Fiat Money

The contemporary monetary system where money is issued by the state via a central bank without any backing by physical commodities such as precious metals. The prefix "Fiat" money is an esoteric name sometimes used in historical scholarship but rarely in practice, instead because of its ubiquity typically money is synonymous with "fiat money."

Colloquially the legitimacy of the currency is from being declared by "fiat", thus the namesake. In practice the legitimacy of a national currency comes from both a collective social contract about the rule of law and its utility to fulfil the properties of money, price stability, and capacity to spur economic growth.

Fiat money notably has a variable supply since the central bank can expand or contract the money supply through various means such as adjusting lending terms of commercial banks, quantitative easing, and modifying interest rates. These activities are the primary mechanisms by which price stability and inflation targeting are implemented. A dynamic money supply is a core principle of Keynesianism.

See also dollar and central bank.


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