Fiat

What Is Fiat?

Most national currencies in use today, including the US dollar, the euro, and the Japanese yen, are examples of fiat money.

How Fiat Money Works

Beyond government approval and regulation, the main reason fiat money is considered valid is collective belief. Its value depends on a shared agreement that it can be used as a medium of exchange with purchasing power. The acceptance of fiat therefore rests on both a government decree and a social convention, along with the expectation that it will keep its value over time. If either the social belief or the government decree is compromised, the practical value of the currency as a means of payment can fall quickly.

Fiat vs. Commodity Money

The first known form of paper money appeared in 11th-century China. The Song dynasty issued the so-called jiaozi, regarded as the first government-issued paper money in history, created to replace heavy iron coins. The later Yuan dynasty (1271 to 1368) was the first to adopt fiat money on a large scale as the main medium of exchange, a practice that continued under the Ming dynasty (1368 to 1644).

Fiat vs. Cryptocurrency