What is Fiat Currency?
Fiat currency is a complicated form of currency. The fiat currency doesn’t have any physical commodity. This indicates that commodities like gold or silver, do not back this currency up. It runs simply without any physical equivalence. Similar to Bitcoins, this is more of a cryptocurrency. The government decides the case with fiat currencies. This means, that the government is eligible to change the rates of the currency as they please.
Fiat currency is a form of currency which is legal in several countries, including the US. The government that issues this currency is the one that decides its rates. It can be accessible across the world. Fiat currency is converted into different forms of currencies, such as the US Dollar or Pounds. This helps users dealing with its access worldwide. This rate depends on the daily announcement of the government.
The major difference between regular money and fiat currencies is that the value of it is not determined by any collateral. Traditionally, people used to exchange commodities like gold in exchange for a loan. Here, there is no need of any such commodities. The value of it is determined by the strength of the government at a particular point in time. It could change overnight, or it may stay stable for a long duration of time.
History
Fiat currency was introduced by US President Nixon in the year 1971. According to him, physical money, or traditional money stands a higher chance of inflation. He also believed that gold should never be converted to dollars since it makes it lose its value. Also, the rates of that money may change every day. Though that might still happen, there are still fewer chances of that. However, it can not be converted into gold or any other such commodity. If a government faces some sort of economic crisis, it might lose value.
How does Fiat currency work?
Due to fiat currency, it is possible for central banks to have higher control over the economy. This is because they can now control the amount of money that is being printed. This also acts as savings for several citizens since they usually cash it when the rates are good. The majority of the coins and paper currencies nowadays are fiat currencies. They are an integral part of the US economy. However, banks are pushing more and more people to shift towards fiat currencies. The risk associated with fiat money is that it might lose its value in the event of hyperinflation.
The rates of fiat currencies depend on the faith of people. This means that if they stop believing in the value of a certain government, the money won’t be worth anything. However, this factor makes it highly risky. This is because it does not run on any rates but the mere word of the government. The greatest advantage of fiat money is that the economic needs of a country can be handled by it. Moreover, it is a risky and complicated form of currency. Yet it is an interesting concept in which to venture.
