Definition of fiduciary money
What is fiduciary money?
Fiduciary money, or currency, refers to banknotes and coins in circulation in the economy. This is the liquidity available to economic actors to carry out transactions. It is a means of payment. Currency is tangible property, unlike scriptural money which is immaterial.
The first coin was minted in 650 BC by King Aliatte II. The objective then, was to avoid having to record all transactions between economic agents by hand. Money put an end to the barter system and allowed trade to flourish. Gradually, all the world's geographical areas created their own currencies, thus facilitating trade.
The value of money based on trust
Currency has a very low intrinsic value. Its value is related to the production costs of banknotes and coins. However, its nominal value (fixed at its creation) is much higher than its intrinsic value. The value of a currency is derived from the confidence placed in it by economic agents.
A banknote or coin has a legal value, that which is indicated on the financial instrument. This value is guaranteed both by the state and by the central bank. If economic agents cease to have confidence in these institutional entities, the currency no longer has any value.
Can a currency lose value?
The face value of banknotes and coins does not change over time or as a result of changes in ownership. However, the purchasing power linked to holding these notes and coins changes over time. Effectively, currency is affected by inflation. The higher the inflation rate, the more eroded the purchasing power associated with holding these notes and coins.
A country's currency can also depreciate on the financial markets via the exchange rate. In this case, a currency loses value against another currency. To compare the changes in purchasing power between 2 currencies, we use purchasing power parity.
Currency as a means of payment
Banknotes and coins are means of payment. They allow economic agents to buy or sell goods and services. The value is fixed within the country or geographical area that issued this material currency. This is the face value set at the time of issue.
Currency as a means of payment is defined by the Monetary and Financial Code according to Articles D121, R121 for metallic money and Articles D122 and R122 for banknotes.
Issuance of banknotes and coins
Fiduciary money can be divided into 2 main categories:
- Paper money: This includes all banknotes. In France, these notes are issued by the Banque de France, the IEDOM and the IEOM. The €20 note represents the majority of paper money issues.
- Divisional currency: These are the coins. In France, these coins are issued by the Treasury, but it is the Banque de France that puts them into circulation.
A coin or banknote is considered to be in circulation from the moment it leaves the institution that issued it. Currency in circulation includes all paper and divisional money made available to the public by central banks. When a new issue is made, there is money creation. Scriptural and fiduciary money forms the monetary aggregate M1 which is the most liquid form of money supply. Fiduciary money represents only 10% of this liquidity.