Fiat money generally does not have intrinsic value and does not have use value. It has value only because the individuals who use it as a unit of account – or, in the case of currency, a medium of exchange – agree on its value.[1] They trust that it will be accepted by merchants and other people as a means of payment for liabilities.
Fiat money is an alternative to commodity money, which is a currency that has intrinsic value because it contains, for example, a precious metal such as gold or silver which is embedded in the coin. Fiat also differs from representative money, which is money that has intrinsic value because it is backed by and can be converted into a precious metal or another commodity. Fiat money 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 (which can be redeemed to a greater or lesser extent).[2][3][a]
Government-issued fiat money banknotes were used first during the 13th century in China.[4] Fiat money started to predominate during the 20th century. Since President Richard Nixon's decision to suspend US dollar convertibility to gold in 1971, a system of national fiat currencies has been used globally.
Fiat money can be:
The term fiat derives from the Latin word fiat, meaning "let it be done"[b] used in the sense of an order, decree[2] or resolution.
History[edit]
China[edit]
China has a long history with paper money, beginning in the 7th century CE. During the 11th century, the government established a monopoly on its issuance, and about the end of the 12th century, convertibility was suspended.[16] The use of such money became widespread during the subsequent Yuan and Ming dynasties.[17]
Loss of backing[edit]
A fiat-money currency greatly loses its value should the issuing government or central bank either lose the ability to, or refuse to, continue to guarantee its value. The usual consequence is hyperinflation. Some examples of this are the Zimbabwean dollar, China's money during 1945 and the Weimar Republic's mark during 1923. A more recent example is the currency instability in Venezuela that began in 2016 during the country's ongoing socioeconomic and political crisis.
This need not necessarily occur, especially if a currency continues to be the most easily available; for example, the pre-1990 Iraqi dinar continued to retain value in the Kurdistan Regional Government even after its legal tender status was ended by the Iraqi government which issued the notes.[46][47]