{"id":37642,"date":"2022-07-14T12:58:35","date_gmt":"2022-07-14T09:58:35","guid":{"rendered":"https:\/\/forklog.com\/en\/?p=37642"},"modified":"2025-08-29T19:32:52","modified_gmt":"2025-08-29T16:32:52","slug":"what-are-fiat-currencies","status":"publish","type":"post","link":"https:\/\/forklog.com\/en\/what-are-fiat-currencies\/","title":{"rendered":"What are fiat currencies?"},"content":{"rendered":"<div class=\"wp-block-text-wrappers-cards single_card\">\n<h2 class=\"card_label\">Key points<\/h2>\n<ul class=\"wp-block-list\">\n<li>Fiat money is fiduciary\u2014based on trust\u2014state-issued currency not backed by any asset or physical commodity and lacking intrinsic value.<\/li>\n<\/ul>\n<ul class=\"wp-block-list\">\n<li>The bedrock of fiat money is users\u2019 and holders\u2019 confidence in the issuer, the state. The value of fiat money is determined by the quality of governance and the performance of the national economy.<\/li>\n<\/ul>\n<ul class=\"wp-block-list\">\n<li>Fiat money replaced gold-backed currencies. Under the gold standard, banknotes and other obligations of a sovereign state were backed by a standardised quantity of precious metal.<\/li>\n<\/ul>\n<ul class=\"wp-block-list\">\n<li>Issuance and the regulation of money in open markets and the wider economy are controlled by the state according to the country\u2019s financial conditions.<\/li>\n<\/ul>\n<\/div>\n<div class=\"wp-block-text-wrappers-cards single_card\">\n<h2 class=\"card_label\">History of fiat money<\/h2>\n<p>The first attempt to introduce fiat is recorded in the third century. Roman emperor Diocletian legally fixed coin values above the nominal price of the silver they contained.<\/p>\n<p>The first fiat money close to modern forms is considered to be the currency introduced under China\u2019s Tang dynasty in the eighth century. Issuance aimed to curb inflation and private coinage and to strengthen state control over finance.<\/p>\n<p>The modern financial system and fiat money emerged after <a href=\"https:\/\/forklog.com\/en\/news\/citibank-hails-bitcoin-as-the-digital-gold-of-the-21st-century\">the end of the US dollar\u2019s peg<\/a> to gold in 1971. The United States unilaterally stopped exchanging the precious metal at a fixed rate and set in motion the \u201cprinting\u201d of unbacked currencies worldwide.<\/p>\n<p>The reason for abandoning the gold standard in the United States was a prolonged trade-deficit problem and a mismatch between the dollar\u2019s exchange rate and its real purchasing power.<\/p>\n<p>The gold standard as a generally accepted backing for state currencies ceased to exist in 1973 at the Jamaica international conference. Since then, exchange rates on the international market have been set by supply and demand.<\/p>\n<\/div>\n<div class=\"wp-block-text-wrappers-cards single_card\">\n<h2 class=\"card_label\">Advantages of fiat money<\/h2>\n<p>Ending the gold standard gave governments access to unlimited money issuance. There is no need to replenish treasury reserves with gold or other hard commodities\u2014currency printing can be aligned with any events, plans or goals.<\/p>\n<p>This allows the state to channel investment in the form of cheap credit to any consumer groups, spurring production and demand and thus improving the efficiency of the economy as a whole.<\/p>\n<p>The main tool of economic support has been quantitative easing (QE). QE injects additional liquidity into markets by having the state buy assets from banks and other financial institutions.<\/p>\n<p>QE aims to expand money reserves in the economy to loosen monetary policy: cutting refinancing rates for banks, easing consumer access to cheaper loans, reducing systemic risks and improving the investment climate.<\/p>\n<\/div>\n<div class=\"wp-block-text-wrappers-cards single_card\">\n<h2 class=\"card_label\">Drawbacks of fiat money<\/h2>\n<p>Flexibility and freedom in monetary policy can be a boon, but they can also create problems. Key risks include:<\/p>\n<p><strong>No intrinsic value<\/strong><\/p>\n<p>The loss of trust\u2014the fundamental basis of fiat money\u2014can wipe out the value of investments and savings, up to a full halt of the economy.<\/p>\n<p><strong>Political risk<\/strong><\/p>\n<p>The value of a particular fiat currency depends on the effectiveness of state governance. Past stability does not guarantee future stability owing to political risks at home and abroad.<\/p>\n<p>Examples include the 1998 crisis in Russia and the volatility of the rouble after the war with Ukraine began.<\/p>\n<p><strong>Debt spiral<\/strong><\/p>\n<p>Government access to virtually limitless issuance brings the risk of creating vast amounts of unsecured debt. The United States is an example. The country has one of the world\u2019s most developed economies and, at the same time, the largest debt, which in the first quarter of 2022 <a href=\"https:\/\/fred.stlouisfed.org\/series\/GFDEBTN\">exceeded $30trn<\/a>, or <a href=\"https:\/\/www.statista.com\/statistics\/269960\/national-debt-in-the-us-in-relation-to-gross-domestic-product-gdp\/\">133%<\/a> of GDP.<\/p>\n<p>According to the US Treasury, annual interest on the debt accrued by June 30, 2022 <a href=\"https:\/\/fiscaldata.treasury.gov\/datasets\/interest-expense-debt-outstanding\/interest-expense-on-the-public-debt-outstanding\">amounted to<\/a> 5% of the federal budget for the same period. The US budget deficit for 2022 was $1trn\u2014the gap is covered by issuing and selling bonds.<\/p>\n<p>According to the Congressional Budget Office, by 2031 interest payments alone <a href=\"https:\/\/www.cbo.gov\/publication\/58147\">will amount to<\/a> $914bn. The US government does not have enough money to meet these obligations and is forced to create new debt to pay the old.<\/p>\n<figure class=\"wp-block-image size-full\"><img loading=\"lazy\" decoding=\"async\" width=\"609\" height=\"475\" src=\"https:\/\/forklog.com\/wp-content\/uploads\/image1-521.png\" alt=\"\u0427\u0442\u043e \u0442\u0430\u043a\u043e\u0435 \u0444\u0438\u0430\u0442\u043d\u044b\u0435 \u0434\u0435\u043d\u044c\u0433\u0438?\" class=\"wp-image-178854\" srcset=\"https:\/\/forklog.com\/wp-content\/uploads\/image1-521.png 609w, https:\/\/forklog.com\/wp-content\/uploads\/image1-521-300x234.png 300w\" sizes=\"auto, (max-width: 609px) 100vw, 609px\" \/><figcaption>Source: US Congressional Budget Office.<\/figcaption><\/figure>\n<p><strong>Financial bubbles<\/strong><\/p>\n<p>A vivid example of inefficiency in a fiat-based economy is the 2006 US housing bubble, which led to the 2007\u20132008 financial crisis.<\/p>\n<p>Banks channelled capital by creating artificial demand for housing. They originated loans and resold these obligations to other banks in the form of derivatives. Once borrowers stopped paying interest and property prices stopped rising, the market collapsed like dominoes.<\/p>\n<\/div>\n<div class=\"wp-block-text-wrappers-cards single_card\">\n<h2 class=\"card_label\">Cryptocurrencies: an alternative to fiat money<\/h2>\n<p>Commodity-backed currencies are not the only alternative to fiat. The cryptocurrency industry, as a young participant in global finance, can foster more efficient economic models.<\/p>\n<p><strong>No restrictions<\/strong><\/p>\n<p>Cryptocurrencies are based on distributed-ledger technologies, including blockchains and the directed acyclic-graph concept. With internet access, anyone can join public crypto networks without restrictions of jurisdiction, age, time zone, gender, financial status or political affiliation.<\/p>\n<p><strong>Decentralisation<\/strong><\/p>\n<p>Cryptocurrencies are designed around decentralisation: no one should hold a dominant vote; changes to the system are made through public consensus.<\/p>\n<p><strong>Issuance mechanism<\/strong><\/p>\n<p>Issuance mechanisms are set before a network or token launches. Every participant knows in advance how many units (tokens, coins) will be created or destroyed and under what conditions.<\/p>\n<p><strong>No intermediaries<\/strong><\/p>\n<p>To send cryptocurrency to someone next door or on the other side of the globe, no intermediaries are needed\u2014only the recipient\u2019s address and a small transaction fee.<\/p>\n<p>To swap one cryptocurrency for another, there are special decentralised exchanges and swap services that operate autonomously from anywhere in the world\u2014<a href=\"https:\/\/forklog.com\/en\/news\/what-is-a-decentralised-exchange-dex\">DEX<\/a>.<\/p>\n<\/div>\n<div class=\"wp-block-text-wrappers-cards single_card\">\n<h2 class=\"card_label\">Further reading<\/h2>\n<p><a href=\"https:\/\/forklog.com\/en\/news\/where-to-track-cryptocurrency-prices\">Where to track cryptocurrency prices?<\/a><\/p>\n<p><a href=\"https:\/\/forklog.com\/en\/news\/what-is-dollar-cost-averaging\">What is dollar-cost averaging?<\/a><\/p>\n<p><a href=\"https:\/\/forklog.com\/en\/news\/what-is-a-moving-average-and-how-is-it-used-in-crypto\">What is a moving average and how is it used in crypto?<\/a><\/p>\n<p><a href=\"https:\/\/forklog.com\/en\/news\/what-is-the-stock-to-flow-model-and-why-is-it-criticised\">What is the stock-to-flow model and why is it criticised?<\/a><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"<p>What are fiat currencies? What underpins their value? What are their advantages and drawbacks? Explained in ForkLog\u2019s educational cards.<\/p>\n","protected":false},"author":1,"featured_media":37643,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"select":"1","news_style_id":"1","cryptorium_level":"1","_short_excerpt_text":"","creation_source":"","_metatest_mainpost_news_update":false,"footnotes":""},"categories":[2113],"tags":[2125,1614],"class_list":["post-37642","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-cryptorium","tag-101-economic-theory","tag-fiat-currencies"],"aioseo_notices":[],"amp_enabled":true,"views":"112","promo_type":"1","layout_type":"1","short_excerpt":"","is_update":"","_links":{"self":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts\/37642","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/comments?post=37642"}],"version-history":[{"count":1,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts\/37642\/revisions"}],"predecessor-version":[{"id":37644,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/posts\/37642\/revisions\/37644"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/media\/37643"}],"wp:attachment":[{"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/media?parent=37642"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/categories?post=37642"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forklog.com\/en\/wp-json\/wp\/v2\/tags?post=37642"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}