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Fiat Money

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Fiat money is currency that cannot be redeemed for a commodity with intrinsic economic value. Fiat money only has value by government fiat, or decree. Thus, fiat money holds its worth only as long as users believe they will be able to exchange it for goods or services. Most currencies in the world today are fiat money. Historically, most money was not fiat money. Currency that is not fiat money could be either an item of value itself, such as silver coinage or be a note redeemable for something else of value. The gold standard is an example of the latter. Fiat money gradually replaced asset-backed currency because of the many cycles of inflation and deflation that occurred in the 18th and 19th centuries with redeemable currency. Today, most fiat money currencies are traded in the foreign exchange market. While in some sense a given national currency is still strictly labeled fiat money, in practice it is thus redeemable for not only one other commodity, but many - other (mostly fiat money) convertible currencies.



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