What is Fiat Currency?
Fiat money only has value because the government maintains that value, or because two parties agree on said value. Fiat money was first introduced as an alternative to commodity-backed money.
Because fiat money is not linked to physical reserves, it risks becoming worthless due to hyperinflation. If people lose faith in a nation's paper currency, like the UK pound (GBP)l, the currency will no longer hold any value. This differs from gold and silver, which, historically, has been used in jewelry and decoration and has many modern economic uses including its use in the manufacture of electronic devices, computers and aerospace vehicles.
For the record, "fiat" is Latin for "let it be done."
Most of the world’s money is called fiat money, meaning it is accepted as money because a government says that it’s legal tender, and the public has enough confidence and faith in the money’s ability to serve as a storage medium for purchasing power.
A fiat system is based on a government’s mandate that the paper currency it prints is legal tender for making financial transactions. Legal tender means that the money is backed by the full faith and credit of the government that issues it. In other words, the government promises to be good for it.
Fiat money is the opposite of commodity money, which is money that’s based on a valuable commodity, a method of valuation that was used in the past. At times, the commodity itself actually was used as money.