What is a fiat currency?
The word “fiat” sounds slightly like the word “fake” and probably it is not coincidence.
According to the Oxford dictionary, “fiat” means a formal authorization or proposition.
While currency is any form of money* that is accepted as a medium of exchange** and is currently in circulation.
Because currency is any form of money, it includes both, money that carries only putative value such as paper money and money that carries naturally-existing value such as silver and gold coins. Therefore, unlike many think, currency does not automatically mean paper money.
In the past, many surprising and unexpected, at least for those living in the 21st century, items were used as currencies. For example, seashells and salt. Of course, these items do not hold a lot of value today. However, in ancient times, seashells were limited in supply by long travels to the seaside while salt was not easy to find or extract from the ground.
Now, to put the two words together, a fiat currency is basically when something with no intrinsic value and not backed up by any asset is made to be used as a medium of exchange by a government order. Although in the past the majority of fiat currencies were made of paper, non-paper fiat currencies were coins made from easily-accessible (and therefore of little value) metals such as iron and copper.
Today, first of all, most world currencies are fiat currencies. Second, all of them are made of paper. Presently, there is a total of 177 fiat paper currencies in the world.
Because money with putative value is fiat currency, that makes money with naturally-existing value to be non-fiat currency. The difference between the two is huge.
Fiat currency is used only in geographical regions where it is agreed to be used by the governing bodies while non-fiat currency, because it already has value, is accepted everywhere. For example, the well-know fiat currency, pound sterling, is officially only used in United Kingdom and several small Crown-dependent regions. For comparison, gold, a non-fiat currency, is accepted in 194 nations around the world.
Contrary to what many may assume, a fiat currency is not something that has been around only for the last couple hundreds of years. In fact, the first recorded fiat currency made of paper, chao, is 250 years away from being a millennium old. It was introduced in 1260s during the Yuan dynasty, the newly established at that time Chinese dynasty.
Throughout history, more than 600 fiat currencies were used in various periods and by various nations. One aspect they share in common is that all of them went through devaluation and eventually collapsed. Based on the number of years each fiat currency existed, the estimated average life expectancy of a fiat currency is 27 years.
Any fiat currency is destined to fail earlier or later because, again, backed up by nothing, there is no intrinsic value in it. The value of fiat currency is purely determined by supply, the amount of it available at any given time, and demand, the desire of people to use it. A fiat currency doesn’t fail because of lack of supply. Because let’s face it, the amount of paper available to print it will never end. The real reason behind its failure is lack of demand. People eventually lose trust in something that is available in unlimited amounts and at any time can be doubled or tripled in circulation. This is exactly what happened with Zimbabwe dollar in 2009, Swedish krona in 1992 and Hungarian pengo in 1946.
As a summary and to put it straight: a fiat currency is “made-up” money with artificially created value and its collapse is inevitable.
So, indeed nothing is coincidence, including the similar-sounding words: “fiat” and “fake”.
You are welcome to share your thoughts below.
* money – any item or record that is accepted as a payment for goods and services. It must be a medium of exchange, unit of account (be measurable) and store value over time.
** medium of exchange – the instance when something is used as an intermediate when exchanging goods and services, it functions as a medium of exchange.