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Fiat Currency

General description

The literal translation of fiat (from Latin) is “There shall be”, as in the biblical Fiat Lux = There shall be Light.

In terms of currencies this implies currencies issued “out of thin air”, by decree, with no other concrete value relation (e.g. backing) but the will and authority of the issuer.

National currencies today, since the abandoning of the gold standard in 1972, are all Fiat Currencies since there is no tangible asset held at the (central) bank to back their value, e.g. that the currency entitles the bearer access to.

If taking the idea of central issuance serious on the other hand, national currencies today being mostly issued by private banks when they extend a loan to a customer, would make them appear less as “fiat”. Some argue that if taking the element of “by decree” as central it is even argued that gold standard would still be considered Fiat (Positive Money: Fiat money or Gold Money, 2012).

In the publication by the Bank of England, a fiat currency is defined as a currency that can only be redeemed for another fiat unit. 1

Some community currencies and complementary currencies are called Local Fiat, referring to all or some of the criteria above.

References

  1. BoE bulletin Q1 2014: Money in the modern economy: An introduction. http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1.pdf
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