounts, it’s also buying assets. It swaps, one for one: reserves for assets. 

When we say the Fed is printing money, we imply that there was nothing, and now there is something. Ta da! But again, that’s not at all what happens. The Fed has to buy something. Usually it’s a Treasury bill, but in an emergency it can be a more questionable asset. Then the Fed credits back reserves. To believe those reserves are just a meme, you have to believe the assets are just a meme. But they aren’t. Don’t take my word for it. The Fed’s assets provide a return, every year, lean years and fat years, without fail.

OK. Now let’s do the Department of the Treasury. It has an account at the Fed, too, but it cannot just magic dollars out of its account. The Treasury can put dollars in its account collecting taxes, or by selling Treasury bills. There is no fiat, no decree. There is no money printer, anywhere. It’s all transactions on a balance sheet, assets for liabilities. 

Now: you may believe that all those mortgages and credit card loans are meaningless assets. You may believe the US government will not be able to collect enough taxes to roll over those Treasury bills. If you are right, then yes, the dollar has no value. But we’re still not talking about trusting anyone’s fiat. We’re talking about credit analysis. So, please: let’s stop calling it fiat money. Let’s start calling it what it is: credit money. 
Newsletter

Related Articles

Saudi Press
0:00
0:00
Close
OPEC+ Agrees to Increase Oil Output for Third Consecutive Month
Turkey Detains Istanbul Officials Amid Anti-Corruption Crackdown
Meta and Anduril Collaborate on AI-Driven Military Augmented Reality Systems
EU Central Bank Pushes to Replace US Dollar with Euro as World’s Main Currency
European and Arab Ministers Convene in Madrid to Address Gaza Conflict
U.S. Health Secretary Ends Select COVID-19 Vaccine Recommendations
Trump Warns Putin Is 'Playing with Fire' Amid Escalating Ukraine Conflict
India and Pakistan Engage Trump-Linked Lobbyists to Influence U.S. Policy
U.S. Halts New Student Visa Interviews Amid Enhanced Security Measures
Trump Administration Cancels $100 Million in Federal Contracts with Harvard
SpaceX Starship Test Flight Ends in Failure, Mars Mission Timeline Uncertain
King Charles Affirms Canadian Sovereignty Amid U.S. Statehood Pressure
Iranian Revolutionary Guard Founder Warns Against Trusting Regime in Nuclear Talks
UAE Offers Free ChatGPT Plus Subscriptions to Citizens
Lebanon Initiates Plan to Disarm Palestinian Factions
Iran and U.S. Make Limited Progress in Nuclear Talks
The Daily Debate: The Fall of the Dollar — Strategic Reset or Economic Self-Destruction?
Trump Administration's Tariff Policies and Dollar Strategy Spark Global Economic Debate
OpenAI Acquires Jony Ive’s Startup for $6.5 Billion to Build a Revolutionary “Third Core Device”
Turkey Weighs Citizens in Public as Erdoğan Launches National Slimming Campaign
Saudi-Spanish Business Forum Commences in Riyadh
Saudi Arabia and Spain Sign MoU to Boost SME Sectors
UK Suspends Trade Talks with Israel Amid Gaza Offensive
Iran and U.S. Set for Fifth Round of Nuclear Talks Amid Rising Tensions
Russia Expands Military Presence Near Finland Amid Rising Tensions
Indian Scholar Arrested in Crackdown Over Pakistan Conflict Commentary
Israel Eases Gaza Blockade Amid Internal Dispute Over Military Strategy
President Biden’s announcement of advanced prostate cancer sparked public sympathy—but behind closed doors, Democrats are in panic
A Chinese company made solar tiles that look way nicer than regular panels!
Indian jet shootdown: the all-robot legion behind China’s PL-15E missiles
The Chinese Dragon: The True Winner in the India-Pakistan Clash
Australia's Venomous Creatures Contribute to Life-Saving Antivenom Programme
The Spanish Were Right: Long Working Hours Harm Brain Function
Did Former FBI Director Call for Violence Against Trump? Instagram Post Sparks Uproar
US and UAE Partner to Develop Massive AI Data Center Complex
Apple's $95 Million Siri Settlement: Eligible Users Have Until July 2 to File Claims
US and UAE Reach Preliminary Agreement on Nvidia AI Chip Imports
President Trump and Elon Musk Welcomed by Emir of Qatar Sheikh Tamim with Cybertruck Convoy
Strong Warning Issued: Do Not Use General Chatbots for Medical, Legal, or Educational Guidance
Saudi Arabia Emerges as Global Tech Magnet with U.S. Backing and Trump’s Visit
This was President's departure from Saudi Arabia. The Crown Prince personally escorted him back to the airport.
NVIDIA and Saudi Arabia Launch Strategic Partnership to Establish AI Centers
Trump Meets Syrian President Ahmad al-Shara in Historic Encounter
Trump takes a blow torch to the neocons and interventionists while speaking to the Saudis
US and Saudi Arabia Sign Landmark Agreements Across Multiple Sectors
Why Saudi Arabia Rolled Out a Purple Carpet for Donald Trump Instead of Red
Elon Musk Joins Trump Meeting in Saudi Arabia
Trump says it would be 'stupid' not to accept gift of Qatari plane
Quantum Computing Threatens Bitcoin Security
Michael Jordan to Serve as Analyst for NBA Games
×