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Fiat Money

Definition

Fiat money is a currency without intrinsic value that has been established as money, often by government regulation. Fiat money does not have use value, and has value only because a government maintains its value, or because parties engaging in exchange agree on its value. It was introduced as an alternative to commodity money and representative money. Commodity money is created from a good, often a precious metal such as gold or silver, which has uses other than as a medium of exchange. Representative money is similar to fiat money, but it represents a claim on a commodity.

Fiat money is a currency without an intrinsic value that has been declared as a legal tender by the government. Its value is derived by studying the relationship between demand and supply, instead of taking into account the value of the material that makes up the currency.

In the ancient times, the currencies were in fact based on physical commodities as people used silver, bronze, and gold. Fiat money works differently and is based on faith, which is not surprising since the word fiat means “it shall be” in Latin.

Learning about Fiat Money

The risks with fiat are very low due to hyperinflation since the money is not linked to any physical reserves. As mentioned above, the only reason why the currency has value is because of faith. If people stop trusting the Dollar or the Euro, the money will not have any value.

All the currencies in today’s world are fiat money because they are only used to make payments and have no intrinsic value, whatsoever. It is only used as a mode of payment, and is inconvertible. Fiat money rose to popularity in the 20th century, after the disintegration of the Bretton Woods system, when the United States of America stopped converting dollars into gold.

How Fiat Money Works

Fiat money is a valid form of payment due to the virtue of the government. It allows the government to use any material (paper in this case) to use as a mode of payment. Since fiat money has no intrinsic value, its conceived value can diminish that can lead to hyperinflation.

The central banks and markets study the value of the paper according to how a country is working, its economy’s state and how these two factors will affect the interest rates.

Fiat money is the exact opposite of commodity money as the latter is valuable and has an intrinsic value. Commodity money was used earlier on and included grains, furs, and valuable metals like gold, silver, and bronze.

Importance of Fiat Money

Other than the apparent convenience and universality of real-life transactions, fiat money is an economical and stable way of running and regulating cash flow from an individual level to a government level.


Further Reading


A theory of money and financial institutions: Fiat money and noncooperative equilibrium in a closed economy
link.springer.com [PDF]
… of services may take place, but on the whole a major breakdown is beyond economics and is … Given that the money is in use and in common acceptance the explanation of the stability of … There are at least three reasons given for the holding of fiat money in an economic system …

Part I: Seigniorage of fiat money and the maqasid al‐Shari'ah: the unattainableness of the maqasidPart I: Seigniorage of fiat money and the maqasid al‐Shari'ah: the unattainableness of the maqasid
www.emerald.com [PDF]
… of services may take place, but on the whole a major breakdown is beyond economics and is … Given that the money is in use and in common acceptance the explanation of the stability of … There are at least three reasons given for the holding of fiat money in an economic system …

Credit money, fiat money and currency pyramids: Reflections on the financial crisis and sovereign debtCredit money, fiat money and currency pyramids: Reflections on the financial crisis and sovereign debt
link.springer.com [PDF]
… of services may take place, but on the whole a major breakdown is beyond economics and is … Given that the money is in use and in common acceptance the explanation of the stability of … There are at least three reasons given for the holding of fiat money in an economic system …

Seigniorage of fiat money and the Maqasid al‐Shari'ahSeigniorage of fiat money and the Maqasid al‐Shari'ah
www.emerald.com [PDF]
… of services may take place, but on the whole a major breakdown is beyond economics and is … Given that the money is in use and in common acceptance the explanation of the stability of … There are at least three reasons given for the holding of fiat money in an economic system …

Money, prices and finance in the new monetary economicsMoney, prices and finance in the new monetary economics
www.jstor.org [PDF]
… of services may take place, but on the whole a major breakdown is beyond economics and is … Given that the money is in use and in common acceptance the explanation of the stability of … There are at least three reasons given for the holding of fiat money in an economic system …

Are alternative currencies a substitute or a complement to fiat money? Evidence from cross-country dataAre alternative currencies a substitute or a complement to fiat money? Evidence from cross-country data
research.tilburguniversity.edu [PDF]
… of services may take place, but on the whole a major breakdown is beyond economics and is … Given that the money is in use and in common acceptance the explanation of the stability of … There are at least three reasons given for the holding of fiat money in an economic system …

The optimal bankruptcy rule in a trading economy using fiat moneyThe optimal bankruptcy rule in a trading economy using fiat money
link.springer.com [PDF]
… of services may take place, but on the whole a major breakdown is beyond economics and is … Given that the money is in use and in common acceptance the explanation of the stability of … There are at least three reasons given for the holding of fiat money in an economic system …

Bitcoin–its economics for financial reportingBitcoin–its economics for financial reporting
onlinelibrary.wiley.com [PDF]
… of services may take place, but on the whole a major breakdown is beyond economics and is … Given that the money is in use and in common acceptance the explanation of the stability of … There are at least three reasons given for the holding of fiat money in an economic system …



Q&A About Fiat Money


What is fiat money?

Fiat money is a currency without intrinsic value that has been declared as legal tender by the government.

What happens if people stop trusting their country's paper-based currency altogether?

If this were to happen then hyperinflation would occur since no one would want to use it anymore which would make it worthless and essentially useless for making payments or purchases in general.

Who established US Gold and Silver coins as official money?

An Act of Congress established US Gold and Silver coins as official money.

Are there any risks with using a fiat currency over a commodity one?

Yes, there are risks with using a fiat currency over a commodity one since hyperinflation can occur when people lose faith in their country's economy which will cause them to stop using their paper-based currency altogether.

What edits should be made to this article to preserve its original intent and purpose?

This article should read like so... "" html body This article is about Official Money . The Latin originates from Roman times where all laws were established by decree or fiat (not just laws regarding money). In ancient Rome, unofficial metal bars were first used for trade but eventually replaced with stamped metal bars called Aes Rude which weighed between 10-12 pounds each bar being approximately one day's wages for a common laborer at that time; then came the Aes Signatum which was a heavier weight bronze bar weighing between 20-25 pounds each bar being approximately one week's wages for a common laborer at that time; finally came the

Where did fiat currency originate from?

Fiat currency originated from ancient Rome.

Why do people trust fiat currencies more than commodity currencies?

People trust fiat currencies more because they are not linked to any physical reserves and are based purely on faith (or lack thereof).

What is the true meaning of the word "fiat"?

The true meaning of the word "fiat" is synonymous with "Act" as in "an Act of Congress."

What does fiat money represent?

Fiat money represents official money.

Is all paper-based currency considered to be "fiat"?

Yes, all paper-based currencies today are considered to be "fiat".

Where did the term "fiat" come from?

The term "fiat" came from Latin.

Is this article about fiat currency correct?

No, it is not correct because it misleads readers to believe that all forms of legal tender are worthless when nothing could be further from the truth.

How was it created?

It was created by a law passed by officials in Rome known as a decree or an act.

Should this article be edited to reflect its true meaning?

Yes, this article should be edited to reflect its true meaning.

How does fiat work differently than commodity money?

Fiat works differently because its value is derived by studying demand and supply instead of taking into account the value of material that makes up the currency. Commodity money, on the other hand, has an intrinsic value based on physical commodities like silver, bronze, or gold.

Are these two terms synonymous?

Yes, they are synonymous.

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