Fiat money

Glossary definition: Money with no intrinsic value, imposed by state power as legal tender.

In plain words

Fiat money is money that cannot be converted into gold, silver or any other commodity and that the state declares legal tender. The euro, the dollar and all of today’s state currencies are fiat money.

Because it is tied to no commodity, its quantity is limited by nothing except the decisions of the central bank and the banking system.

An example

Greece has learned what this means many times: the “thirty years of inconvertible paper” after 1877, leaving gold in 1932, and the hyperinflation of the Occupation in 1944, when the drachma lost almost all its value. Since 2001 the country’s currency has been the euro, which is fiat money too.

The Austrian viewMoney was not invented by the state: as Carl Menger showed, it emerged from market exchange, with commodities such as gold and silver. Fiat money appeared when states suspended the convertibility of their banknotes. For the Austrian School this is not progress: it frees money from every limit, enables inflation and deficits, fuels business cycles, and transfers wealth from savers to those who receive the new money first. Mises and Rothbard argued for a return to sound, commodity money.

In the original“Fiat money is a money consisting of mere tokens which can neither be employed for any industrial purposes nor convey a claim against anybody.”

Ludwig von Mises, Human Action, XVII. Indirect Exchange · 9. The Specific Value of Money · mises.org ↗

Definitions are from the site’s Glossary; the examples and the “Austrian view” are Praxeologos’s reading. Links to outside sources open in a new tab.