Fiat is a Latin phrase that stands for “let it be done” or “it shall be”. However, it has no relation to the real meaning of fiat money. Fiat money is a currency that is issued, regulated, and legally recognized by a country’s government.

The term “fiat money” is used to distinguish these types of currencies from commodity-based money, which have intrinsic value due to their rarity and usefulness in industry and trade.

Fiat money is valuable only when the government mandates it or when the parties of the transaction agree on it. When financial events, such as a sharp cut to bank lending, occur in a country, the government and central bank will have the power to control the monetary system or apply related instruments.

The benefit of fiat currency is that it can expand to meet the needs of a growing economy. Although people believe gold is the only true form of money, and the rest is fiat currency, it is limited in supply as gold is a finite resource.

Because fiat money does not rely on precious metals, a country’s fiat currency will be worthless if inflation rises rapidly. However, the price of anything is determined solely by supply and demand. Creating extra fiat currency will not cause inflation if there is a sufficient supply of goods and services. In most cases, increased demand comes with more production, resulting in a GNP increase, which is a desirable outcome.