In the next centuries, America, New France, and the U.S. The Swedish government later abandoned fiat money and went back to the silver standard because it failed greatly. In the 17th century, Europe started using fiat money after Sweden, Spain, and the Netherlands adopted it. However, due to overspending and hyperinflation, the Mongol Empire fell. Eventually, in the 13th century, when Kublai Khan was the leader, the fiat currency system was established. In the beginning, they allowed the exchange of money for gold, silver, or silk. In the 11th century, the Szechuan province in China started distributing paper money in the market. The Rise of Fiat MoneyĬhina was the first country to use fiat money centuries ago. When people no longer trust a nations currency, then it means the currency is no longer valuable. No one can convert or redeem fiat currency for gold or silver, and for this reason, inflation or hyperinflation may cause it to lose its value. Back to: ECONOMIC ANALYSIS & MONETARY POLICY Why is Fiat Money Valuable?įiat money is valuable only because it is the duty of the government to main that value, or because the transacting parties have an agreement on the value. However, people are exploring other forms of currency, such as the cryptocurrency, which are less restrictive in the market worldwide.
Fiat money is a good form of currency if the government uses it to perform its economic activities. The future of fiat money and the commodity-based currency is not certain, because the history of fiat money shows that the currency has some weaknesses. The commodity-based systems and the gold standard, the creators of the legal tender are now less functional as fiat currency now dominates the market. All the current paper currencies that countries use like the Euro, the US Dollar, the Japanese Yen, and other currencies are examples of fiat money. Countries all over the world invest, save, or purchase goods and services using fiat currency.
The value of fiat currency goes hand in hand with the economic strength of its issuing government. In economics, fiat money or fiat currency is money that obtains its value from a governments legal tender, rather than from a physical commodity like gold or silver. Fiat is a word in Latin that means let us do it our way, or it shall be.
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