Fiat Exchange

Fiat money is a currency not backed by a commodity, such as silver or gold. It’s typically designated by the issuing government to serve as legal tender. In the past, fiat money was occasionally issued by banks and institutions, but in modern times, it’s mainly authorised by government regulation. Generally, fiat money doesn’t have use value or intrinsic value. It has value solely because the individuals using it agree on its value. They trust merchants, financial institutions, and others will accept it. Fiat money is an alternative to commodity money. The latter has intrinsic value as it contains a precious metal like silver or goal, which is embedded in the coin. Fiat is also different from representative money, which has intrinsic value because it’s backed by and can be converted into various commodities, including precious metals. The earliest proof of government-issued fiat money banknotes dates back to 11th century China. Fiat money became the dominant currency form during the 20th century. In 1971, U.S. President Richard Nixon suspended US dollar convertibility to gold, which led to using a global system of national fiat currencies. Fiat money can be:

• Any money that isn’t backed by a commodity;
• Money declared by a government, institution, or person as legal tender;
• State-issued money that is neither fixed in value in terms of any objective standard nor convertible through a central bank to anything;
• Money used because of government decree;
• Non-valuable object that serves as a medium of exchange;

The term “fiat” originates from the Latin word “fiat,” meaning “let it be done,” used in the sense of a resolution, decree, and order.

Treatment in Economics

In monetary economics, fiat money is an intrinsically valueless record or object widely accepted as a means of payment. Generally, the value of fiat money is greater than the value of its metal or paper. One rationalisation for fiat money comes from a micro-founded model known as Lagos and Wright. In it, fiat money doesn’t have an intrinsic worth, but agents get more goods during trades as they assume fiat money is valuable. Fiat money’s value is usually created internally by the community using it, making trading possible. The game theory offers another mathematical model that explains the value of fiat money. It states that in a game where agents create and trade objects, there can be several Nash equilibria where agents settle on stable behaviour. In a model by Kiyotaki and Wright, an object with zero intrinsic worth can have value during trade in one or more of the Nash equilibria.

Money Creation and Regulation

Central banks introduce new money into their respective economies by:

• Purchasing financial assets;
• Lending money to financial institutions;

Commercial banks repurpose or redeploy the newly released base money by credit creation through fractional reserve banking, which automatically expands the total supply of “broad money” (cash + demand deposits). In today’s economies, a small portion of broad money is physical currency. The production of new physical money is the responsibility of national banks, and in some cases, government treasuries. In 1985, the Bank for International Settlements published an extensive review (the first of a series known as “red books”) of payment system developments in the Group of Ten (G10) countries, which are:

• Belgium;
• Canada;
• France;
• Germany;
• Italy;
• Japan;
• The Netherlands;
• Sweden;
• Switzerland;
• United Kingdom;
• United States of America;

Nowadays, the red books cover member countries on the Committee on Payments and Market Infrastructures (CPMI). Below is a table of the value of banknotes and coins in circulation of some major currencies worldwide.

Banknotes and Coins in Circulation (as of 2016)

Country	Billions of Dollars	Per Capita
USD	1,509.34	4,671.03
EUR	1,217.91	3,579.10
JPY	915.72	7,214.21
GBP	93.78	1,428.55
AUD	57.71	2,379.05
CAD	64.40	1,787.01
CHF	79.68	9,516.04
KRW	80.48	1,584.11
HKD	54.16	7,341.34
INR	196.49	151.26

*Note: Local currencies are converted to US dollars using 2016 end of year rates

Circulating Currencies

By definition, a currency is a kind of money and medium exchange. Currency includes metal coins, paper, polymer banknotes, and cotton. Generally, governments have a monopoly on issuing money, even though some states share currencies with other countries. Check the table below to learn the currencies FinHub’s Fiat Exchange module supports.