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Fiat Currency

Definition

This is a medium of exchange (normally paper currency issued by a government) where the currency is not backed by a physical commodity such as gold or silver. Fiat literally means "by sanction or decree" so a fiat currency is the government of a nation telling its citizens that its currency is approved for use as a medium of exchange. The value of this currency is another matter however.

Using the term Fiat Currency :

The value of fiat currency is based on the confidence of its users; therefore, the government must take careful pains to ensure that confidence in its currency remains intact. This means responsible borrowing (debt levels) and maintaining a productive workforce with low taxes. If the government follows other policies such as excessive debt, low productivity and high taxes and redistribution of wealth, the fiat currency suffers unduly over time. Gold is normally viewed as a safe haven from fiat currencies.

Pay Special Attention To :

There is little to no restraint on a government in relation to the amount of fiat currency it may create. Rapid creation of currency with little economic activity to back it up expands credit in the system and may cause an excessive amount of inflation in the price of real goods and services. This inflation is due to a depreciation of the value of the fiat currency. Excessive inflation is very negative long-term for a fiat currency and the citizens of that country. It discourages foreign investment and lessens the international competitiveness (to some degree) of the country.

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Related terms

gold , investing in gold

'Fiat Currency' appears in the definitions of these other terms:

Gold