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Fiat money

Yuan dynasty banknotes are a medieval form of fiat money.
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Fiat money is a type of government issued currency that is not backed by a precious metal, such as gold or silver, nor by any other tangible asset or commodity. Fiat currency is typically designated by the issuing government to be legal tender, and is authorized by government regulation. Since the end of the Bretton Woods system in 1971, the major currencies in the world are fiat money.

Fiat money generally does not have intrinsic value and does not have use value. It has value only because the individuals who use it as a unit of account – or, in the case of currency, a medium of exchange – agree on its value.[1] They trust that it will be accepted by merchants and other people as a means of payment for liabilities.

Fiat money is an alternative to commodity money, which is a currency that has intrinsic value because it contains, for example, a precious metal such as gold or silver which is embedded in the coin. Fiat also differs from representative money, which is money that has intrinsic value because it is backed by and can be converted into a precious metal or another commodity. Fiat money can look similar to representative money (such as paper bills), but the former has no backing, while the latter represents a claim on a commodity (which can be redeemed to a greater or lesser extent).[2][3][a]

Government-issued fiat money banknotes were used first during the 13th century in China.[4] Fiat money started to predominate during the 20th century. Since President Richard Nixon's decision to suspend US dollar convertibility to gold in 1971, a system of national fiat currencies has been used globally.

Fiat money can be:

  • Any money that is not backed by a commodity.
  • Money declared by a person, institution or government to be legal tender,[5] meaning that it must be accepted in payment of a debt in specific circumstances.[6]
  • State-issued money which is neither convertible through a central bank to anything else nor fixed in value in terms of any objective standard.[7]
  • Money used because of government decree.[2]
  • An otherwise non-valuable object that serves as a medium of exchange[8] (also known as fiduciary money).[9]

The term fiat derives from the Latin word fiat, meaning "let it be done"[b] used in the sense of an order, decree[2] or resolution.

  1. ^ Goldberg, Dror (2005). "Famous Myths of "Fiat Money"". Journal of Money, Credit and Banking. 37 (5): 957–967. doi:10.1353/mcb.2005.0052. JSTOR 3839155. S2CID 54713138.
  2. ^ a b c N. Gregory Mankiw (2014). Principles of Economics. Cengage Learning. p. 220. ISBN 978-1-285-16592-9. fiat money: money without intrinsic value that is used as money because of government decree
  3. ^ Walsh, Carl E. (2003). Monetary Theory and Policy. The MIT Press. ISBN 978-0-262-23231-9.
  4. ^ Peter Bernholz (2003). Monetary Regimes and Inflation: History, Economic and Political Relationships. Edward Elgar Publishing. p. 53. ISBN 978-1-84376-155-6.
  5. ^ Montgomery Rollins (1917). Money and Investments. George Routledge & Sons. ISBN 9781358416323. Archived from the original on December 27, 2016. Fiat Money. Money which a government declares shall be accepted as legal tender at its face value;
  6. ^ "Legal Tender Guidelines | The Royal Mint". www.royalmint.com.
  7. ^ John Maynard Keynes (1965) [1930]. "1. The Classification of Money". A Treatise on Money. Vol. 1. Macmillan & Co Ltd. p. 7. Fiat Money is Representative (or token) Money (i.e. something the intrinsic value of the material substance of which is divorced from its monetary face value) – now generally made of paper except in the case of small denominations – which is created and issued by the State, but is not convertible by law into anything other than itself, and has no fixed value in terms of an objective standard.
  8. ^ Blume, Lawrence E; (Firm), Palgrave Macmillan; Durlauf, Steven N (2019). The new Palgrave dictionary of economics. Palgrave Macmillan (Firm) (Living Reference Work ed.). United Kingdom. ISBN 9781349951215. OCLC 968345651.{{cite book}}: CS1 maint: location missing publisher (link)
  9. ^ "The Four Different Types of Money – Quickonomics". Quickonomics. September 17, 2016. Archived from the original on February 13, 2018. Retrieved February 12, 2018.


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