FIAT Money

What is FIAT money?

FIAT money is a type of currency that a national government has declared to be legal tender. However, FIAT money is not provided any kind of backing by physical commodities or assets. The valuation of FIAT money is decided by the concept of supply and demand, rather than any material backing of the currency.

For example, if there is a lot of demand for the US Dollar, but for some reason, there is a lack of Dollars in circulation, the value of the Dollar would increase dramatically. Inversely, if the demand for the US Dollar decreased and there were a lot of US Dollars in circulation, the value of the currency would dramatically decrease.

FIAT money only has a value because the government takes steps to maintain that value, or two parties have come to an agreement to an agreement on a said value. FIAT money was introduced as an alternative to money that is backed by commodities.

Because of the fact that FIAT money is not backed by any financial assets that can give it value, there is a risk of a FIAT currency becoming worthless as a result of hyperinflation.

If faith is lost in a currency, it will eventually become worthless. A notable example of hyperinflation can be found in Weimar Germany where between 1921 and 1923, the Papiermark lost so much value that people were reported to be burning them in the winter to keep warm and the prices of certain products would fluctuate drastically on a day-to-day basis due to instability.

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