Fiat money and value of modern money

20161019_092411Today virtually all currencies (money) are fiat money. That simply means their value is determined by the government saying what their value is and then of course the financial markets define their value according to search and supply. To illustrate this consider the following case: In January 2005 Turkey introduced monetary reform deleting six zeros from the Turkish Lira (TL) and replacing it with 1 New Turkish Lira (NTL).

Both banknotes at the left have exactly the same value. It happened for me to be in Turkey at that time and I was lucky to keep both these till today as excellent example of how the “value” of money is changed through government decisions. The international markets adjust fairly quick to such changes, as do the local prices and customers. So the zeros in a banknotes do not really represent “constant” value, rather they represent the current “assigned” by the government or markets value.