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Fiat money

Fiat money is money declared by a government to be legal tender.[1] The term derives from the
Latin fiat, meaning "let it be done". Fiat money achieves value because a government demands it
in payment of taxes and says it should be used within the country as a "tender" (offering) to pay
all debts. In effect, this validates it to be used to buy and sell goods and services and mandates it
to pay tax. Where fiat money is used as currency, the term fiat currency is used. The most
widely-held reserve currencies—the US dollar, the Euro and the Yen— are fiat currencies, as are
almost all other national currencies.

Fiat money is a form of currency which is deemed valid and legal because the government says that it
is, not because it is backed by a commodity such as gold or silver. The United States is one of the
most prominent nations which relies on fiat money, although many other countries do as well. There
are a number of advantages and disadvantages to this type of currency, and the issues with fiat
money have been debated vigorously for centuries by economists and politicians.

The term “fiat” refers to a government decree. When a government creates fiat money, it declares that
money produced by certain banks or mints is valid legal tender which will be accepted for all
government debts, thereby making the currency legal. When the government is willing to accept a
specific currency for payment of taxes and other government debts, this also means that everyone
else in the society will be willing to accept it in exchange for goods and services. As a general rule, the
money is minted by government-owned mints or banks, and it is marked with language which indicates
that it is legal tender for both public and private debts.

Alternatives to fiat money include commodity currency, in which people exchange actual physical
commodities like gold, and representative currency, in which each bill represents a set amount of a
commodity, and it can be redeemed for that commodity. Historically, many nations had a gold or silver
standard, in which currency was backed by government reserves of gold or silver, and citizens could
walk into banks and ask to exchange their currency for its value in gold or silver. However, many
nations turned away from representative currency to fiat money in order to cope with changing
economic climates.

Fiat money is not self limiting, which can make nations which rely on this type of currency extremely
vulnerable to hyperinflation. Citizens rely on their governments to make the right decisions about
printing money and extending credit to ensure that their economies do not become inflated. When fiat
money systems are abandoned, it is usually because hyperinflation has become such a huge problem
that the economy falls apart.

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