Unlike commodity money which is covered by the value of the precious metal it was created from, usually silver or gold, the value of fiat currency is dependent on the interaction between demand and supply forces. The parties, buyer, and seller, engaged in its exchange will come to an agreement on its value. Are you asking yourself what is fiat currency? Read on to get the full definition…
Definition Of FIAT Money
Fiat is a Latin word. Translated into English, fiat means “Let it be done”. Fiat Currency is money that does not have intrinsic value but is recognized or accepted as a form of legal tender through government regulation. To read more about fiat currencies click on the following links to jump to the correct sections:
See the table below for a complete world fiat currencies list:
|Territory / Country||Currency||ISO-4217 Name|
|Akrotiri and Dhekelia (UK)||European euro||EUR|
|Aland Islands (Finland)||European euro||EUR|
|American Samoa (USA)||United States dollar||USD|
|Anguilla (UK)||East Caribbean dollar||XCD|
|Antigua and Barbuda||East Caribbean dollar||XCD|
|Aruba (Netherlands)||Aruban florin||AWG|
|Ascension Island (UK)||Saint Helena pound||SHP|
|Benin||West African CFA franc||XOF|
|Bermuda (UK)||Bermudian dollar||BMD|
|Bonaire (Netherlands)||United States dollar||USD|
|Bosnia and Herzegovina||Bosnia and Herzegovina convertible mark||BAM|
|British Indian Ocean Territory (UK)||United States dollar||USD|
|British Virgin Islands (UK)||United States dollar||USD|
|Burkina Faso||West African CFA franc||XOF|
|Cabo Verde||Cape Verdean escudo||CVE|
|Cameroon||Central African CFA franc||XAF|
|Caribbean Netherlands (Netherlands)||United States dollar||USD|
|Cayman Islands (UK)||Cayman Islands dollar||KYD|
|Central African Republic||Central African CFA franc||XAF|
|Chad||Central African CFA franc||XAF|
|Chatham Islands (New Zealand)||New Zealand dollar||NZD|
|China||Chinese Yuan Renminbi||CNY|
|Christmas Island (Australia)||Australian dollar||AUD|
|Cocos (Keeling) Islands (Australia)||Australian dollar||AUD|
|Congo, Democratic Republic of the||Congolese franc||CDF|
|Congo, Republic of the||Central African CFA franc||XAF|
|Cook Islands (New Zealand)||Cook Islands dollar||none|
|Costa Rica||Costa Rican colon||CRC|
|Cote d'Ivoire||West African CFA franc||XOF|
|Curacao (Netherlands)||Netherlands Antillean guilder||ANG|
|Czech Republic||Czech koruna||CZK|
|Dominica||East Caribbean dollar||XCD|
|Dominican Republic||Dominican peso||DOP|
|Ecuador||United States dollar||USD|
|El Salvador||United States dollar||USD|
|Equatorial Guinea||Central African CFA franc||XAF|
|Eswatini (formerly Swaziland)||Swazi lilangeni||SZL|
|Falkland Islands (UK)||Falkland Islands pound||FKP|
|Faroe Islands (Denmark)||Faroese krona||none|
|French Guiana (France)||European euro||EUR|
|French Polynesia (France)||CFP franc||XPF|
|Gabon||Central African CFA franc||XAF|
|Gibraltar (UK)||Gibraltar pound||GIP|
|Greenland (Denmark)||Danish krone||DKK|
|Grenada||East Caribbean dollar||XCD|
|Guadeloupe (France)||European euro||EUR|
|Guam (USA)||United States dollar||USD|
|Guernsey (UK)||Guernsey Pound||GGP|
|Guinea-Bissau||West African CFA franc||XOF|
|Hong Kong (China)||Hong Kong dollar||HKD|
|International Monetary Fund (IMF)||SDR (Special Drawing Right)||XDR|
|Isle of Man (UK)||Manx pound||IMP|
|Israel||Israeli new shekel||ILS|
|Jersey (UK)||Jersey pound||JEP|
|Macau (China)||Macanese pataca||MOP|
|Macedonia (FYROM)||Macedonian denar||MKD|
|Mali||West African CFA franc||XOF|
|Marshall Islands||United States dollar||USD|
|Martinique (France)||European euro||EUR|
|Mayotte (France)||European euro||EUR|
|Micronesia||United States dollar||USD|
|Montserrat (UK)||East Caribbean dollar||XCD|
|Myanmar (formerly Burma)||Myanmar kyat||MMK|
|New Caledonia (France)||CFP franc||XPF|
|New Zealand||New Zealand dollar||NZD|
|Niger||West African CFA franc||XOF|
|Niue (New Zealand)||New Zealand dollar||NZD|
|Norfolk Island (Australia)||Australian dollar||AUD|
|Northern Mariana Islands (USA)||United States dollar||USD|
|North Korea||North Korean won||KPW|
|Palau||United States dollar||USD|
|Palestine||Israeli new shekel||ILS|
|Panama||United States dollar||USD|
|Papua New Guinea||Papua New Guinean kina||PGK|
|Pitcairn Islands (UK)||New Zealand dollar||NZD|
|Puerto Rico (USA)||United States dollar||USD|
|Reunion (France)||European euro||EUR|
|Saba (Netherlands)||United States dollar||USD|
|Saint Barthelemy (France)||European euro||EUR|
|Saint Helena (UK)||Saint Helena pound||SHP|
|Saint Kitts and Nevis||East Caribbean dollar||XCD|
|Saint Lucia||East Caribbean dollar||XCD|
|Saint Martin (France)||European euro||EUR|
|Saint Pierre and Miquelon (France)||European euro||EUR|
|Saint Vincent and the Grenadines||East Caribbean dollar||XCD|
|San Marino||European euro||EUR|
|Sao Tome and Principe||Sao Tome and Principe dobra||STN|
|Saudi Arabia||Saudi Arabian riyal||SAR|
|Senegal||West African CFA franc||XOF|
|Sierra Leone||Sierra Leonean leone||SLL|
|Sint Eustatius (Netherlands)||United States dollar||USD|
|Sint Maarten (Netherlands)||Netherlands Antillean guilder||ANG|
|Solomon Islands||Solomon Islands dollar||SBD|
|South Africa||South African rand||ZAR|
|South Georgia Island (UK)||Pound sterling||GBP|
|South Korea||South Korean won||KRW|
|South Sudan||South Sudanese pound||SSP|
|Sri Lanka||Sri Lankan rupee||LKR|
|Svalbard and Jan Mayen (Norway)||Norwegian krone||NOK|
|Taiwan||New Taiwan dollar||TWD|
|Timor-Leste||United States dollar||USD|
|Togo||West African CFA franc||XOF|
|Tokelau (New Zealand)||New Zealand dollar||NZD|
|Trinidad and Tobago||Trinidad and Tobago dollar||TTD|
|Tristan da Cunha (UK)||Pound sterling||GBP|
|Turks and Caicos Islands (UK)||United States dollar||USD|
|United Arab Emirates||UAE dirham||AED|
|United Kingdom||Pound sterling||GBP|
|United States of America||United States dollar||USD|
|US Virgin Islands (USA)||United States dollar||USD|
|Vatican City (Holy See)||European euro||EUR|
|Wake Island (USA)||United States dollar||USD|
|Wallis and Futuna (France)||CFP franc||XPF|
|Zimbabwe||United States dollar||USD|
Origin of Fiat Currency
While most money was backed by physical goods or precious metals, fiat currency is contingent on people’s belief and faith in a country’s economy.
Many of today’s paper money is considered fiat money. They do not carry user value. The function of the paper money is to facilitate a payment. A government would produce coins out of precious metals and manufacture paper currency that would have an equivalent value in terms of a physical good. In the case of fiat currency, it cannot be redeemed. Neither can fiat currency be converted.
Fiat currency because popular and widely used in the 20th century particularly during the period of 1968 and 1973 when the Bretton Woods Agreement was terminated and the United States no longer allowed the U.S. Dollar to be converted to gold.
How Value Of FIAT Currency Is Determined
For the reason that fiat currency is not backed by a physical commodity, it can risk losing its value should the economy undergo struggles and difficulties. Remember that fiat currency’s value is determined by the government. If its economy experiences hyperinflation, the people could lose confidence in the government and likewise, on its currency. In a situation like this, fiat currency will lose its value.
In contrast, precious metals such as gold carry its value when it is used to manufacture items such as jewellery and as a component for computers, aerospace vehicles, and technology devices.
Is The U.S. Dollar Fiat Currency Or Legal Tender?
The answer is “yes to both”. The simple definition of legal tender is any kind of money or medium of exchange which the government recognizes or considers as legal. The United States, like many other nations, can initially introduce fiat currency then through an act of government, authorize it as legal tender as a standard or basis for the repayment of debts.
The U.S Dollar is considered fiat currency because it is covered by the U.S. government. However, because the U.S Dollar is used to repay both public and private types of debt, it is accepted as legal tender.
It was after 1933 that the federal government ended its policy of enabling Americans to procure gold in exchange for their currency. By 1973, the United States also put an end to its policy of securing U.S. paper money from foreign countries by offering gold.
The U.S dollar’s value is influenced by economic factors and by how the government manages interest rate movements. For example, if the government wants to increase the rate of inflation, it can increase money supply or the supply of money circulating in the economy simply by printing more currency.
Pros And Cons Of Fiat Currency
Economies go through boom and bust cycles. The central bank can use the fiat currency to stabilize the effects of liquidity, credit supply, money velocity, and interest rates on the economy.
Since fiat currency is not backed by precious metals or commodities, it is not subject to the risk of having scarce supplies. The central bank can then manipulate its supply in order to manage the country’s economic conditions.
A good example is the United States’ Federal Reserve which is mandated to use its powers to manage the rate of inflation and the level of unemployment.
However, notable events in the new millennium such as the 2007 financial crisis showed the advantages of currencies that are backed by a precious metal such as gold.
The restrictions or limitations in gold’s supply make these types of currencies more stable compared to fiat currency. Financial bubbles are more probable with fiat currency simply because its supply is generally unlimited.
Zimbabwe: A Case Study In The Mismanagement Of Fiat Currency
Fiat money is generally more stable than currencies that are backed by precious metals. However, if mismanaged, fiat currencies can lead to a country’s economic downfall. Case in point is the South African nation, Zimbabwe.
Under the administration of former-President Robert Mugabe, Zimbabwe saw its economy failing during the 1990s. The country was dealing with spiralling rates of unemployment coupled with falling wages and inflation that was hitting upwards of 17%.
By 2000, Mugabe’s government initiated land reform programs which took farms away from white farmers and turned them over to the country’s black citizens.
Because the black citizens who were “awarded” the farms did not have the skill and experience to till the land, Zimbabwe’s agricultural sector began to suffer. As a result, its export earnings from agricultural products fell.
Instead of implementing economic policies that could counterbalance the drop in export earnings, Zimbabwe’s central bank decided to print more money to cover debts and to temper the inflationary effects of dwindling supply.
The consequences were dire and severe. The move to print more money exacerbated the fall of the economy. In 2008, inflation hit almost 500 billion percent.
The value of the Zimbabwe Dollar crashed and burned. During the worst period of the economic meltdown, 1 trillion Zimbabwe dollars only carried a value of US$0.40.
In 2009, the Zimbabwe Dollar was replaced by the United States Dollar.