Fiat Currency

Fiat currency is money that a government declares valid for payment but that is not backed by or redeemable for any physical commodity. Its value rests on trust in the issuer and on legal requirements to accept it for taxes and debts. Every major national currency today is fiat, a global condition that has existed only since the United States ended dollar-gold convertibility in 1971.

Why it matters

Fiat gives policymakers flexibility that commodity money never allowed: central banks can expand the money supply to fight recessions, backstop banks, and finance emergencies. The cost is that nothing external limits issuance. Since 1971 the US dollar has lost more than 85 percent of its purchasing power as measured by the Consumer Price Index, and weaker fiat currencies have fared far worse, with dozens of episodes of high inflation and outright collapse. The entire case for holding gold or bitcoin as savings begins with this record.

In the gold vs bitcoin debate

Gold and bitcoin are the two most prominent non-fiat monetary assets, which is why they are compared so often. Both have supplies no government can expand, but they differ in form: gold's scarcity is physical and proven over millennia, while bitcoin's is digital, capped at 21 million coins, and enforced by open-source software. The question this site examines is which property set better protects savings from fiat dilution. Understanding fiat's mechanics, issuance without a commodity anchor, is the necessary starting point for evaluating why anyone would hold either alternative in the first place.