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Fiat Money: Definition, History & Examples

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  • 0:00 What Is Fiat Money?
  • 0:58 History
  • 2:17 Examples
  • 3:17 Lesson Summary
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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

The United States dollar, as well as other major currencies, is valuable only because someone says it is. In this lesson, you'll learn about fiat money and its history. You'll also have a chance to take a short quiz.

What Is Fiat Money?

Fiat money is money that doesn't have any intrinsic value. It is used as money by government decree, or fiat. Fiat means 'let there be' in Latin.

Take a look at the dollar bills in your wallet. You can see that they are just pieces of paper printed with symbols - they have no intrinsic value of their own. They only become valuable when the government decrees that they have worth. A government must establish and regulate the currency responsibly (such as protecting against counterfeiting and managing the money supply responsibly) in order for fiat money to be successful.

Just as important as government regulation, however, is the people's willingness to accept the value of fiat money. People must accept fiat money as valuable and expect it to hold its value. If people don't accept fiat money as valuable, or believe it will not hold its value, then they will decide to use other assets (such as gold or silver) in purchasing or selling goods and services.

History

Fiat money has a rather long history. We can trace use of fiat money back to China and the T'ang Dynasty (618-907 A.D.). During the Ming Dynasty (1300 A.D.), the emperor's seal and signatures of treasurers were placed on paper made from tree bark.

The West started to use paper money in the early 18th century. France, the American colonies, and eventually the Continental Congress, issued bills of credit that could be used to make payments. However, the governments issued too many bills, which resulted in rising prices that tremendously lowered the value of the bills or even made them worthless. During the 19th century, countries would temporarily turn to fiat currency during times of war. For example, the U.S. government suspended the convertibility of its money to gold or silver coin during the Civil War until 1879.

In the early 20th century, the United States currency was based upon the gold standard. You used to be able to redeem your paper money for the equivalent value in gold. However, in 1971, under President Nixon, the United States went off the gold standard and converted to fiat money due to declining gold reserves and a large deficit in its balance of payments (a record of all money transaction between one country and other countries). Most major countries now use fiat money.

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