Fiat money (from Latin: fiat, “let it be done”) is a type of money that is not backed by any commodity such as gold or silver, and typically declared by a decree from the government to be legal tender.
Throughout history, fiat money was sometimes issued by local banks and other institutions.
In modern times, fiat money is generally established by government regulation.
Fiat money does not have intrinsic value and does not have use value.
It has value only because the people who use it as a medium of exchange agree on its value.
They trust that it will be accepted by merchants and other people.
Fiat money is an alternative to commodity money, which is a currency that has intrinsic value because it contains a precious metal such as gold or silver which is embedded in the coin.
Fiat also differs from representative money, which is money that has intrinsic value because it is backed by and can be converted into a precious metal or another commodity.
Fiat money can look similar to representative money (such as paper bills), but the former has no backing, while the latter represents a claim on a commodity (which can be redeemed to a greater or lesser extent).
Government-issued fiat money banknotes were used first during the 11th century in China.
Fiat money started to predominate during the 20th century. Since President Richard Nixon‘s decision to default on the US dollar convertibility to gold in 1971, a system of national fiat currencies has been used globally.
Fiat money can be:
- Any money that is not backed by a commodity.
- Money declared by a person, institution or government to be legal tender, meaning that it must be accepted in payment of a debt in specific circumstances.
- State-issued money which is neither convertible through a central bank to anything else nor fixed in value in terms of any objective standard.
- Money used because of government decree.
- An otherwise non-valuable object that serves as a medium of exchange (also known as fiduciary money.)
The term fiat derives from the Latin word fiat, meaning “let it be done” used in the sense of an order, decree or resolution.
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