{"id":99701,"date":"2023-09-07T08:33:10","date_gmt":"2023-09-07T08:33:10","guid":{"rendered":"https:\/\/www.techopedia.com\/?post_type=definition&p=99701"},"modified":"2023-09-07T08:35:08","modified_gmt":"2023-09-07T08:35:08","slug":"fiat-currency-fiat-money","status":"publish","type":"definition","link":"https:\/\/www.techopedia.com\/definition\/fiat-currency","title":{"rendered":"Fiat Currency (Fiat Money)"},"content":{"rendered":"

What is Fiat Currency?<\/span><\/h2>\n

Fiat currency is defined as the currency issued by governments or central banks and is regulated and accepted as legal tender within a country or territory. It is used as a medium of exchange to buy goods and services. The central authority has the power to print, regulate, and manage fiat currency.<\/p>\n

The term has its origin in the Latin word “fiat,” meaning “let it be done” or “it shall be.” The word \u201cfiat\u201d was used to refer to a government decree or order.<\/div><\/div>\n

The U.S. dollar, the euro, the Japanese yen, and the British pound sterling are examples of fiat currencies.<\/p>\n

\u0421ryptocurrencies<\/a> are often referenced in relation to fiat currencies \u2013 in terms of their value and the advantages they offer. To appreciate the significance and potential impact of cryptocurrencies, it is important to understand fiat currencies, which are the foundation of the traditional global monetary system.<\/p>\n

Techopedia Explains<\/h3>\n

Fiat currency is a monetary unit that serves as a store of value, numerical account, and medium of exchange for a nation\u2019s economy. Some countries with weak fiat currencies tend to use currencies from neighboring countries or the U.S. dollar in day-to-day transactions.<\/p>\n

Historical Backing of Fiat Currencies: The Role of Gold and Precious Metals<\/h4>\n

Fiat currency does not have its own intrinsic value beyond being issued by a government. It does not have to be backed by a physical asset such as gold or silver \u2013 as it often has been in the past. The widespread acceptance relies on the collective trust and confidence people have in the issuing authority.<\/p>\n

Fiat currencies were historically backed by gold or silver from the first use of coins. The English pound sterling, introduced around\u2009800CE, was initially backed by a silver standard until the gold standard was widely adopted in the 1700s-1800s.<\/p>\n

The U.S. dollar \u2013 now the world\u2019s global reserve fiat currency \u2013 was backed by the gold standard from the 1870s until 1971, except for periods surrounding the Great Depression and the Second World War.<\/p>\n

Gold and other precious metals carry intrinsic value because they are used in jewelry as well as in various manufacturing industries. But fiat currency is inconvertible and cannot be redeemed for a commodity.<\/p>\n

As the size and scope of the international economy expanded over time, the volume of gold and silver produced from mining was not sufficient to keep pace.<\/p>\n

Central Banks and Currency Stability<\/h4>\n

Fiat currencies provide an alternative that gives governments greater flexibility and control in the way they manage their currency and set monetary policy in response to economic fluctuations.<\/p>\n

Most central banks around the world have a mandate to ensure their national currency remains stable and relatively strong, as a currency that rapidly declines in value can be economically damaging. As most fiat currencies are no longer backed by commodities, central banks can cause large variations in the money supply.<\/p>\n

The risk is that loose monetary policy, in which a country increases the supply of currency printed, can result in hyperinflation.<\/p>\n

Key Characteristics of Fiat Currency<\/span><\/h2>\n
\n\n\n\n\n\n\n\n
Feature<\/b><\/td>\nExplanation<\/b><\/td>\n<\/tr>\n
Legal tender<\/b><\/td>\nFiat currency is accepted for settling debts and transactions within a country’s borders. Its legal status gives it widespread acceptance.<\/span><\/td>\n<\/tr>\n
Centrally controlled<\/b><\/td>\nGovernments and central banks are responsible for monetary policy and supply.<\/span><\/td>\n<\/tr>\n
No intrinsic worth<\/b><\/p>\n

\u00a0<\/span><\/td>\n

Unlike commodities, fiat money has no inherent worth. Its value depends on the trust people have in the issuing authority.<\/span><\/td>\n<\/tr>\n
Stability and trust<\/b><\/td>\nFiat currencies are backed by the government’s economic and political stability. People use them because they trust in their purchasing power. Currencies issued by unstable governments tend to wildly fluctuate in value.<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

Advantages and Disadvantages of Fiat Money<\/span><\/h2>\n

Pros<\/h3>\n