top of page

Fiat Currency

Fiat currency is a type of currency that has no intrinsic value and is not backed by a physical commodity like gold. Its value comes from the trust and faith that people and governments have in it, allowing it to function as a medium of exchange.

What is Fiat Currency?


A fiat currency is government-issued money that does not have intrinsic value and is not backed by a physical commodity such as gold or silver. Its value is derived solely from the trust that participants in the economy place in it. Unlike historical systems where currencies were backed by gold reserves, fiat money relies entirely on the faith of the participants and the enforcement by government decree.


Fiat currencies became truly "fiat" in the early 1970s when the United States abandoned the gold standard, severing the link between the U.S. dollar and gold. This shift allowed central banks to create unlimited money, constrained only by political and economic considerations rather than physical gold reserves. Since then, fiat currencies worldwide have had value simply because governments say they do and because people continue to believe they do.


The digital revolution of commercial banking has taken this system even further. When banks issue loans—whether it's for a mortgage, car loan, or a multi-billion dollar corporate takeover—they effectively create money from nothing. This process is known as fractional reserve banking, where banks only keep a fraction of deposits as reserves and lend out the rest. In this way, banks create money that previously did not exist. When they issue an unbacked loan, they create a corresponding deposit in the borrower’s account, effectively increasing the money supply without any physical assets backing it.


This ability to create money is highly advantageous to those with the best relationships and connections to banks. Those closest to the banking system—wealthy individuals, corporations, and well-connected entities—gain access to cheap capital. They can use this to acquire more assets, thus expanding their wealth. Meanwhile, the rest of the population often struggles to keep up with rising prices and must pay interest on loans. An important flaw in the fiat system is that the interest owed on loans is not a part of the initial money supply, meaning that some level of bankruptcy or default is almost inevitable for those unable to compete for a share of the money in circulation.


Historically, all fiat currencies eventually lose their value and go to zero, a phenomenon often attributed to overprinting and mismanagement by central authorities. Inflation erodes the purchasing power of fiat money, and when confidence in the system falters, the currency can collapse. Examples like the hyperinflation in Zimbabwe or the collapse of the Venezuelan bolívar highlight how reliance on unbacked fiat currencies can lead to economic disaster when mismanaged.


In essence, fiat currency is a system built on trust—a financial system where money has value because people believe it does. One could say the whole system is only backed by the sweat of its participants whose future output is monetized. However, its inherent flaws, such as reliance on debt creation, wealth concentration among those with banking access, and a tendency towards devaluation, make it a fragile construct that can easily unravel when trust is lost.

bottom of page