Fiat Money

Published Dec 26, 2022

Definition of Fiat Money

Fiat money is a type of currency that is not backed by a physical commodity such as gold or silver. Instead, it is declared legal tender by a government and is accepted as a medium of exchange. That means it is not backed by any physical asset (i.e., has no intrinsic value), and its value is determined solely by the government.

Example

To illustrate this, let’s look at the US Dollar. The US Dollar is a fiat currency, meaning it is not backed by any physical asset. Instead, its value is determined by the US government. The US government has declared the US Dollar to be legal tender and has thereby made sure it is accepted as a medium of exchange in the US and many other countries.

Why Fiat Money Matters

Fiat money is an integral part of the modern economy. It is used as a medium of exchange in most countries and is the basis of the global financial system. It is also a critical factor in the stability of the economy, as it allows governments to control the money supply and manage inflation. In addition, it is a convenient way to store and transfer value, as it is easily divisible and can be used to purchase goods and services.