FIAT MONEY

The term fiat money is used to mean:

• any money declared by a government to be legal tender.
• state-issued money which is neither legally convertible to any other thing, nor fixed in value in terms of any objective standard.
• money without intrinsic value.

Fiat money refers to money that is not backed by reserves of another commodity. The money itself is given value by government fiat (Latin for “let it be done”) or decree, enforcing legal tender laws, previously known as “forced tender”, whereby debtors are legally relieved of the debt if they (offer to) pay it off in the government’s money. By law the refusal of “legal tender” money in favor of some other form of payment is illegal, and has at times in history (Rome under Diocletian, and post-revolutionary France during the collapse of the assignats) invoked the death penalty.

An example of fiat money is the new, international currency, the Euro. Its introduction changed the face of money, superseding many of the world’s oldest currencies.

Governments through history have often switched to forms of fiat money in times of need such as war, sometimes by suspending the service they provided of exchanging their money for gold, and other times by simply printing the money that they needed. When governments produce money more rapidly than economic growth, the money supply overtakes economic value. Therefore, the excess money eventually dilutes the market value of all money issued. This is called inflation.

In 1971 the US switched to fiat money indefinitely. At this point in time, many of the economically developed countries’ currencies were fixed to the US dollar, and so this single step meant that much of the western world’s currencies became fiat money based.

Following the first Gulf War the president of Iraq, Saddam Hussein, repealed the existing Iraqi fiat currency and replaced it with a new currency. Despite having no backing by a commodity and with no central authority mandating its use or defending its value, the old currency continued to circulate within the politically isolated Kurdish regions of Iraq. It became known as the Swiss Dinar. This currency remained relatively strong and stable for over a decade. It was formally replaced following the second Gulf War.

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References:

• Wikipedia.com
• gainesvillecoins.com