What is Fiat Currency?
So what is Fiat currency or Fiat money, and what is the notable difference between modern types of money.
Although fiat currency or money is an acceptable medium of exchange, its face value exceeds its true value.
This means that fiat currency has no real intrinsic value. In fact, its value is only a result of the government's approval of the currency as a medium of exchange
What is Fiat Currency or Fiat Money?
Fiat currency refers to fiat money of all kinds of money that a government approves and are made legal tender. In other words, it is a national currency.
However, fiat currency is usually used to refer to paper money or coins that are legal tender and the face value exceeds their commodity values, i.e. the cost of a £1 coins base metals are not really worth a pound, possibly a penny or so. This means that their value is not a result of the price of a commodity (silver or gold), nor are they redeemable in commodity. On the contrary, the value of a fiat currency is largely based on the public’s faith in the issuer, which here is a country’s government or central bank.
Examples Of Fiat Currency
In ancient times, people offered paper money to owners of precious metals to have a specific amount of it. Notable examples are the assignats during the French Revolution and the continental currency during the American Revolution. Other notable historical examples of fiat currencies were the “greenbacks” used during the American Civil War period, and the paper marks used in the early 1920s in Germany.
In the present age, some notable examples of fiat currency include the US dollar, euro and the pound sterling.
Characteristics of Fiat Currency
No Intrinsic Value: fiat money has no value in itself.
Its value is based on people's trust in it and willingness to accept it as a medium of exchange. Fiat money loses its value once people start to reject it as a medium of exchange.
People's trust in fiat currency as a legal tender essentially comes from the government backing. And, this is the reason a consumer can issue it as a medium of exchange and businesses accept it.
Fiat currency costs money to exchange. For example if you are wanting to transfer USD to your UK bank account you'd likely pay more than 3% for your bank to exchange US dollars into Pound Sterling.
Difference Between Fiat Currency and Commodity Currency
Commodity currency is the opposite of fiat currency. Commodity currency is a currency that derives its value from basic commodity products such as silver and gold. Its value moves in line with the global price of these commodities and this is because some countries rely heavily on the export of certain raw materials for income.
The difference between the two currencies is that while commodity currency has an intrinsic value (valuable in itself), fiat currency has no intrinsic value. The value of commodity currency is derived from the materials it is made of, fiat currency only has value based on the government's backing. The government maintains the value of fiat money.
Due to the intrinsic value of commodity currency, it is, therefore, a more acceptable medium of exchange.
What is Fiat Currency - Conclusion
All national currencies in the form of paper or coins are fiat money. Although they don't have value in themselves, the government authorizes them as legal tender. Hopefully this article has answered your question about what is fiat currency.