Fiat Currency: What It Is and Why It's Better Than a Gold Standard | The Motley Fool

Fiat money in simple words

Fiat Currency: What It Is and Why It's Better Than a Gold Standard

Fiat money is 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 as is the case for commodity money.

Most modern paper currencies are fiat currencies, including the U.

fiat money in simple words

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. One danger of fiat money is that governments will print too much of it, resulting in hyperinflation.

fiat money | History & Examples | Britannica

Historically, governments would mint coins out of a valuable physical commodity, such as gold or silver, or print paper money that could be redeemed for a set amount of a physical commodity. Fiat money is inconvertible and cannot be redeemed.

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The word "fiat" comes from the Latin and is often translated as the decree "it shall be" or "let it be done. That differs from currency backed by gold, for example; it has intrinsic value because of the demand for gold in jewelry and decoration as fiat money in simple words as the manufacture of electronic devices, computers, and aerospace vehicles.

Special Considerations The U. Earlier in U. In this sense, U.

fiat money in simple words

It also has excellent seigniorage. Fiat currencies gained prominence in the 20th century in part because governments and central banks sought to insulate their economies from the worst effects of the natural booms and busts of the business cycle.

What is Fiat Money?

For instance, the U. Federal Reserve has the dual mandate to keep unemployment and inflation low.

fiat money in simple words

Example of Fiat Money The African nation of Zimbabwe provided an example of the worst-case scenario in the early s. In response to serious economic problems, the country's central bank began to print money at a staggering pace.

These include white papers, government data, original reporting, and interviews with industry experts.

Any money declared by a government to be legal tender. State-issued money which is neither convertible by law to any other thing, nor fixed in value in terms of any objective standard. Intrinsically valueless money used as money because of government decree. An intrinsically useless object that serves as a medium of exchange, i.

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