Fiat Currency

Fiat currency is legal tender that is backed by the sole faith of the central government or bank that issued it, rather than a commodity such as gold. Examples are the US Dollar (USD), Japanese Yen (JPY) and UK Sterling (GBP).

Whilst central, public bodies in charge of the issuance of money has been in use for thousands of years, it is only recently in history (comparatively) that that issuance has been backed by pure ‘faith’ in a government – prior to this the ‘gold standard’ was in force which allowed notes and coins to be redeemable to gold – ‘Fiat’ is Latin for ‘faith’.

The gold standard, no longer utilized by any government, was seen to be able to keep imperfect human impulses of ceaseless money printing in check, which typically lead to cases of hyperinflation, Zimbabwe Dollars and Venezuela Bolivars being modern examples (the gold standard also had drawbacks, namely the favouring of countries that had large gold deposits). However, all fiat currencies’ values tend to fluctuate in relation to the value of the nation in question’s deposits of commodities that drive exports, as well as supply, fiscal policies (interest rates), etc. The only modern currency that bears any resemblance to the gold standard is the Swiss Franc, with purportedly around 30% of the money supply of Switzerland backed by gold reserves, however, this is no the official stance taken by the Swiss Confederation.

An advantage of fiat money is that it allows governments to respond to crises by issuing more money – this response was noted during the Great Financial Crisis (GFC) of 2007/8 and the Covid-19 pandemic of 2020/current day – and managing money velocity, credit supply, etc.

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