Fiat money

‘Fiat’ is Latin for ‘let it be done’. Fiat money is valid because it has been declared so – not because it is made of something valuable. The euro, for example, is legal tender and can’t be exchanged for gold. Most of the money we use is created by commercial banks – for example when they grant loans.^[1]

From gold to trust

Early money was mostly commodity money, made of gold for example. A banknote, by contrast, is accepted because it can be used everywhere and central banks are meant to keep the value of money stable.^[1] On 15 August 1971, the US closed the ‘gold window’: foreign governments could no longer exchange dollars for gold. This effectively turned the international monetary system into a fiat system.^[2]

Strengths and weaknesses

Central banks can respond to crises, for example by cutting interest rates. The downside: the supply isn’t capped, so the value of money depends on good decisions. Even moderate inflationGlossaryInflationA general rise in prices that makes money lose purchasing power. The ECB aims for 2% a year over the medium term for the euro area.On the learning path: Stage 2 · Step 1 – Money, inflation & trust →In the glossary →× adds up: at 2% a year, purchasing power halves in about 35 years.

Fiat and Bitcoin

In the Bitcoin community, ‘fiat’ stands for government currencies. Bitcoin has no issuer, and its maximum supplyGlossary21 million (Bitcoin’s supply cap)Under the network’s rules, there will never be more than just under 21 million bitcoin. The cap follows from the issuance schedule: new bitcoin per block halve every 210,000 blocks until none are created, around 2140.On the learning path: Stage 2 · Step 2 – Halving & 21 million →In the glossary →× is fixed in the code. But it isn’t backed either: its value rests on people accepting it. The difference lies in what you trust – institutions, or open, verifiable rules. The arguments on both sides are in Money, inflation & trust.