Fiat currency refers to a medium of exchange, such as paper money and coins, that is established as legal tender by government regulation. Unlike commodity-based currencies, which are based on physical goods like gold or silver, fiat money derives its value primarily from the trust and faith placed in it by the government and its users. It does not possess intrinsic value or use value in itself.
The key characteristic of fiat currency is that it is backed not by a physical commodity, but rather by the issuing government. This means its value is not determined by material worth but is rather maintained by government decree. Governments declare fiat money to be legal tender, meaning it is recognized by law to be acceptable for settling debts.
Fiat currencies are widely used around the globe and include well-known examples such as the pound sterling, the euro, and the US dollar. The value of fiat money is largely influenced by factors such as monetary policy, economic stability, and the government’s ability to maintain trust in its value. This type of currency is typically used in most modern economies due to its flexibility and stability, provided the backing government remains stable and reliable.