Fiat Money

Fiat currency is money that has a purchasing power derived from a government issued fiat. For example, this can refer to paper money that has no fixed asset backing like gold. Fiat money is also referred to as fiduciary money in other languages. Fiat money contrasts commodity money and private currency; they are opposite types of currency. The world and central authorities have accepted fiat money since the cessation of the international gold standard of the Bretton Woods system of 1971. Some currencies however are deemed trusted and are referred to as hard currency. In the past money was usually based on gold and silver where coins were the legal form of currency at fixed rates. Private banks used notes that were directly supported by currency – used as drafts to lend or move money. Hard currency started to run out so alternate currencies like bank notes were created – this type of money became fiat money when banks began to accept them as legal tender. The very first known example of fiat money in history originates in China. The Chinese government produced credit notes which were valuable for short amounts of time – their value would actually run out over time. This was a way to prevent inflation.