Fiat money or Fiat currency (usually
paper money) is a type of currency
whose only value is that a government made a fiat (i.e.
decreed) that the money
is a legal method of exchange. Unlike commodity
money or representative money it is not based in another commodity
such as gold or silver and is not covered by a special reserve.
Fiat money is a promise to pay by the issuer and does not necessarily
have any intrinsic value. Its value lies in the issuer's
financial means and credit-worthiness. Most currencies in the world
as of 2003 are fiat monies.
Historically, the gold
standard (and sometimes a silver standard if gold
was scarce or monopolized) traded places in most nations as the
of value and unit
of account. These were however inconvenient to use as a medium
of exchange or a standard
of deferred payment due to the transport and storage concerns.
Accordingly, notes began to circulate that a government or other
trusted entity (e.g. the Knights
Templar in Europe in the 13th century) would guarantee as representing
a certain stored value on account. This was the beginning of a long
slow shift to representative
The first historical examples of fiat money was that of China. Although paper fiat money was associated with China through the writings of Marco Polo, Chinese dynasties resorted to fiat money only in extremely desperate situations, and Chinese experiences with fiat money were that it tended to result in hyperinflation.
Until the late 20th century it was uncommon for governments to
issue fiat money. In the situations where fiat money was used, it
was difficult for governments to avoid the temptation of printing
money which generally led to high inflation. The transition from
standard to fiat money occurred in the 1960s and 1970s. Since
the end of World War II, the value of the United
States dollar was pegged to 1/35 troy ounce of gold and other
currencies were pegged to the U.S. dollar. This system, known as
Woods Accord, caused a massive outflow of gold in the 1960s
and early 1970s. Faced by the possibility that United States gold
reserves would completely disappear, President Nixon unpegged the
U.S. dollar from gold on August 15, 1971.
It is worthy to note that every fiat system throughout human history has collapsed in value.