Definition
Fiat currency is money that a government has declared to be legal tender but that is not backed by or convertible into a physical commodity such as gold or silver. The word "fiat" is Latin for "let it be done" the currency has value largely because a state mandates its acceptance for taxes and debts, and because people broadly trust and use it. Nearly all national currencies today, including the US dollar, euro, and Canadian dollar, are fiat currencies.
How fiat money is created
Under a fiat system, a central bank and the commercial banking system can expand the money supply through monetary policy and lending. This flexibility lets policymakers respond to recessions and manage interest rates, but it also means the quantity of money is not fixed. Critics in the sound-money tradition note that this discretionary issuance can erode purchasing power over time and distribute the effects unevenly, a phenomenon related to the Cantillon effect.
Fiat versus commodity and digital money
Commodity money (like a gold coin) carries intrinsic material value; representative money is a claim redeemable for a commodity; fiat money is neither it is valued by convention and law. Bitcoin is sometimes positioned as a third category: a non-state digital asset with a supply fixed in software rather than by decree. Understanding fiat is useful context for evaluating claims that an asset functions as sound money or a long-term store of value.
This entry is educational and takes no position on monetary policy. For a neutral look at the trade-offs of supply-managed versus fixed-supply money, compare it with our entries on sound money and store of value.
In Simple Terms
Fiat currency is money that a government has declared to be legal tender but that is not backed by or convertible into a physical commodity…