Fiat money is a type of government-issuedcurrency that is not backed by a precious metal, such asgold orsilver, nor by any other tangible asset orcommodity. Fiat currency is typically designated by the issuing government to belegal tender, and is authorized by government regulation. Since the end of theBretton Woods system in 1976 by theJamaica Accords, the major currencies in the world are fiat money.
Fiat money generally does not haveintrinsic value and does not haveuse value. It has value only because the individuals who use it as a unit of account – or, in the case of currency, amedium of exchange – agree on its value.[1] They trust that it will be accepted by merchants and other people as a means of payment for liabilities.
Fiat money is an alternative tocommodity money, which is a currency that has intrinsic value because it contains, for example, a precious metal such as gold or silver which is embedded in the coin. Fiat also differs fromrepresentative money, which is money that has intrinsic value because it is backed by and can be converted into a precious metal or another commodity. Fiat money can look similar to representative money (such as paper bills), but the former has no backing, while the latter represents a claim on a commodity (which can be redeemed to a greater or lesser extent).[2][3][a]
Government-issued fiat moneybanknotes were used first during the 13th century inChina.[4] Fiat money started to predominate during the 20th century. SincePresident Richard Nixon's decision tosuspend US dollar convertibility to gold in 1971, a system of national fiat currencies has been used globally.
Fiat money can be:
The termfiat derives from theLatin wordfiat, meaning "let it be done"[b] used in the sense of an order, decree[2] or resolution.
Most of the money in the economy is created, not by printing presses at the central bank, but by banks when they provide loans. [...] This also means as you pay off the loan, the electronic money your bank created is 'deleted' – it no longer exists. So essentially, banks create money, not wealth.[10]
Inmonetary economics, fiat money is an intrinsically valueless object or record that is accepted widely as a means of payment.[1] Accordingly, the value of fiat money is greater than the value of its metal or paper content.
One justification for fiat money comes from amicro-founded model. In most economic models, agents areintrinsically happier when they have more money. In a model by Lagos and Wright, fiat money does not have an intrinsic worth but agents get more of the goods they want when they trade assuming fiat money is valuable. Fiat money's value iscreated internally by the community and, at equilibrium, makes otherwise infeasible trades possible.[11]
Objections to fiat money can be traced back to at least the 1700s. In 1787George Washington wrote toJabez Bowen, regarding theRhode Island pound: "Paper money has had the effect in your State that it ever will have, to ruin commerce—oppress the honest, and open a door to every species of fraud and injustice."[12]
In theGrundrisse (1857–58),Karl Marx considered the modern economic ramifications of a historical switch to fiat money from the gold or silver-commodity. Marx writes:
"Suppose that the Bank of France did not rest on a metallic base, and that other countries were willing to accept the French currency or its capital in any form, not only in the specific form of the precious metals. Would the bank not have been equally forced to raise the terms of its discounting precisely at the moment when its "public" clamoured most eagerly for its services? The notes with which it discounts the bills of exchange of this public are at present nothing more than drafts on gold and silver. In our hypothetical case, they would be drafts on the nation's stock of products and on its directly employable labour force: the former is limited, the latter can be increased only within very positive limits, and in certain amounts of time. The printing press, on the other hand, is inexhaustible and works like a stroke of magic."
Commenting on the passage, Marxist economist and geographerDavid Harvey writes that "[t]he consequence, as Marx saw it, would be that "the directly exchangeable wealth of the nation" would be ‘absolutely diminished’ alongside of ‘an unlimited increase of bank drafts’ (i.e., accelerating indebtedness) with the direct consequence of ‘increase in the price of products, raw materials and labour’ (inflation) alongside a ‘decrease in price of bank drafts’ (ever-falling rates of interest)." Harvey notes the accuracy of the modern economy in this way, save for "...the rising prices of labor and means of production (low inflation except for assets such as stocks and shares, land and property and resources such as water rights)."[13] The latter point can be explained by the private exportation ofdebt,[14]labour, and figurative and/or literal waste[15] to the globalperiphery, a concept related tometabolic andcarbon rift.
Another mathematical model that explains the value of fiat money comes fromgame theory. In a game where agents produce and trade objects, there can be multipleNash equilibria where agents settle on stable behavior. In a model by Kiyotaki and Wright, an object with no intrinsic worth can have value during trade in one (or more) of the Nash equilibria.[16]
China has a longhistory with paper money, beginning in the 7th centuryCE. During the 11th century, the government established a monopoly on its issuance, and about the end of the 12th century, convertibility was suspended.[17] The use of such money became widespread during the subsequentYuan andMing dynasties.[18]
TheSong dynasty in China was the first to issue paper money,jiaozi, about the 10th century CE. Although the notes were valued at a certain exchange rate for gold, silver, or silk, conversion was never allowed in practice. The notes were initially to be redeemed after three years' service, to be replaced by new notes for a 3% service charge, but, as more of them were printed without notes being retired, inflation became evident. The government made several attempts to maintain the value of the paper money by demanding taxes partly in currency and making other laws, but the damage had been done, and the notes became disfavored.[19]
The succeedingYuan dynasty was the first dynasty of China to use paper currency as the predominant circulating medium. The founder of the Yuan dynasty,Kublai Khan, issued paper money known asJiaochao during his reign. The original notes during the Yuan dynasty were restricted in area and duration as in the Song dynasty.
During the 13th century,Marco Polo described the fiat money of theYuan dynasty in his bookThe Travels of Marco Polo:[20][21]
All these pieces of paper are issued with as much solemnity and authority as if they were of pure gold or silver... and indeed everybody takes them readily, for wheresoever a person may go throughout the Great Kaan's dominions he shall find these pieces of paper current, and shall be able to transact all sales and purchases of goods by means of them just as well as if they were coins of pure gold.
— Marco Polo,The Travels of Marco Polo
According to a travelogue of a visit to Prague in 960 byIbrahim ibn Yaqub, small pieces of cloth were used as a means of trade, with these cloths having a set exchange rate versus silver.[22]
Around 1150, theKnights Templar would issue notes to pilgrims. Pilgrims would deposit valuables with a local Templar preceptory before embarking for the Holy Land and receive a document indicating the value of their deposit. They would then use that document upon arrival in the Holy Land to receive funds from the treasury of equal value.[23][24]
Washington Irving records an emergency use of paper money by the Spanish for a siege during theConquest of Granada (1482–1492). In 1661,Johan Palmstruch issued the first regular paper money in the West, by royal charter from the Kingdom of Sweden, through a new institution, theBank of Stockholm. While this private paper currency was largely a failure, the Swedish parliament eventually assumed control of the issue of paper money in the country. By 1745, its paper money was inconvertible tospecie, but acceptance was mandated by the government.[25] This fiat currency depreciated so rapidly that by 1776 it was returned to a silver standard. Fiat money also has other beginnings in 17th-century Europe, having been introduced by the Bank of Amsterdam in 1683.[26]
In 17th centuryNew France, now part of Canada, the universally acceptedmedium of exchange was thebeaver pelt. As the colony expanded, coins from France came to be used widely, but there was usually a shortage of French coins. In 1685, the colonial authorities in New France found themselves seriously short of money. A military expedition against theIroquois had gone badly and tax revenues were down, reducing government money reserves. Typically, when short of funds, the government would simply delay paying merchants for purchases, but it was not safe to delay payment to soldiers due to the risk ofmutiny.
Jacques de Meulles, the Intendant of Finance, conceived an ingeniousad hoc solution – the temporary issuance of paper money to pay the soldiers, in the form ofplaying cards. He confiscated all the playing cards in the colony, had them cut into pieces, wrote denominations on the pieces, signed them, and issued them to the soldiers as pay in lieu of gold and silver. Because of the chronic shortages of money of all types in the colonies, these cards were accepted readily by merchants and the public and circulated freely atface value. It was intended to be purely a temporary expedient, and it was not until years later that its role as amedium of exchange was recognized. The first issue of playing card money occurred during June 1685 and was redeemed three months later. However, the shortages of coinage reoccurred and more issues of card money were made during subsequent years. Because of their wide acceptance as money and the general shortage of money in the colony, many of the playing cards were not redeemed but continued to circulate, acting as a useful substitute for scarce gold and silver coins from France. Eventually, theGovernor of New France acknowledged their useful role as a circulating medium of exchange.[27]
As the finances of the French government deteriorated because of European wars, it reduced its financial assistance to its colonies, so the colonial authorities in Canada relied more and more on card money. By 1757, the government had discontinued all payments in coin and payments were made in paper instead. In an application ofGresham’s Law – bad money drives out good – peoplehoarded gold and silver, and used paper money instead. The costs of theSeven Years' War resulted inrapid inflation in New France. After theBritish conquest in 1760, the paper money became almost worthless, but business did not end because gold and silver that had been hoarded came back into circulation. By theTreaty of Paris (1763), the French government agreed to convert the outstanding card money intodebentures, but with the French governmentessentially bankrupt, these bonds were defaulted and by 1771 they were worthless.
TheRoyal Canadian Mint still issues Playing Card Money in commemoration of its history, but now in 92.5% silver form with gold plate on the edge. It therefore has an intrinsic value which considerably exceeds its fiat value.[28] The Bank of Canada and Canadian economists often use this early form of paper currency to illustrate the true nature of money for Canadians.[27]
| Country | Year |
|---|---|
| United Kingdom | 1821 |
| Germany | 1871 |
| Sweden | 1873 |
| United States (de facto) | 1873 |
| France | 1874 |
| Belgium | 1874 |
| Italy | 1874 |
| Switzerland | 1874 |
| Netherlands | 1875 |
| Austria-Hungary | 1892 |
| Japan | 1897 |
| Russia | 1898 |
| United States (de jure) | 1900 |
An early form of fiat currency in theAmerican Colonies was "bills of credit".[30] Provincial governments produced notes which were fiat currency, with the promise to allow holders to pay taxes with those notes. The notes were issued to pay current obligations and could be used for taxes levied at a later time.[30]Since the notes were denominated in the local unit of account, they were circulated from person to person in non-tax transactions. These types of notes were issued particularly inPennsylvania,Virginia andMassachusetts. Such money was sold at a discount to silver. The government would then spend them, and they would expire at a fixed later date.[30]
Bills of credit have generated some controversy from their inception. Those who have wanted to emphasize the dangers of inflation have emphasized those colonies where the bills of credit depreciated most dramatically: New England and the Carolinas.[30] Those who wanted to defend the use of bills of credit in the colonies have emphasized the middle colonies, where inflation was practically nonexistent.[30]
Colonial powers intentionally introduced fiat currencies backed by taxes (e.g.,hut taxes orpoll taxes) to mobilise economic resources in their new possessions, at least as a transitional arrangement. The purpose of such taxes was later served byproperty taxes. The repeated cycle of deflationary hard money, followed by inflationary paper money continued through much of the 18th and 19th centuries. Often nations would have dual currencies, with paper trading at some discount to money which representedspecie.
Examples are
During theAmerican Civil War, the Federal Government issuedUnited States Notes, a form of paper fiat currency known popularly as 'greenbacks'. Their issue was limited by Congress at slightly more than $340 million. During the 1870s, withdrawal of the notes from circulation was opposed by theUnited States Greenback Party. It was termed 'fiat money' in an 1878 party convention.[31]
Immediately afterWorld War I, governments and banks generally still promised to convert notes and coins into their nominal commodity (redemption byspecie, typically gold) on demand. However, the costs of the war and the required repairs and economic growth based on subsequent government borrowing made governments suspend redemption by specie. Some governments were wary of avoidingsovereign default but did not realise the consequences of paying debts by consigning newly printed cash not associated with a metal standard to their creditors, which resulted inhyperinflation: for example thehyperinflation in the Weimar Republic.
From 1944 to 1971, theBretton Woods agreement fixed the value of 35 United States dollars to onetroy ounce of gold.[32] Other currencies were calibrated with the U.S. dollar at fixed rates: for example the pound sterling traded for many years within a narrow band centred on US$2.80. The U.S. promised to redeem dollars with gold transferred to other national banks. Trade imbalances were corrected by gold reserve exchanges or by loans from theInternational Monetary Fund (IMF).
The Bretton Woods system was ended by what became known as theNixon shock, a series of economic changes by United States PresidentRichard Nixon in 1971. These changes included unilaterally canceling the directconvertibility of theUnited States dollar togold. Since then, a system of national fiat monies has been used globally, with variable exchange rates between the major currencies.[33]
During the 1960s, production ofsilver coins for circulation ceased when theface value of the coin was less than the cost of theprecious metal it contained (whereasit had been greater historically). In the United States, theCoinage Act of 1965 eliminatedsilver from circulating dimes and quarter dollars, and most other countries did the same with their coins.[34]The Canadian penny, which was mostlycopper until 1996, was removed from circulation altogether during the autumn of 2012 due to the cost of production relative to face value.[35] On February 9, 2025, United States PresidentDonald Trump instructedScott Bessent, thesecretary of the Treasury, to halt production of the penny, citing its high production costs.[36]
In 2007, the Royal Canadian Mint produced a million dollargoldbullion coin and sold five of them. In 2015, the gold in the coins was worth more than 3.5 times the face value.[37]
Acentral bank introduces new money into an economy by purchasingfinancial assets or lending money to financial institutions.Commercial banks then redeploy or repurpose this base money by credit creation throughfractional reserve banking, which expands the total supply of "broad money" (cash plusdemand deposits).[38]
In modern economies, relatively little of the supply of broad money is physical currency. For example, in December 2010 in the U.S., of the $8,853.4billion of broad money supply (M2), only $915.7 billion (about 10%) consisted of physical coins and paper money.[39] The manufacturing of new physical money is usually the responsibility of the national bank, or sometimes, the government'streasury.
TheBank for International Settlements published a detailed review of payment system developments in the Group of Ten (G10) countries in 1985, in the first of a series that has become known as "red books". Currently the red books cover the participating countries onCommittee on Payments and Market Infrastructures (CPMI).[40] A red book summary of the value of banknotes and coins in circulation is shown in the table below where the local currency is converted to US dollars using the end of the year rates.[41] The value of this physical currency as a percentage of GDP ranges from a maximum of 19.4% in Japan to a minimum of 1.7% in Sweden with the overall average for all countries in the table being 8.9% (7.9% for the US).
| Country or region | Billions of dollars | Per capita |
|---|---|---|
| United States | $1,425 | $4,433 |
| Eurozone | $1,210 | $3,571 |
| Japan | $857 | $6,739 |
| India | $251 | $195 |
| Russia | $117 | $799 |
| United Kingdom | $103 | $1,583 |
| Switzerland | $76 | $9,213 |
| Korea | $74 | $1,460 |
| Mexico | $72 | $599 |
| Canada | $59 | $1,641 |
| Brazil | $58 | $282 |
| Australia | $55 | $2,320 |
| Saudi Arabia | $53 | $1,708 |
| Hong Kong SAR | $48 | $6,550 |
| Turkey | $36 | $458 |
| Singapore | $27 | $4,911 |
| Sweden | $9 | $872 |
| South Africa | $6 | $113 |
| Total/Average | $4,536 | $1,558 |
The most notable currency not included in this table is the Chineseyuan, for which the statistics are listed as "not available".
The adoption of fiat currency by many countries, from the 18th century onwards, made much larger variations in the supply of money possible. Since then, huge increases in the supply ofpaper money have occurred in a number of countries, producing hyperinflations – episodes of extreme inflation rates much greater than those observed during earlier periods ofcommodity money.[42][43] Thehyperinflation in the Weimar Republic of Germany is a notable example.[44][42]
Economists generally believe that high rates of inflation and hyperinflation are caused by an excessive growth of themoney supply.[45] Presently, most economists favor a small and steady rate of inflation.[46] Small (as opposed to zero ornegative) inflation reduces the severity of economicrecessions by enabling the labor market to adjust more quickly to a recession, and reduces the risk that aliquidity trap (a reluctance to lend money due to low rates of interest) preventsmonetary policy from stabilizing the economy.[47] However, money supply growth does not always cause nominal increases of price. Money supply growth may instead result in stable prices at a time in which they would otherwise be decreasing. Some economists maintain that with the conditions of aliquidity trap, large monetary injections are like "pushing on a string".[48][49]
The task of keeping the rate of inflation small and stable is usually given tomonetary authorities. Generally, these monetary authorities are thenational banks that control monetary policy by the setting ofinterest rates, byopen market operations, and by the setting of bankingreserve requirements.[50]
A fiat-money currency greatly loses its value should the issuing government orcentral bank either lose the ability to, or refuse to, continue to guarantee its value. The usual consequence is hyperinflation. Some examples of this are theZimbabwean dollar,China's money during 1945 and theWeimar Republic's mark during 1923. A more recent example is thecurrency instability in Venezuela that began in 2016.
This need not necessarily occur, especially if a currency continues to be the most easily available; for example, the pre-1990Iraqi dinar continued to retain value in theKurdistan Regional Government even after its legal tender status was ended by the Iraqi government which issued the notes.[51][52]
fiat money: money without intrinsic value that is used as money because of government decree
Fiat Money. Money which a government declares shall be accepted as legal tender at its face value;
{{cite book}}:ISBN / Date incompatibility (help)Fiat Money is Representative (or token) Money (i.e. something the intrinsic value of the material substance of which is divorced from its monetary face value) – now generally made of paper except in the case of small denominations – which is created and issued by the State, but is not convertible by law into anything other than itself, and has no fixed value in terms of an objective standard.
{{cite book}}: CS1 maint: location missing publisher (link){{cite book}}: CS1 maint: location (link)The Bretton Woods arrangement collapsed in 1971 when U.S. President Richard Nixon suspended the convertibility of the dollar into gold. Since then, the world has lived in a system of national fiat monies, with flexible exchange rates between the major currencies
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