What is Fiat money (Fiat currency)?
Fiat money or fiat currency is a currency issued as a legal tender that doesn’t have any intrinsic or underlying value. The term” fiat” signifies a decree or some type of formal authorization. The value of fiat currency is derived from an official law, which is why it is considered legal tender. The true value of fiat money is based on the public’s trust in the currency and the issuing government. When individuals and businesses don’t trust a specific fiat currency, they will not accept it as a medium of exchange. Some national currencies, such as the US dollar, euro, yen, etc., enjoy a high degree of trust among market participants, which is why these currencies are widely accepted.
In the past, transactions were based on commodity money with specific intrinsic value derived from its materials, such as gold or silver. Today’s fiat money is made of paper, and its value comes from multiple factors like trust, supply and demand, the strength of the national economy, and other economic factors. In its essence, fiat money represents a form of a promise made by the issuing government or central bank that the specific currency may be used as a medium of exchange.