What’s a Fiat Currency?

Throughout history, man has exchanged goods and services either through barter or through the use of currencies.

In the good old days, currencies where things of intrinsic value to the culture that used them. Pieces of bone, sea shells, gold, silver and the like have all been used as currencies

When a currency is fiat, it’s value is not tied to a tangible asset. The word fiat derives from the latin “fiat”, which means, “let it be done.” In other words, it’s value is whatever the government decrees it to be.

To a government, a fiat currency provides extreme monetary freedom, as they are not restricted by the need to keep an intrinsically valuable asset, such as gold, on hand to “back” the currency. They’re free to create more and more currency by simply printing it.

If not managed, however, the printing of more and more currency eventually results in a reduction in the value of each note and, as a result, of the currency overall. This leads to inflation, where it takes more of a currency to make purchases. In cases where currency production is out of control, hyperinflation can take place, which devalues the currency to an extreme extent.

Now, if you’re wondering how any of this effects you, I’d encourage you to read this article.