Fiat standard may consist of three distinct types, such as: utopian, the involuntary and the manage currency standards. In actual practice, only the last two are observed existing at the present time.
Utopian Paper Standard. For purposes of academic interest, this type is included for discussion.
The underlying philosophy behind the proposed adoption of this standard is that money today is desired primarily for what it will bring the individual in the form of goods and services it will buy, and not for represents, whether in a specific weight and fineness of gold or silver. As envisioned by its advocates, the seal of the government and the attribute of legal tender are all that are necessary to make money issued under this standard acceptable. Thus, following this line of thinking, it is contended that there is no necessity of building up stocks of gold as is required in the case of the gold standard.
On the other hand, its main objection lies in the fact that the money sought to be put into circulation is undefined in terms of any commodity and therefore, irredeemable. As such, critics point out that this standard presents the grave dangers of limitless inflation.
The Involuntary Paper Standard. When a nation, whether on a gold or silver standard, finds herself in a serious predicament of not being able to redeem its money, such a situation brings on its path the consequent result of an involuntary paper standard.
This situation is oftentimes observed as the result of a war. Thus, in spite of the desire of the government to redeem its paper money, circumstances prevent it from doing so. Nevertheless, the government and the people still cling fervently to the hope that it could one day return he gold or silver standard as the case may be.