Fiat Currency System
Understand how modern money works through central banking, monetary policy, and the mechanisms that control our financial system
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0 / 5 completedWhat is Fiat Currency?
Fiat currency is money that derives its value from government decree rather than physical commodities like gold or silver. The term "fiat" comes from Latin meaning "let it be done" - essentially, money has value because the government says it does and people accept it.
🏦Key Characteristics
Government Backing
Value comes from legal tender laws and trust in the issuing government, not intrinsic commodity value
Unlimited Supply
Central banks can create new money through various mechanisms, unlike commodity-backed currencies
Controlled by Policy
Monetary authorities adjust supply and interest rates to influence economic conditions
Inflation Risk
Purchasing power can decline over time as more money enters circulation
📊 Historical Context
Gold Standard Era (1870s-1971): Currencies were backed by gold reserves, limiting money creation
Bretton Woods (1944-1971): US dollar pegged to gold, other currencies pegged to dollar
Nixon Shock (1971): US abandoned gold standard, ushering in modern fiat era
Today: All major currencies are fiat, controlled by independent central banks