Fiat money is government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it. The value of fiat money 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 as is the case for commodity money.
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Most modern paper currencies are fiat currencies, including the U. Fiat money gives central banks greater control over the economy because they can control how much money is printed.
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Most modern paper currencies, such as the U. One danger of fiat money is that governments will print too much of it, resulting in hyperinflation. Historically, governments would mint coins out of a valuable physical commodity, such as gold or silver, or print paper money that could be redeemed for a set amount of a physical commodity.
In other words, money acts as an intermediary. Instead of making a direct trade, an indirect trade can be made instead. For instance, Mr B wants to buy a chicken from Mr A. However, Mr A wants a fish in exchange for their chicken.
Fiat money is inconvertible and cannot be redeemed. The word "fiat" comes from the Latin and is often translated as the decree "it shall be" or "let it be done.
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That differs from currency backed by gold, for example; it has intrinsic value because of the demand for gold types of money fiat jewelry and decoration as well as the manufacture of electronic devices, computers, and aerospace vehicles.
Special Considerations The U. Earlier in U.
In this sense, U. It also has excellent seigniorage.
Fiat currencies gained prominence in the 20th century in part because governments and central banks sought to insulate their economies from the worst effects of the natural booms and busts of the business cycle. For instance, the U. Federal Reserve has the dual mandate to keep unemployment and inflation low.
Example of Fiat Money The African nation of Zimbabwe provided an example of the worst-case scenario in the early s. In response to serious economic problems, the country's central bank began to print money at a staggering pace.
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