A fiat currency is a type of money that has no intrinsic value and is not backed by a physical commodity like gold or silver. Instead, its value comes from the trust and confidence that people and governments have in its ability to function as a medium of exchange, a store of value, and a unit of account. It is essentially money by decree, meaning it is declared as legal tender by a government, and people are required to accept it for payments.
Here are some key characteristics of fiat currency:
- No intrinsic value: Fiat money has value because the government says it does, not because it is made of a valuable material (like gold coins).
- Backed by trust: Its value is based on the trust and stability of the issuing government or central bank. For example, the U.S. dollar is a fiat currency, and its value is based on trust in the U.S. government and its economy.
- Legal tender: Governments enforce the use of fiat currencies by declaring them legal tender, which means they must be accepted for debts and payments within the country.
- Inflation risk: Fiat money can lose value due to inflation if too much of it is printed or if people lose confidence in the currency.
Most modern currencies, like the U.S. dollar (USD), the euro (EUR), and the Japanese yen (JPY), are examples of fiat money.