We all know Fiat
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It’s hard to learn something new if you don’t fully understand what already exists. Currently, the dominant form of currency is fiat money. What is fiat money? The U.S. dollar is an example of fiat money. The euro is fiat money. We all know fiat money. Let’s dive in and learn more about what fiat money really is.
Define Fiat
Fiat is the name for the type of currency that is the U.S. dollar, the euro, the Swiss franc, the Indian rupee etc. It’s basically the paper money we currently use. Fiat is a word, NOT an acronym. It doesn’t stand for anything. The definition of fiat money is “a form of money that a government declares to be legal tender”.
What the heck is legal tender?
It’s basically whatever the government has decided that people are allowed to use to settle debts or meet financial obligations like paying your taxes. This means that the U.S. government said that American citizens can use dollars to pay their taxes. That’s what makes the dollar fiat money. The government told us we could use it.
Fiat and gold
A lot of people think that all fiat money is backed by gold and IT IS NOT. For example, the U.S. dollar is not backed by gold or any other commodity because the government has no limit as to how much of the U.S. dollar they can print.
Get ready for a mini history lesson.
In 1971, United States President Richard Nixon announced that the United States was closing the gold window. Nixon essentially pushed to make sure that the U.S. dollar was not backed by gold anymore and instead, the U.S. dollar would be fiat money (which is not backed by anything and can be printed with no limit).
Centralized Fiat
Let’s get comfortable with the definition of fiat money. Fiat money is “a form of money that a government declares to be legal tender”. This means that fiat money is controlled by a central authority, the government. The government declared it legal tender which means that the government controls the money.
Only the government can print more money. If you wanted to print more U.S. dollars, you would get in legal trouble. The government also decides how much of it to print and where the printed money goes or how it’s managed. Fiat money is centralized.
Centralized means that the government, one entity, controls it.
We all know Fiat!
Fiat money is the dominant form of currency in the world right now. We all know fiat. Do not be scared of the word fiat.
We use fiat money everyday to buy and sell things. It’s just the word that describes what type of currency the paper money we use today is. Fiat money is the money we are all using right now.
