Fiat’s What You Got

You’ve probably heard of the Italian made car, the Fiat. You may also know the reference to fiat as an order or a government decree. And you may know that you carry around fiat currency everyday. The dollar and coins that allow us to purchase goods or services is a fiat currency. The word is derived from the Latin word, fiat, that means ‘it shall be ’ or ‘let it be done’.

Our government has decreed that our dollar and coins will be the way we will pay for items of value. Fiat currency does not have real value of its own. It is not like silver or gold where the metal has a certain worth by itself with no decree. If our coins do contain metal it is still fiat currency unless the metal is worth more than the declared value of the coin.

There was a time when fiat currency was used as a simpler way to trade one product for another. Rather than having gold or silver in your pocket you could have lighter coins and paper currency. Each dollar could be exchanged for a certain amount of gold. We knew our money had collateral and wasn’t created by a machine with no way to measure its worth other than by the machinations of the banks and economists deciding the worth of our money. During President Nixon’s tenure the dollar was deemed ‘off the gold standard’ and our currency was no longer backed by gold.

Now the dollar’s strength is measured in comparison to the fiat currencies of other countries. The value of the fiat currency is more likely to be based on a stronger economy and a more stable government.