Fiat Money Definition

Fiat money is a currency that a government has declared to be legal tender, but is not backed by a physical commodity. The value of fiat money is derived from the faith and credit of the issuing government, rather than the intrinsic value of the money itself.

Fiat money has been used throughout history, but its use has become more widespread in recent years. In 1971, the United States abandoned the gold standard and began using fiat currency. Today, fiat currencies are used around the world, including in Canada, Australia, and most European countries.

The word ‘fiat’ comes from the Latin word for ‘decree’ or ‘order.’ When a government declares something to be legal tender, it is saying that it can be used to pay debts and taxes. Fiat money is not backed by any physical commodity, such as gold or silver. Instead, it is backed by the full faith and credit of the issuing government.

While fiat money does have some advantages over other types of currency, it also has some disadvantages. One disadvantage is that fiat currencies are prone to inflationary pressures. This means that over time, prices for goods and services tend to rise as more fiat currency enters circulation. Another disadvantage of fiat currency is that it can be subject to manipulation by central banks and other financial institutions.