Legal Definitions - fiat money

Fiat money refers to currency that a government has declared to be legal tender, but which is not backed by a physical commodity like gold or silver. Its value is derived solely from the government's decree that it must be accepted as a means of payment for goods, services, and debts, and from the public's trust in the government and its economy. Unlike commodity money, which has intrinsic value (e.g., gold coins), fiat money's worth is purely based on collective belief and governmental authority.

• Example 1: Everyday Purchases

  Imagine Maria buying her weekly groceries at a supermarket in the United States. She pays for her items using a twenty-dollar bill. This twenty-dollar bill is an example of fiat money. It is simply a piece of paper with no inherent value in itself, but the U.S. government has declared it legal tender. The supermarket accepts it because they trust that other businesses and individuals will also accept it as payment for goods and services, and that it can be used to pay taxes and settle debts, all due to the government's backing.

• Example 2: Paying Taxes

  A small business owner in Canada files their annual income tax return and pays the amount owed to the Canadian Revenue Agency using Canadian dollars. Canadian dollars are a form of fiat money. The Canadian government mandates that taxes must be paid in its national currency. This requirement reinforces the value and acceptance of the Canadian dollar, as individuals and businesses need to acquire and use it to fulfill their legal obligations to the state, thereby giving it practical utility and value.

• Example 3: International Travel and Exchange

  A tourist from the United Kingdom travels to France and exchanges British Pounds for Euros to pay for meals and souvenirs. Both the British Pound and the Euro are forms of fiat money. Neither currency is directly convertible into a fixed amount of a physical commodity like gold. Their value in exchange for each other, and for goods and services within their respective economic zones, is maintained by the authority of their central banks and governments, and by the widespread public acceptance of their use as a medium of exchange.