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What is Fiat Money?

Welcome to the Investors Trading Academy talking glossary of financial terms and events. Our word of the day is “Fiat Money”. Money has no intrinsic value and cannot be redeemed, but is made legal tender through government decree. All modern paper currencies are fiat money. The value of fiat money depends on the strength of the issuing country's economy. Inflation results when a government issues too much fiat money. Fiat money is currency which derives its value from government regulation or law. The term derives from the Latin fiat -"let it be done", "it shall be". It differs from commodity money and representative money. Commodity money is based on a good, often a precious metal such as gold or silver, which has uses other than as a medium of exchange, while representative money is a claim on the commodity rather than the actual good. The first use of fiat money was recorded in China around 1000 AD. Since then, it has been used continuously by various countries, concurrently with commodity currencies. Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation's paper currency, like the dollar bill, the money will no longer hold any value. Most modern paper currencies are fiat currencies, have no intrinsic value and are used solely as a means of payment. Historically, governments would mint coins out of a physical commodity such as gold or silver, or would print paper money that could be redeemed for a set amount of physical commodity. Fiat money is inconvertible and cannot be redeemed. Fiat money rose to prominence in the 20th century, specifically after the collapse of the Bretton Woods system in 1971, when the United States ceased to allow the conversion of the dollar into gold. By Barry Norman, Investors Trading Academy