What Is A Fiat Money?
Fiat money is a form of currency in circulation designated legal tender by the government. Still, it does not have any physical backing, such as gold, and instead derives its value from the market’s demand-supply relationship.
The term ‘fiat’ has Latin origins and is loosely translated as ‘it shall be’ or ‘let it be done.’ As such, the value of the currencies is that which is as maintained by the government, and they bear no utility in themselves. Fiat currency came into being when governments used to mint coins out of physical commodities such as gold and silver or use a fixed amount of a physical commodity to trade in exchange for paper currency. However, fiat cannot be converted or redeemed since specific commodities do not back them. Fiat money is a good currency if it can perform the necessary functions in a nation’s economy for its monetary unit, such as holding value, facilitating transactions, and giving a numerical account.
The downside to the currencies not being backed to commodities is the potential for loss in value or overly bloated value such that the currency becomes seriously weak. Cases where the nationals do not regard the country’s currency, do not bode well for the value of the fiat currency as it would drop drastically. This is unlike other currencies that have the backing of other commodities, e.g., gold which is heavily demanded on its own by jewelers, decorators, electronic device manufacturers, aero-contractors, and engineers. Usually, fiat money allows central governments to exercise a degree of control over the economy and protect their respective nations’ economies from fluctuating economic realities. Conversely, it does not entirely forestall unpleasant financial situations, as demonstrated by the mortgage crisis of 2007.
You should also note that hyperinflation will occur in the economy if the country’s government issues too much fiat currency.
Fiat Money Example
Examples of fiat money differ in countries such as Australia with Australian Dollar, Belgium with Euro, China with Chinese yuan, United States with US Dollar, etc.« Back to Glossary Index