fiat money

noun
Updated on: 13 Oct 2017

Definition of fiat money

:money (such as paper currency) not convertible into coin or specie of equivalent value

First Known Use of fiat money

1876


Financial Definition of FIAT MONEY

fiat money

What It Is

Fiat money refers to any currency lacking intrinsic value that is declared legal tender by a government.

How It Works

As valid currency solely by virtue of a government declaration, fiat money is not backed by any commodity, such as gold, but only by the faith of the bearer. In this respect, unlike currencies backed by gold or silver, fiat money does not have any intrinsic value (e.g., paper money and much coinage). The U.S. dollar is an example of fiat money.

Why It Matters

Fiat money allows the declaring government to employ virtually any material, such as paper (which is lightweight and convenient for carrying), as a medium of exchange. However, since the value of fiat money lies solely in the faith of those using it, its value can be easily diminished and result in rapid inflation.


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