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Fiat currency definition
Fiat currency is government-issued money that is accepted as legal tender but is not backed by a physical commodity such as gold or silver. Its value rests on the authority of the issuer and the trust of the people who use it.
Fiat currency holds value because households, businesses, and financial institutions accept it for payments, savings, taxes, and trade. Most modern money is fiat, including the US dollar, the euro, the Japanese yen, and the British pound, and a central bank can adjust its supply to manage inflation and interest rates.
Fiat currency differs from commodity money, which is backed by or made of a physical asset such as gold under a gold standard. It also differs from cryptocurrency, which no government issues; a fiat currency's value can shift with monetary policy, inflation, and demand in the foreign exchange market.
Fiat currency Example
The US dollar is a fiat currency.
It is not backed by a fixed amount of gold or silver.
People accept the dollar because it is legal tender in the United States and is widely used for payments, savings, and trade, not because it can be exchanged for a commodity.
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