What is a Fiat Currency?

Fiat Currency Definition. A Fiat Currency is money declared by a government to be legal tender, state-issued money that cannot be legally convertible to any other thing or commodity, such as gold, or money that has no intrinsic value. The term “fiat” comes from the Latin word that means “let it be done”, as in a government issued decree. The U.S. Dollar, along with most other national currencies and all reserve currencies, is a fiat currency. President Nixon removed the backing of the Dollar by gold in 1971 and allowed the Dollar to float to determine its value relative to other fiat currencies at the time. All Federal Reserve notes and most circulating coins are money because the government says they are, not because they are backed by precious metals. Fiat money is commonly understood to be of paper, although it may also consist of overvalued metal coins. Under conditions of proper monetary management, fiat paper money can be a stable currency. Usually, a fiat-money currency loses value once the issuing government refuses to further guarantee its value through taxation, but this need not necessarily occur.

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