What Is Fiat Money?
Fiat money is a 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.
Most modern paper currencies are fiat currencies, including the U.S. dollar, the euro, and other major global currencies.
KEY TAKEAWAYS
• Fiat money is a government-issued currency that is not backed by a commodity such as gold.
• Fiat money gives central banks greater control over the economy because they can control how much money is printed.
• Most modern paper currencies, such as the U.S. dollar, are fiat currencies.
• One danger of fiat money is that governments can print too much of it, resulting in hyperinflation.
Examples of Fiat Money
The U.S. dollar, the euro, the British pound, the Japanese yen, the Albanian lek, and the Indian rupee are all examples of fiat money.
Because it’s a currency that is backed by an issuing government, fiat money usually provides some economic stability—but not always.