Fiat Money

When we first started using money...you know, metal bits or shells or what-have-you as a medium of exchange...we felt more comfortable using it if it was “backed” by a physical good. Rather than just “saying” that this shell is worth $100 of value, it worked better if you could turn in that shell at the bank for $100 of value of something...like gold, or silver, or another commodity.

Fiat money is the new kind of money: money that’s not backed by a tangible commodity. You can’t turn your money in to the bank in exchange for a physical good that’s backing that money. Until the 1970s, even the U.S. dollar was backed by gold, meaning you could redeem USD for gold bars. Oh, the good old days.

When society’s been around and is stable long enough, people trust that a currency is legit. Once it’s legit enough, it doesn’t need to be dependent on an underlying physical commodity…people will still trust and use it, as it turns out.

Today, most currencies are fiat money. Fiat money is supported not by physical goods, but by supply and demand of that currency in the international market. The anti-fiat-money crew will tell you this is bad, because fiat money is more prone to inflation than commodity-backed money.