LeoGlossary: Fiat Currency

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Currency that is created by the governments and circulate by the banks.

This is not backed by any commodities, giving central banks more control over monetary policy. Value is derived from supply and demand for the currency.

Since fiat currencies are not backed by physical commodities, confidence is vital to their success. If people lose trust in the currency, for whatever reason, it can move towards becoming worthless.

Examples are:

All of these operate under the fractional reserve banking system. This means the commercial banks are the ones that expand the money supply through the making of loans. Contraction takes place as people pay off principal or defaults occur.

Governments will often designate the fiat currency to be the nation's legal tender.

In October 2021, El Salvador made history when it became the first country to make Bitcoin legal tender. This is operating in parallel of the nation's other form of legal tender, the US Dollar.


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