Which one of the functions or properties listed in Part 1 did some people feel was threatened in 1862 by the issuance of fiat currency? Choose one:
A. Barter
B. Unit of account
C. Store of value
D. Hard to counterfeit
E. Medium of exchange
The correct answer and explanation is:
Correct Answer: C. Store of value
In 1862, the issuance of fiat currency in the United States raised concerns among many people about the currency’s reliability as a store of value. A store of value is a function of money that allows it to retain its value over time, enabling people to save or hold money for future use without it rapidly losing purchasing power.
The U.S. government introduced fiat currency known as greenbacks during the Civil War to help finance the war effort. Unlike previous currency that was backed by gold or silver, these greenbacks were not redeemable for precious metals. Their value was determined by government decree rather than intrinsic worth or direct commodity backing. This move marked a significant shift in monetary policy and led to widespread debate.
Critics feared that without a tangible backing like gold or silver, the paper currency could easily lose value if the government issued too much of it. Inflation, which is the general rise in prices over time, became a serious concern. If inflation occurred, then the currency would buy fewer goods and services in the future, undermining its ability to act as a store of value. People worried that their savings held in the form of this new paper money might become worthless or greatly diminished in value.
Additionally, because the value of fiat money depends heavily on public trust in the government and its fiscal policy, any political instability or mismanagement could further weaken the currency. This uncertainty made many people skeptical about holding or saving in fiat currency.
Therefore, in 1862, the function of store of value was seen by some as being at risk with the introduction of fiat currency, making C. Store of value the correct answer.