You’ve probably heard the term “fiat money” before, but what exactly is it? In a nutshell, fiat money is government-issued currency that isn’t backed by a physical commodity like gold or silver.
That might sound like a recipe for disaster, but fiat money has actually been around for quite a while—longer than you might think.
Here’s a quick history of fiat money to bring you up to speed.
Fiat Money Through the Ages
The first known instance of fiat money dates all the way back to ancient China, where the emperor would issue paper currency that could be used to buy goods and services in the empire. Of course, since there was no such thing as banks or paper money back then, this currency wasn’t actually made out of paper—it was made out of thin pieces of metal that were easy to carry around.
Fiat money later cropped up in medieval Europe in the form of credit notes issued by goldsmiths. These notes could be exchanged for gold at any time, which helped people avoid lugging around heavy sacks of gold coins when they wanted to make a purchase. However, since goldsmiths were private individuals and not governments, there was always the risk that they could go out of business or simply refuse to exchange the notes for gold.
The first true fiat currency didn’t come into existence until 1694, when the English government began issuing paper money that wasn’t backed by gold or silver. This allowed the government to print more money as needed without having to worry about finding enough precious metals to back it up—but it also meant that the value of the currency could fluctuate pretty wildly depending on how much faith people had in the government.
One notable example of this occurred during America’s Revolutionary War, when Continental dollars were issued by the Continental Congress to fund the war effort. These dollars quickly became worthless due to rampant inflation caused by too much printing, which led Benjamin Franklin to famously quip that “not worth a continental.”
Fiat Money Explained
Fiat money has come a long way since its early beginnings in ancient China. Today, it’s the most common type of currency in circulation worldwide—but that doesn’t mean it’s without its problems.
For one thing, fiat currencies are prone to inflationary pressures if too much is printed, which can lead to big swings in value. What’s more, since fiat money isn’t backed by anything physical, there’s always the risk that people will lose faith in it and stop using it altogether. Still, despite its flaws, fiat money remains an integral part of our global economy—for better or for worse.