Fiat money is a currency that has been established as a legal tender, often by government policies. Unlike commodities like gold, fiat money does not have intrinsic value. In other words, the paper money is essentially worthless. Rather, its value is derived from the supply and demand, as well as the trust in the issuing government.
Most legal tangible currencies are fiat currencies, including USD, GBP, HKD, SGD, AUD, and EUR. In more technical terms, fiat money is defined as:
- Medium of exchange — To function as intended, a fiat currency has to be widely accepted as a form of payment for goods and services. This requires both the seller and buyer to share the same perception of the value of an item.
- Store of value — Fiat money must act as a store of value, and users must have confidence that their money will retain value. Without stability in value, the prices of items will fluctuate and make less economic sense to use as a measurement of value.
- Unit of account — A unit of account means the currency can be divided into smaller units. For example, a dollar can be divided into four quarters, and the total value of four quarters equals a dollar.
For an in-depth discussion on fiat money, read our University article What Is Money?
Additionally, read our two-part series on the history of money here and here.
