Fiat currency, also known as fiat money, is a type of currency that is not backed by a commodity such as gold or silver. Instead, it is declared legal tender by the issuing government and authorized by government regulation. Fiat money generally does not have intrinsic value or use value, and its value is derived from the trust and agreement of individuals who use it as a medium of exchange. Fiat money is an alternative to commodity money, which is a currency that has intrinsic value because it contains a precious metal such as gold or silver.
Here are some key features of fiat currency:
- No backing: Fiat currency is not backed by a physical commodity, such as gold or silver.
- Value: The value of fiat currency is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it.
- Legal tender: Fiat currency is designated by the issuing government to be legal tender, and is authorized by government regulation.
- Intrinsic value: Fiat money generally does not have intrinsic value and does not have use value.
- Control: Central banks have greater control over the economy because they can control how much money is printed.
Fiat currency 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. Fiat currency is not supported by any physical commodity, but by the faith of its holders and virtue of a government declaration. The most important feature of fiat money is the stability of its value.