Fiat currency is a type of money that is issued by a government and declared as legal tender, meaning it must be accepted for payments of debts and goods and services within the issuing country. Unlike money backed by physical commodities like gold or silver, fiat currency has no intrinsic value; its value is derived [...]
Fiat currency is a type of money that is issued by a government and declared as legal tender, meaning it must be accepted for payments of debts and goods and services within the issuing country. Unlike money backed by physical commodities like gold or silver, fiat currency has no intrinsic value; its value is derived entirely from the trust and confidence of people and institutions in the government and the economy.
Key Characteristics of Fiat Currency:
- No Intrinsic Value:
Fiat currency is not backed by physical commodities. Its value depends on the stability of the government that issues it and the trust of its users. - Legal Tender:
Governments mandate its use for payment of taxes, goods, and services. - Control by Central Banks:
The supply and value of fiat currency are regulated by central banks, such as the Federal Reserve (USA) or the European Central Bank (EU), through monetary policies. - Inflationary Nature:
Fiat money can be printed or issued in unlimited amounts, which can lead to inflation if too much money is circulated.
How Fiat Currency Works:
Fiat money functions as a medium of exchange, store of value, and unit of account in an economy. It facilitates trade and economic growth by enabling people to buy goods and services, save for the future, and measure economic value.
Examples:
- US Dollar (USD)
- Euro (EUR)
- Japanese Yen (JPY)
Use Cases: Paying for goods and services, savings, investments, and as a reserve currency for global trade.
