What is Fiat Money?

Fiat money refers to a currency which the government has declared as legal tender. This was basically introduced as replacement for commodity money. Commodity money typically is built from a commodity like gold or silver that offers many uses besides being only a medium of exchange. The fiat money will not be supported by any physical commodity in that sense. Historically almost all currencies had been founded upon commodities such as gold and silver. Fiat money however is founded upon faith of the economy.

You can say that most of the modern paper currencies are actually fiat currencies as these have no intrinsic values. They are simply being used as mediums of payment. Fiat money cannot be redeemed and it is inconvertible. This currency gained a lot of popularity during the 20th century when the central banks and governments tried to improve their economies from the ruins of business cycles.

Most of the global money is fiat money since it is held as money as the government states that it is legal tender. The people have faith in this money’s capacity to work like a storage medium for buying power.

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