Fiat Money

Fiat money represents a hard currency or medium of exchange, most commonly representing money issued by a government.

While fiat money has no utility in and of itself, it does have inherent value, given a government maintains and guarantees its value.

Parties will exchange fiat money based on agreed upon rates or currency rates. This is quite common in modern times with up to the second streaming exchange rates that are universally accepted.

Fiat money is the latest alternative or advancement to commodity money, which carries its own intrinsic value.

Historically, countries have used the gold standard to peg their currencies and help set its value.

Most countries have since moved away from the gold standard since the 1970s and now rely almost completely on national fiat currencies.

Interestingly, with the proliferation of digital assets, some countries have explored the possibility of replacing fiat currencies with national cryptocurrencies.

This remains controversial however and at the time of writing few countries have opted for this course.

Fiat Money Explained

Fiat money must adhere to uniform and basic standards. This includes being money declared by a government as legal tender.

Additionally, fiat money is state issued, which is neither convertible by law to anything else, nor fixed in value in terms of any objective standard.

Fiat money is produced by a central bank. These entities are responsible for introducing new money into an economy through the purchase of financial assets or lending money to institutions.

Commercial banks are then responsible for repurposing this base money by credit creation through fractional reserve banking.