The value of Fiat currency is a nation's credit, and that is because it is used to clear off debt by the citizens of a nation.
Fiat currency is, thus, a government issued-currency that is not supported by physical commodity, such physical commodity can be gold or silver.
The value of fiat money then is gotten from the relationship between supply and demand and the stability of government issuing it instead of the worth of a commodity that backs it.
For example, the United states dollar, euro and many world currencies are all fiat currency.
Government, historically, mint coins from valuable physical commodity and print paper money that could be redeemed for a particular amount of physical commodity.
In the case of inflation or hyperinflation, fiat money tends to loose value and this is because it is not connected to physical reserves such as gold or silver. if people lose faith in the country's currency, it tends to lose its value.
This is entirely different from currency that is backed by gold mainly because the demands for products made of gold such as jewelries, computers, electronic devices and aerospace vehicles are very high.
Fiat currency is issued by most government as legal tender for the purpose of debt repayment
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KEYWORDS:
- fiat money
- gold or silver
- currency
- government
- debt
- physical commodity
- legal tender
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