Key TakeawaysFiat Currency refers to any currency that a government declares to be legal tender for transactions but is not backed by a physical commodity, such as gold or silver.
Instead, the currency’s value comes from the trust and confidence of the people who use it, and the stability of the issuing government.
Fiat currency, from the Latin word “fiat” meaning “let it be done,” is based entirely on trust.
Unlike representative money which represents a claim on a commodity, fiat money’s value is not based on physical goods but rather the trust and credit of the economy.
Governments and central banks regulate and manage their fiat currencies, adjusting monetary policy to achieve economic objectives such as controlling inflation, stabilizing employment, and maintaining the value of the currency.
Fiat money has several unique characteristics:
Advantages:
Disadvantages:
Fiat money and cryptocurrencies are fundamentally different:
Fiat currencies have been used for over a thousand years.
However, the modern concept of fiat money became more prevalent in the 20th century, especially after the Nixon Shock in 1971, when the US fully abandoned the gold standard, converting the US dollar into fiat money.
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