Fiat currency is a type of currency that is not backed by a physical commodity like gold (see: [[gold standard]]) or silver (see: [[Silverites]]) but is instead issued by a government and derives its value from the trust and confidence of the people using it. The term "fiat" comes from the Latin word meaning "let it be done" or "by decree," emphasizing that the value of fiat currency is established by government decree or regulation. ## Characteristics of fiat currency 1. **Government issuance**: Fiat currency is issued and regulated by a country's central bank or monetary authority. This institution controls the [[money supply]] and is responsible for maintaining the stability and value of the currency. 2. **No intrinsic value**: Unlike commodity-backed currencies, such as the gold standard, fiat currency does not have intrinsic value because it is not linked to a physical commodity with a limited supply. The value of fiat currency is based on the trust and confidence of the people using it and their belief in the stability of the issuing government. 3. **Legal tender**: Fiat currency is declared legal tender by the government, meaning it must be accepted as a form of payment for goods and services within the country. This status further supports the trust and confidence in the currency, as people know it will be accepted in transactions. 4. **Flexible monetary policy**: Since fiat currency is not tied to a finite commodity, central banks have greater flexibility in managing monetary policy. They can increase or decrease the money supply and adjust interest rates to respond to economic conditions, such as inflation or recession, more effectively than under a commodity-backed system. ## Fiat currency dominates post-WWII Fiat currency became the dominant form of currency globally after the collapse of the [[gold standard]] and the Bretton Woods system in the 20th century. Today, most countries use fiat currencies, such as the US dollar, the euro, the British pound, and the Japanese yen. While fiat currency allows for more flexible monetary policy and is not dependent on the availability of a specific commodity, it can also be subject to [[inflation]] or hyperinflation if the government or [[central banks]] fail to manage the [[money supply]] responsibly. In extreme cases, a lack of confidence in a fiat currency can lead to a loss of value and currency crises.