money & economicsWikipedia
Fiat money has value only because people agree to accept it, not because of any metal behind it
Fiat money is government-issued currency, usually created by a central bank and made legal tender by regulation, but not backed by gold, silver or any other commodity. Since the Jamaica Accords ended the Bretton Woods system in 1976, every major government currency is fiat money. Its value rests entirely on shared trust: people use it as a unit of account and a medium of exchange because they expect merchants and others to accept it for payment. Fiat money looks like older paper that was redeemable for metal, but it has no such claim. The term fiat comes from Latin for let it be done, meaning an order or decree. Government-issued banknotes of this kind first appeared in China in the 13th century.
A fiat currency is accepted because the law makes it legal tender and because enough people expect others to take it. Its supply is controlled by a central bank rather than by the quantity of a metal. Economists differ on the mechanism: monetarist and Austrian schools argue that more money raises prices, while Keynesian and modern monetary theory economists argue that an increase in money alone is insufficient to cause inflation.
Fiat money underpins almost every transaction in the modern economy, so its stability depends on the credibility of central banks and governments. It also explains why economists disagree about whether printing more of it causes inflation.
Governments moved away from metal backing in stages, beginning with the suspension of US dollar convertibility to gold in 1971. Since then, the global monetary system has relied almost entirely on national fiat currencies.
Fiat comes from the Latin for let it be done, the same word used for a decree or order.
Adapted from Wikipedia, the free encyclopedia · CC BY-SA 4.0
Image: Wikimedia Commons
