May 17, 2020

What is a Fiat Currency?

What is a Fiat Currency?

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A fiat currency is a type of money that has no intrinsic value and can’t be exchanged for any physical commodity or good.  A fiat currency is usually created inside a national economy and is legal tender for the buying and selling of goods and as payment for all debts both public and private inside the currency’s system of exchange in the nation of origin.

Banknotes issued by governments were first introduced in China in the 11th century. Paper banknotes have been used by different countries over the centuries and usually along with currencies backed by commodities held in reserve. Fiat currencies first became commonly used internationally in the last century as currencies were removed from the gold standard. In 1971, when the U.S. dollar was detached from gold the U.S. dollar became the new standard of valuation as a system of international fiat currencies were used around the world and valued against other fiat currencies.

The word  ‘fiat’ originates from the Latin language and means “let it be done” like in a transaction. 

The only value of a fiat currency is in its utility value as a means of transaction of goods and services. It’s value is based only on the strength of the nation that prints it and backs it as legal tender. It has value because two parties engaging in a transaction agree on its value for exchange. Also in the case of the U.S. dollar the faith in the currency can come from the backing of the U.S.  military and it’s economic power. 

Paper currency was first introduced as an alternative in 11th century China instead of using a commodity like gold or silver for money. Representative money like gold or silver certificates are similar to fiat currency as they are paper money, however representative money is a future claim on a commodity like a precious metal which can be traded in and redeemed for the correlating value of what backs its value. 

All major international currencies are backed by nothing of intrinsic value and are fiat, almost all crypto currencies are backed by nothing of value and are also fiat currencies. 

What is a Fiat Currency?