What Is Fiat Money?

Fiat money is government-issued currency not backed by physical commodities, relying instead on trust in the issuing authority. Unlike commodities like gold or silver, a fiat currency derives its value from government mandate and public faith. Common examples include the U.S. dollar and the euro. Governments opt for fiat currencies as they provide significant economic control, enabling tactics such as adjusting interest rates or printing additional money. Their stability often hinges on the robustness of the issuing government. Many governments designate fiat as the only legal tender, necessitating its use for tax payments and general transactions, fostering trust and continuity. While convenient for daily transactions, fiat currencies inherently face inflation, with their value decreasing as more of it gets printed. This system can occasionally lead to hyperinflation in extreme cases.