Fiat money started to predominate during the 20th century. Government-issued fiat money banknotes were used first during the 11th century in China. Fiat money can look similar to representative money (such as paper bills), but the former has no backing, while the latter represents a claim on a commodity (which can be redeemed to a greater or lesser extent). Fiat also differs from representative money, which is money that has intrinsic value because it is backed by and can be converted into a precious metal or another commodity. They trust that it will be accepted by merchants and other people.įiat money is an alternative to commodity money, which is a currency that has intrinsic value because it contains, for example, a precious metal such as gold or silver which is embedded in the coin. It has value only because the individuals who use it as a unit of account – or, in the case of currency, a medium of exchange – agree on its value. In modern times, fiat money is generally authorized by government regulation.įiat money generally does not have intrinsic value and does not have use value. Throughout history, fiat money was quite rare until the 20th century, but there were some situations where banks or governments stopped honoring redeemability of demand notes or credit notes, usually temporarily. It is typically designated by the issuing government to be legal tender. Fiat money is a type of currency that is not backed by a commodity, such as gold or silver.
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