Definition of Fiat Currency
What is fiat currency? What is the definition of fiat currency? What exactly does "fiat currency" mean?
A fiat currency is a currency that is not convertible into anything else (such as a metal like gold or silver). Fiat currency is also declared to be legal tender by the government that issues it.
The US Dollar, Euro and Japanese Yen are all fiat currencies because:
1) they are not legally convertible into anything else (such as gold and silver)
2) they are declared to be legal tender by their respective governments
The first fiat currency is believed to have come from the Song Dynasty in China in the 10th century.
The problem with fiat currencies is governments can simply print more notes whenever they feel like it, due to the fact that a dollar or a Euro or Yen aren't convertible into something like gold or silver.
Fiat currencies are essentially useless, only retaining value due to the implicit banking of the governments that issue them.
If a government decides to turn on the printing presses, these fiat currencies quickly lose their values because there is nothing tangible that is backing their value.
Look to Zimbabwe as an example of a country with a fiat currency that has essentially made all of their outstanding notes worthless through hyperinflation.
If you had 100,000 Zimbabwean dollars sitting in your bank account ten years ago, these dollars are almost completely worthless due to the printing presses. These 100,000 dollars had no tangible value, due to the fact that there was nothing backing them that was of any value.
The only "backing" that they had was from the Zimbabwean government, and the government essentially made the notes worthless by firing up the printing presses.
If a government loses control and hyperinflation runs rampant, then the value of a fiat currency can quickly become worthless, as there is nothing of tangible worth that is backing its value.
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