Fiat Money
Fiat money is a type of currency that is declared legal tender by a government, but is not backed by a physical commodity. It is a currency established as money by government regulation or law. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. Fiat money is not backed by reserves, such as gold or silver, but only by the faith of the government that issued it.
History of Fiat Money
The concept of fiat money has been around since the Middle Ages, when European governments began issuing paper money. The first paper money was issued by the Chinese during the Tang Dynasty in the 7th century. Fiat money was also used in the American colonies prior to the Revolutionary War. The Continental Congress issued paper money known as Continentals, which were not backed by gold or silver and eventually became worthless. The use of fiat money became more widespread in the 20th century, when governments began to issue paper money without any backing.
Comparison of Fiat Money and Other Types of Money
| Type of Money | Backed by | Value |
|---|---|---|
| Fiat Money | Government Regulation | Supply and Demand |
| Commodity Money | Physical Commodity | Commodity Value |
| Representative Money | Physical Commodity | Commodity Value |
Summary
Fiat money is a type of currency that is declared legal tender by a government, but is not backed by a physical commodity. It is a currency established as money by government regulation or law. The value of fiat money is derived from the relationship between supply and demand rather than the value of the material that the money is made of. For more information about fiat money, you can visit websites such as Investopedia, The Balance, and Investing.com.
See Also
- Commodity Money
- Representative Money
- Gold Standard
- Silver Standard
- Fractional Reserve Banking
- Central Bank
- Monetary Policy
- Inflation
- Deflation
- Currency Exchange
